Tax Avoidance: Causes and Solutions - Scholarly Commons Home

elated to all of the six software packages purchased. Each of the purchases and subsequent
claims for depreciation losses for each of the software packages were tax-avoidance
schemes.”
In case J61 49 , a farmer claimed significant write downs on livestock that had been
purchased and leased back to the vendor. Judge Baber found the arrangement “disclose a
clear purpose of tax avoidance.” “The arrangements consisted of the said agreements
entered into by the objector with the various farmers regarding stock. I find that such
arrangements would not have been entered into in that particular way unless tax avoidance
had been among the purposes of the objector. Further, it is clear from the evidence that tax
avoidance was the main purpose.”
3.0 Current New Zealand approach
3.1 Overview
How the court ascertains the legal effect of a transaction is a critical issue because the
initial tax liability of a taxpayer will be determined by how the transaction is characterized.
There are two possible ways used by the court to discover the true meaning of a transaction.
One approach is to look for the legal nature of a transaction (i.e. the "form"), while the
other approach ignores the legal position and regard is given to “the substance of the
matter”. Commonly, these contrasting approaches are called “form and substance”. 50 The
form method assesses the form or legal character of the arrangements actually entered into
and carried out by the taxpayer while ignoring the economic consequences arising from the
transaction. The substance method, on the other hand, looks at the real substance of the
transaction, focusing on the overall economic result intended and achieved by the
transaction.
The form approach was affirmed by the House of Lords in the leading case of IRC v Duke
of Westminster. 51 And New Zealand Courts follow the approach in tax cases to uphold a
taxpayer's arrangements even if the purpose or object of those arrangements is to avoid tax.
However, there are two situations where the form approach does not apply. First, where the
49 (1987) 9 NZTC 1366.
50 Inland Revenue Department, IG9702: Form and Substance in Taxation Law, Wellention, 1997.
51 [1936] AC 1.
19