Choice principle revisit - a closer look at Privy Council's decision in Peterson v CIR

Abstract

Choice principle is a very difficult concept in the context of tax avoidance. It ultimately ousts the operation of a general anti-avoidance provision in the Income Tax Act by saying that tax benefits obtained by a taxpayer can be permitted as a matter of statutory construction. This principle was initially developed in Australian courts. It has only been considered as well established in New Zealand since the Privy Council decision in O’Neil V C of IR. On 28th February 2005, the Privy Council delivered the final decision of Peterson v C of IR. Despite the tax avoidance arrangement in Peterson being highly artificial, the Privy Council upheld the taxpayer’s appeal by saying that the depreciation deduction claimed was a legitimate choice. The position of choice principle, in the writer’s view, has been strengthened in New Zealand tax law after the Peterson decision. This is inevitable as the relationship between general anti-avoidance provision and other provisions of the Income Tax Act is not clearly defined. It has even been submitted that the choice principle should replace the general anti-avoidance provision and become the essential pillar in the area of tax avoidance. However, this proposition is outside the bounds of this dissertation. With the main purpose of revisiting choice principle from the Peterson decision, this dissertation also reviews concepts of “arrangement”, “tax avoidance”, “purpose and effect”, and “commissioner’s adjustment power”. These concepts are recommended by the Inland Revenue Department in its Exposure Draft as important steps to consider in a tax avoidance case, before and after applying choice principle.