TAX AVOIDANCE CASES
Although the levy avoidance provisions in the Act are new in the insurance context, many have been copied from existing tax avoidance provisions in income tax legislation. As a result, the courts are likely to have regard to previous tax avoidance cases when interpreting the new levy avoidance provisions in the Act.
The legal test
The leading tax avoidance case in New Zealand is the Supreme Court decision in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue  2 NZLR 289. The case involved a forestry investment scheme with complex contractual arrangements. Investors in the scheme had essentially claimed deductions in their 1997 income tax returns for insurance premiums and licence fees that they had contractually promised to pay after harvesting the forest 50 years later. The IRD argued that the entire investment scheme was a tax avoidance arrangement.
The majority of the Supreme Court expressed the test for tax avoidance in the following way:
“The ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament's purpose.”
The Court described the insurance aspects of the investment scheme in Ben Nevis as “artificial and contrived”. The payment of insurance premiums and licence fees had been deferred for 50 years. The promised payments might in fact never be paid. The insurance company involved had also been incorporated in the British Virgin Islands specifically for the investment scheme and was controlled by an investor who was a tax lawyer and the architect of the entire scheme.
In context, the contractual promises the investors had made to pay insurance premiums and fees 50 years later, when viewed in a commercially and economically realistic way, could not have been within the contemplation of Parliament when the provisions allowing income tax deductions had been enacted. As a result, the entire investment scheme failed to pass the 'parliamentary contemplation' test and was a tax avoidance arrangement.
The taxpayers in Ben Nevis had argued that the courts should interpret tax avoidance legislation in a way that gives taxpayers “reasonable certainty in tax planning.” However, the Supreme Court declined to give more detailed guidance on the test for tax avoidance. The majority stated:
“The courts should not strive to create greater certainty than Parliament has chosen to provide. We consider that the approach we have outlined gives as much conceptual clarity as can reasonably be achieved. As in many areas of the law, there are bound to be difficult cases at the margins. But in most cases we consider it will be possible, without undue difficulty, to decide on which side of the line a particular arrangement falls.”
The Ben Nevis case was one that clearly fell on the 'tax avoidance' side of the line. However, it remains to be seen whether it will be as easy to distinguish levy avoidance from legitimate business decision making in the insurance context.
There is no restriction on what the court can take into account when considering whether a tax avoidance arrangement exists. The factors that are relevant and their significance will vary in each case. However, the features that might be examined include:
- The economic and commercial effect of documents and transactions;
- The nature and extent of the financial consequences for the taxpayer;
- The way the arrangement is carried out;
- The role of all relevant parties and any relationships between them;
- The duration of the arrangement; and
- Whether the arrangement has been structured in an artificial or contrived way.
The very broad definitions of "levy avoidance" and "levy avoidance arrangement" in the Fire and Emergency New Zealand Act 2017 make it inevitable that the courts will at some stage be asked to assist with interpreting the Act and applying it in the insurance context. It remains to be seen:
- where the courts will draw the line between acceptable insurance policy and pricing arrangements and levy avoidance; and
- how easy it really is to decide on which side of the line a particular arrangement falls.