Discerning Commercial and Economic Reality: Applying the GAAR to Frucor

New Zealand Journal of Tax Law and Policy, September 2021

19 Pages Posted: 1 May 2021 Last revised: 20 Jul 2021

See all articles by Craig Elliffe

Craig Elliffe

University of Auckland - Faculty of Law

Date Written: April 24, 2021


Even though the New Zealand courts have been interpreting this legislation for over 130 years, there is no doubt that applying the anti-avoidance rules is a difficult task. This is why it is common for judges to come to different conclusions or even arrive at the same conclusion through a different reasoning process. In Frucor Muir J so rightly observed, “Benchmarking against parliamentary intention, for all the appropriateness of the exercise, can be an elusive quest.” This article looks at the development of the general anti-avoidance rule in New Zealand in the specific context of the impending appeal of the Frucor case from the Court of Appeal to the Supreme Court.

This article begins with an exposition of the test in New Zealand before highlighting the significance of the approach in Ben Nevis from an economic substance perspective. In the light of this analysis, it then examines how the law, specifically the Parliamentary contemplation test, should be applied in expenditure related tax avoidance cases.

The conclusion reached is that the Parliamentary intention behind part D of the Income Tax Act is to provide a deduction for taxpayers. This deduction, however, ought not to be available when the expense, viewed in a commercially and economically realistic way, is not in economic substance borne by the taxpayer. This is an example where the line between acceptable tax planning and unacceptable tax avoidance is crossed and the analysis above therefore suggests the Court of Appeal were right to consider it in the latter category of transaction.

The nature of tax planning and tax avoidance necessitates an approach from Parliament that, in the hands of the judges, is both flexible and responsive. After more than a decade since the Supreme Court delivered the Ben Nevis judgment, one can see that the New Zealand legislation and case law is robust, challenging and effective against aggressive tax avoidance behaviour. On balance, despite the lack of commercial certainty, this is desirable.

Keywords: New Zealand tax avoidance, general anti-avoidance rules, GAAR, Frucor, Ben Nevis, economic substance

JEL Classification: H20, H87, K33, K34

Suggested Citation

Elliffe, Craig Macfarlane, Discerning Commercial and Economic Reality: Applying the GAAR to Frucor (April 24, 2021). New Zealand Journal of Tax Law and Policy, September 2021, Available at SSRN: https://ssrn.com/abstract=3833209 or http://dx.doi.org/10.2139/ssrn.3833209

Craig Macfarlane Elliffe (Contact Author)

University of Auckland - Faculty of Law ( email )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

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