Alesco to do battle in Supreme Court

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The Supreme Court’s decision to hear Alesco’s tax battle with the Inland Revenue Department has brought a collective sigh of relief to taxpayers and their advisers – but also a degree of apprehension.

The most recent anti-avoidance cases have been slam-dunks for the commissioner and taxpayers will not be holding their breath for the tide to turn in their favour.

All we can hope for a more clarity around the anti-avoidance rules.

This is why the Alesco appeal is so important.

It is not simply grandstanding by those with vested interests. The principles at stake go far beyond that.

Alesco, and other taxpayers involved in hybrid-type funding structures, were relying on determinations issued by the commissioner and that the resulting tax deductions were significantly less than would have been available under more conventional funding, such as interest-bearing loans.

Simply because someone decided to do something in a tax efficient manner does not, and should not, automatically brand the behaviour as tax avoidance.

The court’s decision to allow the appeal comes hard on the heels of the IRD’s Interpretation Statement of the rules – its first, and long overdue, anti-avoidance statement since February 1990.

Deep within the 133-page document are some gems.

First up is an acknowledgement that not all complex fact situations or undesirable policy outcomes amount to tax avoidance – an interesting statement as this is not how the commissioner has tended to view the tax avoidance world.  

In her words:  “Even when an arrangement is complex or unusual, or produces tax results that may be undesirable from a policy perspective, it may not be a tax avoidance arrangement.  Taxpayers may structure arrangements to their best tax advantage, provided the use of the provisions is within what Parliament would have contemplated.  However, literal compliance with the provisions is not sufficient to establish that the use is within Parliament’s contemplation."

This is good news, as the line in the sand appeared to have moved so far in favour of the tax office that where taxpayers had a choice of paying a higher or lower amount of tax, they would always opt for the higher amount or run the risk of being slam-dunked as a tax avoider. 

The downside is determining what may or may not be within Parliament’s contemplation.   Given what goes on during our Parliamentary question time, one sometimes wonders just how much Parliament actually contemplates.

Another gem is the statement that avoiding foreign tax will not be tax avoidance for the purpose of applying the anti-avoidance provisions.  

However, in true plain English fashion, this statement is then qualified by saying “...if the New Zealand tax avoidance purpose is an end in itself, and not merely incidental, the fact that there is a foreign tax purpose will not preclude the application of BG 1” (the anti avoidance provisions.).

For business operators, the tax avoidance interpretation statement will likely seem illegible goobledygook and of no practical use.

But for tax geeks it is a well-written, well-argued statement that, if anything, lacks practical details and examples.  This, however, is not unexpected.  Providing ultimate certainty is possibly neither desirable nor even possible in this type of statement,  meaning if taxpayers really want certainty they should get a binding ruling and ensure they do not vary any of the factual situations on which this ruling is based.

But New Zealand cannot, and should not, take a blinkered approach and ignore what is happening in the rest of the world. The British tax office has issued extensive guidance on the use of its anti-avoidance rules. Under these, it would consider the counter-factual “what if” situation before applying the rules.

My reading of these, as they apply to the Alesco situation, is the fact the commissioner issued a determination stating the tax treatment, and that the available alternative would have resulted in less tax being paid, means Alesco’s funding would not have been deemed tax avoidance.

Joanna Doolan  is a tax partner with EY