Tax Avoidance, Compliance, and Ethical Considerations
Core framework
New Zealand has a general anti-avoidance provision (the arrangement provision) that can void a tax advantage from an arrangement with a dominant purpose of tax avoidance. Candidates must know the penalties regime, the disclosure obligations, and the tax agent and ethics standards.
Key concepts: tax avoidance vs tax mitigation; the dominant purpose test; shortfall penalties (unacceptable interpretation, gross carelessness, evasion); voluntary disclosure reductions; tax agent obligations; and the code of conduct for tax agents. Ethics includes confidentiality, competence, and avoiding conflicts of interest.
Traps
- Treating a legitimate commercial arrangement as avoidance merely because it reduces tax; the dominant purpose must be tax avoidance.
- Forgetting that voluntary disclosure before notification can reduce penalties.
- Ignoring the tax agent obligation to act honestly and with reasonable care.
- Confusing avoidance (arrangement) with evasion (deliberate omission or fraud).
Worked example
A taxpayer restructures a business with a genuine commercial purpose but also obtains a tax benefit. The Commissioner may examine the dominant purpose. If the arrangement is found to be avoidance, the tax advantage may be voided and a shortfall penalty may apply.
Rule of thumb
Ask: what is the dominant purpose of the arrangement? Then consider disclosure and penalty consequences.