GAAR (Anti-Avoidance) v GAAR (Anti-Abuse)

Abstract

Nations such as New Zealand and recently the United Kingdom have sought to tackle the problem of tax avoidance through General Anti-Avoidance Rules (‘GAAR’s) rather than relying solely on specific Targeted Anti-Avoidance Rules (‘TAAR’s). The New Zealand GAAR (ss BG1 and GA1 Income Tax Act 2007 (‘ITA 2007’)) can be traced back to s 40 Land and Income Tax Assessment Act 1891. By contrast, the United Kingdom has long resisted calls for the enactment of a GAAR, relying instead on judicially developed doctrines. The comparatively recent enacted Part 5 of the Finance Act 2013 incorporates this Nation’s first GAAR, operative from 17 July 2013. This paper critically evaluates the GAARs in each of these Nations to determine which approach (anti-avoidance v anti-abuse) is preferable. It concludes that the United Kingdom GAAR is too narrow, being confined to abusive tax schemes. Whether an arrangement is “abusive” is subjective and uncertain, effectively being determined by a person’s tolerance for tax avoidance. The uncertainty under this GAAR is multiplied by the introduction of the “double reasonableness” test that excludes the tax arrangement from being considered abusive if it can reasonably be regarded as a reasonable exercise of choices of conduct afforded by the provisions of the Act. It is contended that this sets too high a threshold and significantly narrows the scope of the GAAR. Further, the burden of proving this double unreasonableness test lies with HMRC, not the taxpayer. Ultimately while the New Zealand GAAR has been subject to criticism, it is a more effective tool to combat tax avoidance.