the "spirit" of the law

[airborne]

Hi,

so I started studying financial markets, financial law etc. One thing that has been frustrating me so much lately is the term "spirit".

Right now I'm reading about tax avoidance and tax evasion and the definition given for tax avoidance is "It interprets the letter[what is written?] rather than the spirit of the law, and uses techniques that are contrived..."

This is just bullshit!!!! it is a setup for decisions made by whim. This means if I give most of my taxable income to charity(if its authorized by bureaucrats its tax deductible) they can take me to court for tax avoidance if they feel like it... whatever goes. And this is not the only subjective BS I see, its everywhere and every time I see it I get pissed off.

Edited January 29, 2008 by airborne

[Qwertz]

That's an awfully sketchy definition of tax avoidance. Sounds like it was written by a Socialist. Or someone else who thinks it is every person's duty and privilege to pay taxes, and to do so cheerily.

Tax avoidance is trying to reduce a taxpayer's tax liability before it is incurred. Tax evasion is trying to avoid paying a tax liability already incurred. The latter is illegal, the former is not. I would appreciate it, if you do not mind, if you could share with us the author's cited statutory or case law to support the proposition that a taxpayer may be prosecuted for tax avoidance. That would help figure out what the author is really talking about.

In law, we very rarely invoke the "spirit of the law" because it is not a winning legal argument. We are much more likely to make reference to legislative intent, using the Congressional record (or the Federalist papers, or some other relevant document) as a reference. Take whatever issue you will with legislative intent as a source for interpreting the law (I take rather a lot myself); it is, alas, the state of things.

~Q

EDIT:

And now I'm noticing you are in Australia, so nothing I said may be at all applicable. Sorry.

Edited January 29, 2008 by Qwertz

[airborne]

There have been cases where people have been prosecuted for tax avoidance. But it depends on whether a violation occurred against the "spirit of the law".

A quick search returned me to a 2004 case where the "High Court upheld 5-0 an appeal by the tax office against a Canberra couple, the Harts, who split a home loan to claim big tax deductions on their investment property." and some press releases by the ATO(Australian Tax) warning anyone selling aggressive tax-planning schemes that they can be prosecuted. Some special cases are beyond the grasp of "spirit of the law" violations, e.g. certain strategies used by fund managers managing forced superannuation(this is like your IRA or 401k I think) contributions etc.

The focus of my subject isn't law so I cant delve into it to deeply,,,

Edited January 29, 2008 by airborne

[DavidOdden]

Right now I'm reading about tax avoidance and tax evasion and the definition given for tax avoidance is "It interprets the letter[what is written?] rather than the spirit of the law, and uses techniques that are contrived..."

Tax avoidance is generally understood to be the legal stuff and tax evasion is the illegal stuff, so your source may simply be confused about the two or might have a socialist axe to grind. But I understand that Australia has a General Anti-Avoidance Rule, and while it's very hard to find a literal statement of the rule, it seems to be the requirement that you not be deemed to have attempted to avoid the obligation which a tax-assessing panel determines you did in fact have. Bullshit, as you say. My quick distillation is that you are prohibited from doing X if the purpose of doing X is to reduce tax liability. An example would be a tax-divorce, something that was feasible and probably actual in the US, where a couple would have a better tax status if they were not married. It looks like you can seek a ruling in advance, if that helps.

[Qwertz]

David is spot on. I would only add, for thoroughness' sake, this bit:

My quick distillation is that you are prohibited from doing X if the purpose of doing X is to reduce tax liability[, even if X would be legal but for the purpose to reduce tax liability].

The question then becomes whether Australian law treats all actions X, having been predetermined to be "tax avoidance" actions, are prima facie evidence of an intent to avoid tax. US courts got rid of a similar kind of rule that applied to all criminal cases a while ago. That is the limit of my recollection of the subject.

~Q

[John McVey]

One thing that has been frustrating me so much lately is the term "spirit".

Right now I'm reading about tax avoidance and tax evasion and the definition given for tax avoidance is "It interprets the letter[what is written?] rather than the spirit of the law, and uses techniques that are contrived..."

The key phrase is economic substance. The spirit of the tax law is that certain things should be taxed and certain things should not be taxed, where the law is to be applied so as to tax according to the actual economic substance of the things in question. This is covered in section 177D of the Income Tax Assessment Act 1936 (aka ITA36). Tax avoidance schemes are those deemed to be arranged so as to comply with the letter of the law while having an actual economic substance other than what the framers of the law had in mind as its purpose.

If you have a decent tax text it will give you the meanings and case citations for key terms like "scheme," "purpose," "taxpayer," and so on. I don't know about today's, but the CCH "2002 core tax legislation and study guide" I have includes this material. CCH are world-respected so I presume the latest will be equally as good. If not, just pop around to a law library and ask to be shown a decent text.

Many commentators have noted there is an uneasy tension between tax avoidance and legitimate tax planning. They even note that there are conflicts between the avoidance issues and principles against them on the one hand and the use of provisions expressly to shift taxpayer behaviour this way and that on the other! The real problem is inherent in the concept of tax: there is no such thing as a fair tax, it is all inherently unjust, and so it cannot ever objectively be set down in writing. The result is what we have: in jurisdictions without general avoidance provisions there is the conflict between the black-letter and the spirit, and an open door to subjectivism in jurisdictions that do have general avoidance provisions.

This ... is a setup for decisions made by whim.

Ultimately, yes, but not in the short run. What it relies on in the first instance is determination by what would be seen as the economic substance by reference to what is "reasonable" and other standards as set down in Part IV of the Acts Interpretation Act (Cth) 1901 (aka AIA), as applied the Part IVA of ITA36. True, in the short term you are subject to the Commissioner's whim if you don't have enough means to challenge him in court. However, you wont see much whim coming from the Tax Commissioner, not off his own bat and without back-up. A Tax Commissioner who ignores the AIA and case law is going to get dressed down severely by academics, law firms and associations, other legal commentators, business groups and taxpayer associations, all of whom have a voice that politicians of all stripes will hear. The Commissioner's real ability to indulge in whim is quite limited, despite his nominal powers.

It's that back-up that's the issue, as in the end it is not the Commissioner's whim you have to worry about but that of the Justices of the High Court: they are bound only by the legislation and Constitution, and can override even precedents of previous High Courts (principles findings can go back and forth ad infinitum as bench compositions change). HC Justices are known for their activism - in finance, for example, you will learn in time to have an especial loathing of Justice Lionel Murphy, who once expressly said he would contrive opinions however he could for the sake of Public Policy (particularly, the brand of socialism championed by his Whitlamite comrades). I don't recall the details, but he tried mucking around with how the Cheques Act worked to the detriment of banks. I haven't followed law closely for a while, so I don't know any more about present judges beyond what anyone can get from the web.

The High Court - if it deigns hear your case - will at the least go through the motions of proper interpretations of the law, including reference to the AIA as necessary. But what does "reasonable" mean? The AIA does not define it, but just relies upon the common accepted meaning. The problem is that one can equivocate with the word in today's world between "that which conforms to reason" and "that which someone finds comfortable." What's holding us back from total subjectivism is the professionalism of and continuing true respect for at least some reason and justice in the whole of the legal, accounting, and business professions; in turn this relies upon what is taught by universities and learned from the prevailing opinions in journals etc, plus whatever that politicians think they can get away with; and in turn all this is determined by the prevailing philosophy from root to branch.

Once upon a time we could rely upon the principles of English common law being passed on from generation to generation, which in their groping way really were aimed at finding justice and thumbing the nose at overbearing authority. However, while those principles and cases are still held to be persuasive they are no longer binding on Australian courts. I hear there is a big bun-fight brewing in Queensland over land ownership law changes, and much of it involves the abandonment of that English common law heritage in favour of BS from the UN. What we have is but momentum from a better time, and that momentum is being turned as bad philosophy takes its toll.

This means if I give most of my taxable income to charity(if its authorized by bureaucrats its tax deductible) they can take me to court for tax avoidance if they feel like it... whatever goes.

With that particular example I doubt very much you'd be denied your deduction never mind taken to court - unless as part of your donation you are getting some form of assessable value in return that you aren't declaring. ITA36 s177F(1)( c ) says the Commissioner can nix your deduction, but s177D says only if he can demonstrate that your intent was to create a scheme whose purpose is to provide you with a tax benefit contrary to the intents of the tax law. He cannot do it by pure whim, he has to contrive at least some basis in the tax law and all case law associated with it, all with reference to how the AIA works. If you're small fish, why would the Commissioner bother? And if you're big fish then the Commissioner is going to have a fight on his hands.

JJM