Judicial Approaches to Tax-Influenced Financial Arrangements

Abstract

A study of judicial approaches to tax-influenced financial arrangements raises two issues: the characterization of transactions for tax purposes, and the interpretation of tax legislation. This paper addresses the first in the context of form and substance approaches, considering how broad a view the courts should take in looking for the real substance of the transaction. Subsequent to an explanation of the conventional form-based approach of the courts following the Duke of Westminster, the exceptions to this rule are raised (sham transactions and arrangements to which a general anti-avoidance provision applies), leading to a discussion of the development of the fiscal nullity doctrine in England, and its rejection in Australia. On the subject of Judicial interpretation of tax legislation, this paper analyses the scheme and purpose approach adopted in New Zealand and its limits; that is, the extent to which the underlying scheme and purpose of the legislation may be obscured by conflicting objectives within the legislation, reliance on outdated provisions, the absence of a comprehensive concept of income and the imperfections of tax accounting. In advocating for this approach, examples are given which illustrate the difficulty of identifying tax norms and principles for general application, through a discussion of: (1) the relationship between sections 260 and 51 of the Australian income tax legislation; (2) whether the treatment of personal exertion income should rest on identifiable underlying tax norms; and (3) the simplistic approach to assessability/deductibility of interest.

Abstract by Allegra Crawford.

Keywords: The Judiciary, tax-influenced financial arrangements, income tax, statutory interpretation, form and substance, sham transactions, general anti-avoidance provisions, fiscal nullity doctrine, tax legislation, scheme and purpose, tax accounting, tax norms, assessability and deductability of interest

JEL Classification: H20, H24, H25, K34