Anti-avoidance rule changes on the horizon

The general anti-avoidance rules in the income tax law, commonly referred to as Part IVA, are to be rewritten in 2012.

The Government’s decision, announced by then Senator Mark Arbib on 1 March 2012, followed a series of court cases lost by the Commissioner of Taxation in attempting to apply Part IVA.

Part IVA – the existing law

Part IVA gives the Commissioner the power to cancel a ’tax benefit’ received by a taxpayer in certain circumstances.

For Part IVA to apply:

• there must be a scheme within the meaning of the legislation;
• there must be a tax benefit in connection with the scheme; and
• the dominant purpose of the taxpayer must have been to obtain a tax benefit.

If the Commissioner is satisfied that these criteria are met, he can make a determination to cancel the tax benefit.

A common difficulty for the taxpayer is that, as in all tax appeals, the taxpayer has the onus of proving their case. There is no obligation on the Commissioner to prove that the criteria are met.

This often creates a muddy playing field where the taxpayer seeks to prove that their transaction could not be done in any other way – that is, there was no other viable alternative scenario that the taxpayer would have pursued to obtain the same commercial result.

For example, in the Commissioner’s most recent loss, the taxpayer successfully demonstrated that, if it had not completed the transaction in the way it did (which involved a restructure to divest a particular services division by public float), it would not have entered into the transaction at all: see Commissioner of Taxation v Futuris Corporation Ltd [2012] FCAFC 32.

What can we expect under the new law?

In recent years, the Commissioner has been more willing to expand the scope of Part IVA to transactions, or parts of transactions, implemented in a particular (tax-effective) manner.

This is reflected in Senator Arbib’s comments:

The Government amendments will confirm that Part IVA always intended to apply to commercial arrangements which have been implemented in a particular way to avoid tax. This also includes steps within broader commercial arrangements.

It is difficult to see how Part IVA always intended to apply to ordinary commercial arrangements, when the Treasurer’s comments introducing Part IVA in 1981 were in clear terms.

The proposed provisions – embodied in a new Part IVA of the Income Tax Assessment Act 1936 – seek to give effect to a policy that such measures ought to strike down blatant, artificial or contrived arrangements, but not cast unnecessary inhibitions on normal commercial transactions by which taxpayers legitimately take advantage of opportunities available for the arrangement of their affairs.

Leading cases such as Spotless Services made it clear that Part IVA could apply to cancel a tax benefit in commercial arrangements that were ‘tax-driven’. However, this was not the same as choosing to implement part of a transaction in a tax-effective way. Part IVA was never intended to compel taxpayers to pay the greatest amount of tax possible in the circumstances.

The trend, if left unchecked, is likely to be that the Commissioner will have greater scope to determine that transactions – and parts of transactions – implemented in a tax-effective manner will fall within the scope of the anti-avoidance provisions.

The Government’s intention is to introduce amendments into Parliament for the 2012 spring sitting. The amendments are expected to apply retrospectively to the date of Senator Arbib’s announcement.

Taxpayers should also be wary of the Commissioner continuing to attack transactions entered into before 1 March 2012. Language such as the ‘amendments will confirm that Part IVA was always intended to apply to commercial arrangements’ suggests that the Commissioner will maintain his current position despite the recent run of losses in the courts.

Our team specialising in tax controversy will be monitoring the consultation process. Please contact us if you would like to discuss.