What is Tax Avoidance?
Since the inception of the income tax the difference of opinion between a taxpayer and the tax collector has always been and will always remain. A taxpayer by all means wants to minimise its tax liability, whereas the tax collector maximise. New Zealand has had a general anti-avoidance provision since The Property Assessment Act 1879, s 29. Therefore, it’s imperative to know what constitutes tax avoidance, is paying less taxes means tax avoidance? It was well said by Lord Tomlin in Duke of Westminster v Commissioners of Inland Revenue  2 All ER 758:
"Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax"
In a practical world all of us are surrounded by choices, choosing one option over the other may result in lesser tax. For example, a self-employed person will pay less tax than a wage or salary earner as the tax law makes certain deductions available against its gross income, which is not available for a wage or salary earner.
Parliament has made such “Choices” available for all of us where paying less tax does not constitute tax avoidance. The “Choice Principle” originated between1957 to 1977 by the Australian courts . The principle of choice has proved persuasive and was used in many leading New Zealand tax cases. It was endorsed in the privy council judgement of Lord Hoffmann in O’Neil & ORS v Commissioner of Inland Revenue (2001) 20 NZTC 17 (PC) that the adoption of a course of action which avoids tax should not fall within the boundaries of tax avoidance if the legislation on its true construction, was intending to give the taxpayer the choice of avoiding in that way. In a nutshell this principle allows one to structure their tax affair and receive favourable tax position as long as parliamentary intentions are not frustrated.
Recent tax cases on tax avoidance have created a very fine line between legitimate tax mitigation and deliberate tax avoidance. The much awaited decision on a highly controversial case Penny and Hooper v Commissioner of Inland Revenue  NZSC 95, (2011) 3 NZTR (SC) was delivered in 2011. It was held even legitimate structure of business will fall within the scope of tax avoidance if one of the purposes of the structure was to avoid tax. In the case the taxpayers used a trust to shield their business and personal income to obtain tax advantage.
Section BG1 - Avoidance, states “A tax avoidance arrangement is void as against the Commissioner for income tax purposes”. The key words in the legislation are “tax avoidance”, “arrangement” and “purpose”.
Tax avoidance can be classified in two ways general anti avoidance or specific anti avoidance. General anti avoidance is legislated in section BG1 of Income Tax Act 2007. And the specific provisions are dealt individually as and when occurs e.g. thin capitalisation rules, transfer prices rules etc.
Generally there is not much confusion in specific provision as the name suggests it deals with a specific problem, and since the specific rules are legislated in the law it does not add much confusion.
The problem area is section BG1 which purposely left open to challenge all transactions. The history of this section in New Zealand is based Elmiger and Another v Commissioner of Inland Revenue (1966) NZLR 683 (SC) [Elmiger]. It was the first case on tax avoidance which was decided in the favour of Commissioner of Inland Revenue. The case itself was heavily reliant on the judgement Australian case of tax avoidance of Newton v Federal Commissioner of Taxation  2 All ER 758(PC) [Newton] Judgement and principles of Newton played a significant role in providing directions to New Zealand tax avoidance cases. The wording of current tax avoidance legislation s BG1 is indeed based on the judgement of Elmiger.