Wins likely to encourage IRD pursuit

Thomas Pippos. Photo / Supplied

Encouraged by its big wins in the Westpac, BNZ and Trinity tax cases, the Inland Revenue Department is likely to pursue other transactions which may comply with the letter of the law but which it regards as being avoidance, says tax expert Thomas Pippos.

This week Justice Rhys Harrison ruled Westpac's use of a series of "structured finance" transactions between 1998 and 2002 were tax avoidance and he upheld the IRD's amended assessment against the bank which currently stands at $961 million including interest.

The BNZ lost a similar case against the IRD several weeks ago, taking a $661 million hit.

"Now that they've actually had some wins you will be seeing the department probably looking at some other transactions from an avoidance perspective much harder than it looked at them in the past", Deloitte's Pippos said yesterday.

Chapman Tripp tax partner Casey Plunket observed that Justice Harrison's ruling added to the growing body of jurisprudence around the principle set out in Section BG 1 of the Income Tax Act, that a taxpayer can be deemed to have been avoiding tax even though they have complied with the letter of the law.

That principle was central to the IRD's arguments in the Trinity or Ben Nevis tax case which went to the Supreme Court.

Pippos said relevant legislation in a number of relevant areas was far from perfect. In the past the IRD might have moved to have the law changed when it identified something it didn't like, but recent cases demonstrated its willingness to challenge transactions from an avoidance point of view, employing a wider ranging application of BG1 before it can get the law changed.

This had now created "huge uncertainty" as to where tax minimisation crossed the boundary into tax avoidance.

As the structured finance cases progressed through the courts, the IRD "has been careful not to clarify the essentially grey area of tax avoidance", he said.

It remained to be seen "how high above the legislation" IRD would look when pursuing transactions or arrangements it perceived to be tax avoidance.

BNZ has said it will appeal Justice Wild's High Court decision, and Westpac is expected to follow suit.

Plunket said it was likely ASB Bank and ANZ National would await the outcome of the BNZ and Westpac appeals before taking their cases to court.

He said while there were clearly grounds on which Justice Harrison's ruling could be challenged, in many respects it was a "dispassionate and sound" consideration of the issues.

He noted Justice Harrison largely discounted a number of aspects including the overall cost to the tax base which Justice Wild "commented on with a degree of indignation" in his ruling on the BNZ case. "It does give the whole thing a more balanced feel."