Tax avoidance - a view from the dark side.

• Jurisdiction: Australia
• Author: Bloom, David
• Date: 01 April 2016

In discussion of tax avoidance in Australia and the United Kingdom, attempts are generally made to define tax avoidance by distinguishing it from other tax activities--often with positive or negative connotations. However, an examination of the nature of taxation and the anti-avoidance provisions now present in both jurisdictions suggests that the way the law views tax avoidance may not match some political rhetoric. This article argues that courts should be trusted to give effect to parliamentary intention, and that, in the words of Lord Hoffmann, 'tax avoidance in the sense of transactions successfully structured to avoid a tax which Parliament intended to impose should be a contradiction in terms'. Tax avoidance, where specific and general anti-avoidance provisions are present, is always unsuccessful.

CONTENTS I Introduction II The Relevance of Morality III Exitus Acta Probat IV The Obligation To Pay Tax Is, of Necessity, Legal and Not Moral V The Duke of Westminster Case VI The Role of the Courts and of the Profession VII The Australian GAAR VIII Thesis IX The United Kingdom GAAR I INTRODUCTION

I know of only one authority which might justify the suggested method of construction:

'When I use a word,' Humpty Dumpty said in rather a scornful tone, 'it means just what I choose it to mean, neither more nor less.' "The question is,' said Alice, 'whether you can make words mean so many different things' 'The question is,' said Humpty Dumpty, 'which is to be master--that's all.'

After all this long discussion the question is whether the words 'If a man has' can mean 'If a man thinks he has.' I am of opinion that they cannot, and that the case should be decided accordingly. (1)

Much has been written on the topic of 'tax avoidance' in Australia and in the United Kingdom. I have restricted myself to these two jurisdictions because both now have a general anti-avoidance rule ('GAAR')--Australia, federally, since 1915 and the United Kingdom only recently, the addition having been made by the Finance Act 2013 (UK) c 29 ('Finance Act'). (2)

In his Adventures in Tax Avoidance the late Peter Clyne said: "Ihe first thing to do when we are writing or thinking about tax avoidance is to stop mincing words'. (3) I propose to follow his counsel. Lord Denning MR said in Re Weston's Settlements; Weston v Weston: 'The avoidance of tax may be lawful, but it is not yet a virtue'. (4) And Murphy J, in O'Brien v Komesaroff, described the respondent's 'tax-avoidance' schemes as 'anti-social activities'. (5)

Attempts are generally made to define tax avoidance by distinguishing it from other tax activities such as 'tax minimisation', 'tax planning' and 'tax evasion'. In his foreword to Justice Pagone's book Tax Avoidance in Australia, (6) the Hon Murray Gleeson, former Chief Justice of Australia, distinguishes between 'legitimate tax planning' on the one hand and 'illegitimate tax avoidance' on the other. (In this, as in many things, he is, as will be seen, and in the writer's view, correct.)

He adds: 'Tax evasion was a different issue, and one normally dealt with by the penal law'. (7) With one Australian exception, he is again correct. In Victoria, tax avoidance was, by the Income Tax Act 1895 (Vic) made an offence. Thus s 44 provided:

(1) Every contract covenant agreement or undertaking made or entered into whether by deed, or in writing, or verbally either before or after the commencement of this Act between or by any person or persons or companies whatsoever which but for the provisions of this section would altogether or partially relieve any person or company from the burden or incidence of the tax or from liability to pay any tax shall so far as such contract covenant agreement or undertaking relates to or covers the tax be wholly and absolutely null and void.

(2) Every person or company who is a party to any such contract covenant agreement or undertaking made after the commencement of this Act shall be guilty of an offence and shall on conviction be liable to a penalty not exceeding One hundred pounds. (8)

In the body of his book, Justice Pagone cites Lord Nolan's distinction between 'impermissible tax avoidance' and 'permissible tax minimisation'. (9) Again, with respect, this puts it correctly, although it must always be remembered that both are perfectly lawful activities.

Where the line becomes blurred, is when judges and academics apply adjectives to 'tax avoidance' attempting to distinguish between 'acceptable' and 'unacceptable' tax avoidance, effective' and 'ineffective' tax avoidance and, more simplistically, 'good' and 'bad' tax avoidance. Such distinctions play into the hands of politicians, and the journalists who assist them, in the practice of demagogy.

In her 2004 paper titled 'Defining Taxpayer Responsibility: In Support of a General Anti Avoidance Principle', Professor Judith Freedman equates 'acceptable avoidance' with 'tax planning or mitigation'. (10) Lord Hoffmann, in his 2005 lecture on 'Tax Avoidance', refers to a decision that employees who were paid in platinum sponge which was instantly convertible into cash were, for Pay-As-You-Earn purposes, 'paid in money' and says: 'Judges sometimes draw a distinction between acceptable tax avoidance, like giving up smoking, and unacceptable tax avoidance, like schemes with platinum sponge'. (11) In concluding, Lord Hoffmann says:

The lesson, in my opinion, is that tax avoidance in the sense of transactions successfully structured to avoid a tax which Parliament intended to impose should be a contradiction in terms. The only way in which Parliament can express an intention to impose a tax is by a statute which means that such a tax is to be imposed. If that is what Parliament means, the courts should be trusted to give effect to its intention. Any other approach will lead us into dangerous and unpredictable territory. (12) Again, as will be seen, in the writer's view this statement is correct in Australia because our statute contains anti-avoidance provisions--both specific and general. I later hazard the view that the position now ought to be the same in the United Kingdom.

In a joint paper published by Oxford University, Professors Freedman and Devereux and Dr Vella refer to effective' tax avoidance. (13) Its opposite is, presumably, 'ineffective' tax avoidance. Yet isn't all tax avoidance ineffective under a statute with provisions which target 'avoidance' and render it ineffective? The authors later seem to arrive at this result when they opine that '[s]trictly speaking', a 'scheme [which] is effective ... is not tax avoidance at all'. (14)

II THE RELEVANCE OF MORALITY

In a speech delivered to the 18th Australian Legal Convention in Canberra on 8 July 1975 (and published in the Australian Law Journal) Sir Anthony Mason, then a Justice of the High Court of Australia and later Chief Justice, said:

There is the never-ending debate on the morality of tax avoidance and, more recently, the morality of lawyers participating in it. To me it has always seemed that the morality of tax avoidance (as distinct from tax evasion) is very much a matter for the individual taxpayer, although he runs the risk of adverse comment... However, the morality of tax avoidance is a matter separate and distinct from the issue of tax liability in particular cases. (15) In a 2004 paper, Professor Freedman pointed out that the 'debate about whether morality has a place in the arena of tax avoidance is nothing new'. (16) She refers to an article by Professor Wheatcroft where he concluded that

whatever may be the personal sympathies of a judge who tries a Revenue case, his decision has to be based on purely legal and technical grounds, and Parliament can expect no discretion or elasticity from the courts in enforcing taxation law. (17) It is worth noting, while we are on the tricky subject of morality, that not everyone shares the government's fervent zeal for taxation and its collection. Whether the Parliament likes it or not, income tax is, in every sense, an imposition. Thus, by the Income Tax Act 1986 (Cth) s 5(1) 'income tax is imposed' upon taxable incomes, not anything else; and the tax imposed by s 5(1) is levied and made payable for the financial year by s 7. (18)

One could, perhaps appropriately, begin this discussion at Runnymede. But an interesting definition of taxation appears very much later, in 1980, in The Oxford Companion to Law:

Traditionally the principal way in which the ruling classes in organized communities have oppressed, fleeced, and expropriated some of their subjects. It has been known from very early times, and from the earliest times the tax-gatherer has been an object of public fear, hatred, and execration. Taxation was originally a contribution levied from people generally to defray the major common expenses of the State, namely defence and the maintenance of law and order, but not only have the public purposes for which taxation is levied widened to include public health, education, housing, town planning, social services, subsidies to industries, and many other purposes, but taxation is now even in nominally liberal-democratic countries the major weapon of class-warfare, designed to rob some people of their earnings and property in the interest of 'redistribution of wealth'. Indeed, in effect some individuals are expected to work gratuitously, receiving a small percentage commission from the State for their efforts. The tax system is the greatest inhibitor of effort, ingenuity, and exercise of ability. There are no adequate rewards for ability, skill, ingenuity, and responsibility. Subsidiary purposes are to limit the expenditure on socially undesirable consumption goods, such as alcohol or tobacco, and to stimulate or inhibit economic activities. In practice all taxation does far more to inhibit than ever to stimulate economic activity or growth.

The taxing power and its exercise was frequently a matter of dispute between King and Commons and...