Contemplation a dangerous tool

Recent court decisions on tax putting emphasis on what Parliament was contemplating when it made changes to tax rules are a "dangerous tool", says PricewaterhouseCoopers chairman John Shewan.

"Parliamentary contemplation" has its place, Shewan told the New Zealand Institute of Chartered Accountants (NZICA) tax conference.

"But it is hindsight based and fatally flawed. I'm very very worried where this might end up."

Shewan referred in particular to its use in, amongst others, the Bank of New Zealand Investments case and the Penny and Hooper tax case brought by the Inland Revenue Department.

The rule outlined in the BNZ case is extraordinarily broad, Shewan told the conference.

The ruling asked the question: "Would it have been within Parliament's contemplation that the specific provisions be 'deployed' ... in the manner in which they were deployed by the taxpayer in this particular arrangement?"

There is a risk of that becoming, at a practical level, a question of: "If we reconvene Parliament today, put this transaction before them, and ask them to reset their minds back to the date the legislation was passed, and ask whether, had they been aware of this particular arrangement, they would have contemplated that the specific provisions would have applied in the way argued by the taxpayer, would they say yes?"

That is unrealistic, he said. It presumes "Parliament can contemplate the vast array of commercial transactions and the adaptations that competitive markets inspire, and 'know' how to predict the 'acceptable' income tax reflex."

He asked whether it could be used to retrospectively invalidate the use of the portfolio investment entity (PIE) regime, along with the use of property investment losses to offset other income for tax purposes.

The two defendants, who are orthopaedic surgeons, were prosecuted by the IRD on the basis they were paying themselves below the market rate salary for their jobs, and doing so in a way to minimise tax.

The IRD lost the most recent round of the case, but the IRD is taking it to the Court of Appeal.

Shewan told the conference the lower court had interpreted the question of what was in the mind of Parliament very broadly.

The department's stance is that Parliament did not contemplate such arrangements when it brought in the 39% top tax rate in 1999.

Yet Parliament was specifically told, by Shewan and other tax experts, that such arrangements were an inevitable consequence of the new tax rate.

"The assumption seems to be Parliament would never have contemplated negative revenue consequences....Penny and Hooper should never have been a case before the courts, in my humble opinion."

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