tax avoidance? not legitimate!

i finally caught up with the 60 minutes piece about nz being used as a tax haven via the rules around foreign trusts.  if you haven't seen it yet, then it's well worth a watch.  as a chartered accountant, i found the funniest bit being peter dunne's use of the of the phrase "legitimate tax avoidance", backed up by one mr key.

seriously dudes, you never heard of the winebox inquiry and the changes to the law which followed.  such as section BG1 of the income tax act 2004, which kind of goes like this:

BG 1 Tax avoidance

Avoidance arrangement void

(1) A tax avoidance arrangement is void as against the Commissioner for income tax purposes.

Reconstruction

(2) Under Part G (Avoidance and non-market transactions), the Commissioner may counteract a tax advantage that a person has obtained from or under a tax avoidance arrangement.

the 2004 act has been replaced by the 2007 act, but the provision still remains & it's still at section BG1.  it basically means that once the commissioner of inland revenue decides the structure or scheme you've set up is solely for the purpose of tax avoidance, he gets to ignore it or set it aside and assess tax as if that whole thing had never happened.  the onus is then on you to prove that you had valid commercial reasons for doing what you did, and the tax avoidance was merely incidental.

tl;dr version: tax avoidance is not legitimate in this country, unless it's merely incidental.  for example, we had the whole thing with livestock values in this country*, where farmers could switch between valuation methods in order to get the best result.  the hitch was that one of the schemes could only be switched out of 2 years after you made the choice to change.  of course there were times when the tax advantage was huge in the current year, so the 2 year wait was really inconvenient.

in order to avoid the 2-year wait, farmers would set up a trust or a company and sell all their livestock to the new entity which could use whichever valuation method it chose.  well, guess what?  the IRD has deemed this tax avoidance, and have announced that they are going to review farm accounts in the period of 2008 & 2009, to see if any farmers had done such a thing.  any who get caught are going to end up with a huge tax bill, because the change in valuation methods will be reversed and will then have flow-on effects for all subsequent years.  add on late payment penalties and the IRD's exceptionally high interest rates, and i bet some farmers are having a little trouble sleeping about now.

basically, the effect of the winebox inquiry was a removal of the distinction between tax avoidance and tax evasion - other than the fact that the latter is a criminal offence while the former isn't.  but neither of them is legitimate.  the fact that mr key doesn't know this isn't quite so surprising - he was out of the country when a lot of this stuff was happening.  but what is mr dunne's excuse?   he's been minister of revenue for a pretty long time, and has had ample opportunity to learn about his portfolio.

* in case you hadn't caught up with it, which is likely if you aren't interested in tax laws, changes have been made so that you can't switch out of this particular valuation method at all now.