In this edition, I will consider the technical meaning of the term “tax avoidance” and “tax evasion” in general. I may allocate several articles for this topic from now on.
Many people talk about tax avoidance but not may understand the correct meaning of this terminology. Some people believe the term “avoidance” is not a bad one, nor culpable while they believe “evasion” is. Is this the case?
You need to understand the contextual meaning of the term.
How? Let us look at the statutory usage of the two terminologies. Income Tax 2007 uses the terminology “avoidance” 136 times whereas Tax Administration Act 1994 uses the terminology “evasion” 17 times. The two terminologies are used in different contexts. Let us look at the details of the differences one by one.
We tend to use the word “evasion” when we intend to express different degrees of culpability. Clause 141A to S141E provides five different degrees of culpability and the highest level is defined as “evasion.” This section is designed to determine different levels of penalties when a taxpayer is found wrong in his or her tax return. S141E carries 150% civil penalty, together with criminal penalty. S141A may carry a civil penalty of $250 (up to $1000) per offence. Lupton v CIR is the authority on this and we plan to have a chance to analyze more in detail in the next (or so) edition.
We tend to use the terminology “avoidance” when IRD is challenging an entire scheme (or plan) as a plan to avoid tax liability or limit a tax liability. SBG1 provides that “a tax avoidance arrangement is void as against the Commissioner for income tax purposes (author’s emphasis). Ben Nevis v CIR is the most recent and highest authority on this point. The Supreme Court established parliamentary contemplation test in this case. Alesco v CIR is another authority on this point. It is sufficient to mention that there is a defence to this if you show that the avoidance was a “merely incidental” to the scheme. To help the audience have better and practical understanding, we will discuss more in detail on Ben Nevis in the next issue.
In a similar vein, s76 Goods and Services Act 1985 provides that “a tax avoidance arrangement entered into by a person is void against the Commissioner for tax purposes.” Tale Holdings Limited v CIR is an authority for this and we plan to discuss more in detail about this case in due course.
Now, let us assume that Mr Jun mistakenly family support in the year of 2014 under the Child Support Act 1991. Let us assume the application was granted as the income he reported was low enough. Let us again assume it turned out later that the tax return was wrong and he now has to pay the amount of the family support (with interest) back to IRD. In these circumstances, if Mr Jun made a simple mistake in calculating his taxable income which enabled him to apply the family support under the Child Support Act 1991 where we cannot find the word “avoidance” or “evasion”, then the culpability is to be assessed against s141A to S141E of the Tax Administration Act 1994.
What if he used a business purposely which was not in operation in any real sense as the business was in a name a company under the Companies Act 1993, and he created exaggerated amount of expenses, resulting in lesser amount of taxable income for tax purposes, and further he was enabled to apply for the family support, we can then see that the business was part of the entire scheme of arrangement under the Income Tax Act 2007, then the IRD will examine the entire settings including the paper business under SBG and GB of the Income Tax Act 2007 to see whether the scheme was one of those avoidance.
Likewise, if he made a fraudulent claim of GST relating to the paper business, the IRD will examine the scheme under s76 of the Goods and Services Act 1985 to see whether there was a scheme of avoidance.
This article is designed to give general information to the audiences and readers of this article. This is not designed to provide a legal advice to a particular person of particular circumstance. If you have any enquiries, you should seek legal advice on that issue. A. B. Lawyers Limited does not accept any liability arising from misjudgment by the audience, without having independent legal advice on his/her case.
The writer advises that translation to Chinese, from English version, is done by one of the office legal assistant. There may be occasions you notice misinterpretation, despite we do our best to make correct translation. If you notice that, it is much appreciated you let us know that.