New Zealand Revenue Department Moves On Tax Avoidance Schemes

by Mary Swire, Tax-News.com, Hong Kong

17 January 2002

The New Zealand Inland Revenue Department and the Treasury have released an issues paper proposing changes to the law in order to combat bogus tax avoidance schemes.

The schemes, which all but disappeared in the late 1980s, but have re-emerged in recent years, usually involve small investments in high risk areas such as films, forestry projects, and the commercialisation of concepts, and often involve the transfer of property at excessively high prices, thus magnifying the tax deductions available.

According to the issues paper, the financial structure is arranged in a such a way that investors are often able to claim greater tax deductions than the amount of money invested, and are at no risk of ever having to repay loans, but can still qualify for interest deductions. Such schemes often make use of non-residents, tax-exempt organisations, or entities not registered for GST.

The IRD claims that the potentially serious loss of tax revenue (by the end of the 2000 fiscal year, over $436 million in tax credits was being claimed by tax avoidance schemes), the potential effects on attitudes towards compliance for other taxpayers, the drain on Revenue resources, and the impact on investors in the schemes if the promised tax benefits do not arise, are all pressing reasons to change the law as quickly as possible.

The issues paper calls for the registration of all tax minimisation schemes meeting an as yet undecided number of criteria, and for the deductability of net tax losses beyond the money at risk to be deferred until such times as the scheme generates profit, or the financial structure is changed.

New Zealand's tax professionals have reacted cautiously to the IRD and Treasury proposals, arguing that genuine tax minimisation schemes may be caught up in the new laws. However, they have welcomed the plans for a registration process, believing that it will help the government to keep track of the tax avoidance schemes, and to monitor them.

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