Tax Avoidance: Causes and Solutions - Scholarly Commons Home

section GB 1(1) to adjust the income of the taxpayer so as to counteract any tax advantage
derived by the taxpayer from the arrangement.
Section GB1 ITA 2004 provides as follows:
“Where an arrangement is void in accordance with section BG 1, the amounts of gross
income, allowable deductions and available net losses included in calculating the taxable
income of any person affected by that arrangement may be adjusted by the Commissioner
in the manner the Commissioner thinks appropriate, so as to counteract any tax advantage
obtained by that person from or under that arrangement, and, without limiting the generality
of this subsection, the Commissioner may have regard to…”
The object of s BG 1 is to grant the Commissioner the power to adjust the taxpayer's
income tax liability subject to an arrangement as if that arrangement had not been entered
into or carried out. It was recognised in Mangin 166 that:
“[the section] gives rise to a number of extremely difficult problems as to what
hypothetical state of affairs is to be assumed to exist after the section has annihilated the tax
avoidance element in the arrangement.”
In Miller 167 , the Court of Appeal discussed the ambit of the Commissioner's power under
the reconstruction section:
“.. gives the Commissioner a wide reconstructive power. He 'may' have regard to the
income which the person he is assessing would have or might be expected to have or would
in all likelihood have received but for the scheme, but the Commissioner is not inhibited
from looking at the matter broadly and making an assessment on the basis of the benefit
directly or indirectly received by the taxpayer in question.”
The Commissioner therefore considers section GB 1(1) allowing the exercise of a wide
discretion in the adjustment of gross income, allowable deductions and net losses subject to
a tax avoidance arrangement, so as to counteract any tax advantage. The adjustment can
only be made where a tax advantage has been obtained and the adjustments may apply to
166 Mangin v CIR [1971] NZLR 591, p 602 per Lord Wilberforce (PC).
167 Miller v CIR; Managed Fashions Ltd v CIR (1998) 18 NZTC 13,961, 13,980 (CA).
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