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Griffiths, Shelley --- "Income Tax In New Zealand" [2006] OtaLawRw 11; (2006) 11 Otago Law Review 331

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Income Tax in New Zealand

(By Garth Harris, Chris Ohms, Casey Plunket, Audrey Sharp and Nigel Smith, Brookers Ltd, New Zealand, 2004)

This book is a recent addition to the Brooker's Treatise series. What a daunting task it must have seemed to the authors as they embarked on this work and what a mammoth undertaking it must have become. When they began in 1990, the Income Tax Act 1976 was still in force; shortly after the book was published, the Income Tax Act 2004 was enacted. In the interim, the Income Tax Act 1994 was passed, income tax legislation went through a re-write and simplification process and only the truly masochistic would want to count how many Income Tax Amendment Acts were passed.

If you need to know whether you have to pay tax on the prize you won for your latest academic masterpiece, this is not the book in which to find the answer. Nor is it the reference for your accountant to use to find the appropriate depreciation rate for the desk you use in your home office. There are a number of useful and authoritative income tax guides available in New Zealand that will answer those questions. This work is pitched at a deeper analytical level. Its objective is to give a comprehensive coverage of income tax from a legal perspective. As the authors note in the preface, it is intended that the book provide a 'well developed explanation of the legislation, its underlying principles and its major issues' [vii] so that readers have the basis from which to conduct their own research and reach their own judgments.

We are, it might be said, all income taxpayers now. Income tax, which accounted for approximately 78 per cent of the tax revenue collected by the New Zealand government in 2004, lies at the heart of current fiscal policy. Of all the epithets that could be attached to income tax law, simple would come at the bottom of the list. Why is this so? Is this inevitable? Is this complexity a necessary consequence of the fact that income tax is fundamentally disconnected from that which it seeks to tax? It is axiomatic that income tax must be levied on 'income'. A definition of income lies at the heart of income tax. One of the fundamental reasons why income tax law seems so unusual, so different from other areas of the law, is that there is no mischief in tax. Income tax legislation is written not to mediate relationships or to correct errant behaviour. In the modern state it is written to enable the government to raise the not inconsiderable revenue needed to deliver the public policy objectives considered necessary or to achieve some redistribution of wealth within a society. A priori, there is no reason why wages are subject to income tax while Lotto winnings are not. The receipt of each improves the position of the recipient. At the end of those transactions, the recipient of the wage and of the Lotto win has a larger pool of economic resources over which he or she has control. But a choice has been made to tax one and not the other. There is no intrinsic reason in the nature of the resource flow that makes that so. There is thus a world of transactions and different societies at different times chose to tax some transactions and not others. This raises the possibility of tax arbitrage, for who would chose to earn income that is taxable

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when it might be possible to structure the transaction so that there was no tax consequence. It is because of this that there are tax avoidance provisions. While tax law generally might be difficult, avoidance is deeply challenging. It brings to an area of law that is in many ways rendered black and white by the time tax calculations are made, a sphere of moral judgment. A taxpayer is avoiding tax when he or she is paying less tax than the legislature might have intended, not by engaging in illegal activity, but by structuring his or her affairs in a way that is not acceptable, is morally reprehensible. In this penumbra around the reasonably settled core of what is income for the purposes of income tax legislation, judges have stumbled around whether the legislation contains a general anti-avoidance provision (as in New Zealand and Australia) or not (as in the UK).

Since the last comprehensive, analytical work on income tax in New Zealand was published in 1976, the changes undergone by the income tax system have been breathtaking. While during the 1990s there emerged a broad political consensus on the shape of the system, the prior decade was marked by reform at such a break neck speed that it would scarcely be overstating the case to call it a revolution. The use of the business investment incentives was abandoned. No longer was the tax system so overtly used as a way of 'picking winners'. The tax base was broadened and the marginal rates were reduced (in the case of individuals the top rate was reduced from 66 to 33 per cent and the company rate was reduced from 48 to 33 per cent). A new international regime was introduced, the double taxation company dividends ended, accrual rules on financial instruments and a fringe benefit tax regime were introduced. In the 2005 general election campaign that political consensus was severely strained and probably broken as the National Party stuck with the idea of a broad base low rate model, while the Labour Party preferred to deliver the bounty of an economic boom to targeted 'deserving' taxpayers. Notwithstanding that, the New Zealand income tax system is fundamentally different from 1976. If nothing else this book is timely, overdue one might say. But it is more than timely. It is a comprehensive, well-organized book. Although five authors are involved (not many considering the breadth of the subject matter) it is not disjointed and only occasionally falls in to the trap of being repetitive. The authors are a mix of academics and practitioners. Sadly, Garth Harris one of the authors died in 1999 but it is clear from the memorial by Professor Ian Eagles at the beginning of the book that prior to his death he made a significant contribution to its structure and to its substantive writing, as he had to tax jurisprudence generally during his distinguished career.

Part A of the book contains what is called an overview of the New Zealand income tax system. This is filled with diagrams, mirroring the approach taken in the Income Tax Act where Part B is full of diagrams that aim to explain the tax process. The difficulty confronted by the Act and by this book, is to explain how this complicated tax process operates. Transactions occur whether there is income tax or not. Some transactions are harvested by tax gatherers; some remain outside the tax base. Determining whether a particular income event is one to which tax attaches is the complex part. For instance, although New Zealand has no direct capital gains tax regime, there are occasions when the disposal of a capital asset will trigger tax obligations. Thus the sale of land that was purchased with the

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'purpose' or 'intention' of 'disposing' of it will attract income tax. [Income Tax Act 1994 section CD 1(2)(a); Income Tax Act 2004 section CB 5] In chapter 1, a six-step process is set out to provide a framework for determining whether the event is a taxable one or not. The first two steps, the 'finding of fact' and 'ascertaining legal relationships', are where the really difficult work is done. At step three, a taxpayer must apply the tax legislation to the identified transactions and relationships. Steps four and six are simpler in the sense that they involve calculations. Step five in the book's formulation is the most perplexing of all tax problems - what is a tax avoidance arrangement. Setting out a framework in this way is a worthwhile approach. The only reservation one might have is that the titles of the steps are different in chapter one from those in chapter two and this creates some confusion whether the steps are identical. (On careful reading it would seem that they are.)

Chapter two is entitled 'The Legal Framework'. It delves into the particular issues of fact finding in tax matters and into questions of interpretation of tax statutes. In this chapter Chris Ohms disagrees with the orthodoxy that in tax jurisprudence judges have been slow to embrace purposiveness in statutory interpretation, to the point of ignoring provisions in the Acts Interpretation Acts of 1924 and 1999 [67 - 68]. He cites several taxation cases where the Courts have apparently embraced purposiveness. A more fruitful line of analysis might have been to look at Sir Ivor Richardson's 'scheme and purpose' approach to interpreting tax statutes. ["Appellate Court Responsibilities and Tax Avoidance" (1985) 2 Australian Tax Forum 3, 8] As Dr Ohms points out, statutory purpose can be gleaned from internal and external sources. In interpreting tax statutes, judges have been reluctant to go to the external purpose, given that any tax statute has the very limited purpose of 'the collection of funds to swell the general revenues of the state.' [CIR v International Importing Ltd [1972] NZLR 1095,1096] There has not been equivalent discomfort with internal purpose. Indeed Sir Ivor's 'scheme and purpose' might conceptually be seen as fitting squarely into the 'internal' purpose that Dr Ohms describes. This part of the book is quite disappointing. There are distinctive statutory interpretation issues in income tax legislation. Dr Ohms does not confine himself to these. The general exposition of statutory interpretation seems unnecessary. The treatment of specific issues of taxation interpretation seems slight by comparison.

Chapter two then contains several pages on 'fiscal nullity'. This is something developed by the English Courts. To begin with, it seemed that fiscal nullity was a doctrine created by the House of Lords to deal with avoidance because there is no general anti-avoidance provision in English tax legislation. In more recent cases, the House of Lords has declaimed fiscal nullity as a method of interpreting statutes. What has never been clear is the status of fiscal nullity in New Zealand. The Privy Council in O'Neil v CIR [(2001) 20 NZTC 17,051] and Auckland Harbour Board v CIR [(2001) 20 NZTC 17,008] alluded to some possible significance in the New Zealand context. The introductory paragraph in this section [2.7.1] appears to say all that needs to be said about the possible status of fiscal nullity in New Zealand. The following nine paragraphs contain a detailed exposition of the major English cases and this seems unnecessary.

The structure of the remainder of the book is derived from the fundamental charging section in the Income Tax Act 1994. Sections BB1 and BB 2 [now re-

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enacted as BB1 and BB2 in the Income Tax Act 2004], set out the core statutory formula; a person is liable for tax on his or her taxable income at the relevant tax rate. Once calculated, the person must satisfy his or her liability. Apart from the relevant tax rate, which can safely be ignored because it is what it is, the other core elements in the statutory charge are the nub of what income tax is about. Income tax is imposed on taxable income - this is the tax base. Income tax is imposed on the income of some person - this is the tax entity. The bulk of this book - 22 of 28 chapters - is devoted to an analysis of the tax base and tax entities. All the major categories of income and deductions are given full and detailed treatment. There are also three useful chapters on issues of international taxation.

Part C deals with tax entities and the particular issues of individuals, partnerships, companies and trusts are dealt with in appropriate detail. Part D deals with returns assessments and filing. Part E returns to difficult ground -tax avoidance. A tax avoidance arrangement, one that alters the incidence of taxation or relieves a person of the liability for income tax by postponing or reducing income tax, is void against the Commissioner of Inland Revenue. The literal application of the relevant sections would catch numerous transactions. For instance, a builder, needing a van for her business, will likely be faced with at least two methods of acquiring the vehicle, purchase or lease. It is likely the two methods will give rise to different income tax consequences. We would expect that the builder would choose the method that has the more favourable impact on her tax liability. Read literally, this choice renders the transaction vulnerable to challenge by the Commissioner of Inland Revenue. It is the search to give meaning to the section in a way that catches the activity that the legislature has proscribed while allowing taxpayers to make the choices that seem legitimate that has vexed the Courts for so long. This part of the book considers all the essential elements that the Commissioner has to establish to meet the statutory criteria, and analyses in detail the jurisprudence around the choice principle and tax 'mitigation'. This is a difficult and shifting area of the law and the book guides us through it well. Parts D and F deal with administrative matters: the return filing and assessment processes, dispute resolution and penalties. There are penalties for such matters as not filing returns and for not paying tax on time. There are also severe penalties for breaching standards ranging through to a penalty of 100 per cent of the tax shortfall for taking an 'abusive tax position'. These are significant penalties for what is lawful activity. It will be interesting to observe how the Courts interpret these sections and it is to be expected that future editions of this book will include more than descriptions of the provisions.

Tax is a subject that lawyers commonly shy away from. As a result, chartered accountants have established virtual hegemony over tax practice. It would be totally inappropriate to denigrate the importance of the accountant's perspective and learning in taxation practice. On the other hand, there is, in this intensely legal framework of statutory interpretation and case analysis, an important place for the lawyer and not just for those who specialise in taxation. As Benjamin Franklin noted in 1789, there are only two certainties in life, death and tax. There are tax consequences of innumerable transactions entered into daily; there are for example tax consequences in relationship property transfers, on the purchase of land and on death. There is a role for lawyers in all these transactions whatever

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area of the law they practice in. Law students, and no doubt practising lawyers as well, are put off tax for various reasons, not least of which is a fear that tax involves doing sums. The importance of this book lies in the creation of a coherent, extensive treatment from a legal perspective. It will be an extremely useful point of reference for law students. It will be a very useful work for practitioners as well. In terms of the six-step process identified by the authors of this book, there is a vital role for lawyers in steps one, two, three and five. These are not the places of arithmetical calculations. These are occasions for the characterisation of transactions and fact finding within the context of statutory interpretation. It is here the lawyer should find him or herself comfortably at home. The real importance of this book lies not in making tax law seem simple (because it is not), but in demonstrating that tax is truly a matter of law and not just a matter of sums. The definition of a treatise is a work that deals with a subject systematically and extensively. That description is certainly apposite for "Income Tax in New Zealand"'.

Shelley Griffiths, Faculty of Law, University of Otago.