Tax Avoidance: Causes and Solutions - Scholarly Commons Home

incurs ... Income tax is avoided ... when the taxpayer reduces his liability to tax without
involving him in the loss or expenditure which entitles him to that reduction.”
In Challenge 146 case, the Privy Council suggested that for a taxation advantage to be
enjoyed, the taxpayer should actually incur the expenditure, loss or disadvantage, that
Parliament intended the taxpayer to have suffered in that situation. Tax avoidance is distinct
from tax mitigation, is sometimes said to be identifiable by the presence of the “hallmarks”
or “badges” of tax avoidance. Thus, tax mitigation is outside the scope of the general antiavoidance
provision where the taxpayer obtains a tax advantage by reducing his income or
by incurring expenditure in circumstances in which the taxing statute affords a reduction in
tax liability.
However, in case Hadlee 147 , the Court of Appeal question about the distinction, Cooke P
stated that: “The distinction between tax avoidance and tax mitigation is both authoritative
and convenient for some purposes, but perhaps it can be elusive on particular facts.
Whether it could solve all the problems in this field may be doubtful and none of the cases
collected by Lord Templeman at pp 562-3 of the report is closely in point.”
The distinction of tax avoidance and tax mitigation was further rejected by the House of
Lords in Macniven v Westmoreland Investments Ltd 148 as well as in O'Neil v CIR, 149 where
the Privy Council described it as unhelpful because it describes a conclusion rather than a
signpost to it. Clearly, the concept tax mitigation has now been effectively nullified.
The purpose test
The next step of identifying the tax avoidance arrangement is to determine the purpose or
effect of the arrangement and whether the purpose or effect of tax avoidance is not merely
incidental.
In the general anti-avoidance context, the predication approach has been used by the courts
to determine in which the arrangement was entered into whether it has a purpose or effect
146 Ibid.
147 Hadlee & Sydney Bridge Nominees Ltd v CIR [1991] 3 NZLR 517 (CA).
148 Macniven v Westmoreland Investments Ltd [2001] 2 WLR 377 (HL).
149 O'Neil v CIR (2001) 20 NZTC 17,051 (PC).
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