Tax Avoidance: Causes and Solutions - Scholarly Commons Home

might have arisen but for the arrangement, and if ‘might’, probably might or ordinarily
might or conceivably might?’ A complicating fact is that every financial transaction of the
taxpayer may effect a tax change and it is not to be supposed that the potential or
prospective liability in respect of future income to which the definition refers was intended
to have that reach. ...”
This difficulty is also discussed by Inland Revenue 142 : “The comments of Richardson J
suggest he was not willing to extend the reach of the definition to apply to every financial
transaction that may effect a tax change. If this is taken to reflect the stance taken by judges
generally, the practical matter remains as to whether to come within the definition of
‘liability’, the liability must be one which would have arisen, or which probably or
conceivably might have arisen, but for the arrangement.”
In essence, it would appear that what is necessary is a test that recognizes an outcome that a
reasonable person would expect to have occurred in the absence of the actual transaction
that did occur.
Tax Mitigation
The distinction between tax mitigation and tax avoidance was first introduced by the Privy
Council in Challenge 143 .The Board began by citing Lord Tomlin's famous statement in the
Duke of Westminster 144 that:
“... every man is entitled if he can to order his affairs so that the tax attaching under the
appropriate Act is less than it would otherwise be.”
The majority subsequently recorded their view on tax mitigation in the following way 145 :
“Income tax is mitigated by a taxpayer who reduces his income or incurs expenditure in
circumstances which reduce his assessable income or entitle him to reduction in his tax
liability. Section [BG 1] does not apply to tax mitigation because the taxpayer's tax
advantage is not derived from an ‘arrangement’ but from the reduction of income which he
142 Inland Revenue, Exposure Draft INA0009: Interpretation of Sections BG 1 and GB 1 of the Income Tax
Act 2004, Wellington, September 2004, p 32, para 3.3.29.
143 CIR v Challenge Corporation Ltd (1986) 8 NZTC 5,219.
144 CIR v Duke of Westminster [1936] AC.
145 CIR v Challenge Corporation Ltd (1986) 8 NZTC 5,219, 5,225.
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