Because tax avoidance is a struggle but legislation and ingenious taxpayers on the other hand , legislature seeks through the introduction of provisions that impose tax to ensure that objective of raising revenue for the government is achieved and thus blocks potential loopholes that may be used for tax avoidance.
This may take any of the following three forms
- May take specific provisions
- May impose specific ant-avoidance provisions
- May use general anti-avoidance provisions
1. Specific provisions
The legislature may impose tax in certain circumstances or upon certain taxations whether or not there is a motive for tax avoidance. It will not give exceptions. It thereby casts a net so wide that every conceivable taxpayer is caught and perfectly innocent taxations are subject to tax.
2. Specific anti-avoidance provisions
Law may after imposing a tax under certain circumstances may aim at specific taxation that may be entered into for purposes of tax avoidance. Provisions tend to cancel tax advantages in certain taxations and this cast a duty on courts that interpret this kind of statutes to consider the taxpayer and whether acts amount to tax avoidance or give him/her a tax advantage.
Depending on statutory definitions of tax advantage , the taxation must be one where if it were carried out in one way , there would be a liability to pay either tax or a greater amount of tax than if carried out in any other way.
Lord Upjohn in I.R.C vs. .Brebner .However circumscribed circumstances under which a tax advantage may bee removed by saying , “When the question of carrying out a general commercial taxation as this was and reviewed the fact that there were two ways of carrying it out.
1) Paying the maximum amount of tax
2) Paying more or much less tax
It would be quite wrong s an unnecessary through inference that in adopting another course , one of the main object is for purposes of the section , avoidance of tax. No commercial man in his right senses will carry out a commercial transaction except a…
3) General anti-avoidance provisions
Seeks to nullify tax avoidance in general and in England have been rejected as a mechanism of tax laws- insisted to have specific anti avoidance provisions. In the Commonwealth countries , this is what the British exported and it is what most tax laws have for tax avoidance statutes.
Lord Denning in Newton vs. Commissioner of Taxation (Australia)
The directors of a company increased the capital and simultaneously made a capital payment to shareholders out of undistributed profits. Was this arrangement to avoid tax? It was held that this arrangement was to avoid tax and it was therefore set aside.
In order to bring an argument within this section , you must be able to predicate by looking avert acts by which it was implemented in such a way as to avoid tax
If you cannot so predicate. You have to acknowledge that taxation is capable of reference to ordinary or family dealings and as such , they do not fall under this section.
Mancin vs. I.R.C
The appellant leased land to trustees upon which wheat was planted. Trustees were to hold the land for one year , cultivate it at a nominal rent. Under trust , any income that was to arise was to be held on trust for the benefit of appellant’s wife and children for which he did a separate trusts.Appelant employed by trustee to plant , harvest and sell what crop whose proceeds he accounted to trustees. He paid for the labor and expenses in return. The bulk of the .NET profit was distributed to the wife for benefit of the children. This continued for three years and the effect was to reduce appellant’s income , which trust , settled on wife and children from which the wife and the children claimed allowances and paid tax at owners rates.
Under general aanti-avoidancce provision , the commissioner sought to set aside taxation and hence appealed.Held , dismissing appeal by taxpayer , scheme was advised for sole purpose of escaping liability on substantial part of taxpayers income.