The Federal Government has recently released exposure draft legislation that will amend the taxation general anti avoidance rules under Part IVA, potentially rendering around 30 years of jurisprudence all but obsolete.

The Government has been working on the consultation and design of the proposed changes for quite some time now. While the changes were originally to apply from March 2012, when the consultation process began, Assistant Treasurer Bradbury has announced that they will now apply from 16 November 2012.

Special counsel Justin Byrne outlines the proposed changes and explains their effect.

Key points

  • The new rules will have retrospective effect once passed, and will apply from 16 November 2012. Any transactions undertaken since that time will be subject to the proposed amendments.
  • If enacted in its current form, the legislation will materially alter the operation of the general anti avoidance rules. The exact breadth of the changes, however, will only become apparent in the next five to ten years, once the courts start to judge matters based on the new legislation. Until then, there will be some level of uncertainty as to the true application of the laws.
  • Although the proposed changes may make it more likely that a ‘tax benefit’ will arise, the sole or dominant purpose of the taxpayer (which is objectively determined) still needs to be obtaining that tax benefit, if the anti avoidance rules are to apply.

Taxation general anti avoidance rules

The taxation general anti avoidance rules apply where a taxpayer obtains a tax benefit and, objectively viewed, the sole or dominant purpose of the taxpayer in entering into a scheme is to obtain a tax benefit.

The provisions require that an alternate course of action, which the taxpayer could have taken, be put forward. This alternate course of action is then compared with the actual course of action, taking into consideration a number of factors, which provide a basis upon which a conclusion about the purpose of participating in the scheme can be drawn. As currently drafted, Part IVA allows an alternate case to be put forward that the taxpayer would have ‘done nothing’ in comparison to what actually occurred. This is often coupled with the argument that the tax cost of an alternative course of action would have been prohibitive, leading to the decision to do nothing. If this is shown to be the case, Part IVA has no application as it is currently drafted.

Under the proposed amendments, the alternative courses of action that the taxpayer could have taken are to be framed on the basis that the tax outcome of that alternate course of action is to be ignored. On that basis, true comparisons of alternate courses of action can be made, none of which involve a consideration of the tax consequences of those actions. This will remove the taxpayer’s ability to argue that an alternate course of action was not taken because of the resulting adverse taxation outcome and the quantum of that tax liability.

On an initial reading of the proposed legislation, it appears that it will be easier for a tax benefit to be identified. However, even if a tax benefit is found to exist, the taxpayer’s objective purpose (which must be the sole or dominant purpose) in entering into the scheme must have been to obtain that tax benefit, if Part IVA is to apply. The proposed amendments therefore appear to shift the focus of Part IVA from determining what a ‘tax benefit’ is (which may be more readily identified under the proposed changes) to what the ‘main game’ of Part IVA really is - that is, the issue of whether the taxpayer entered into the scheme for the sole or dominant purpose of obtaining that tax benefit.

Consultation on the draft legislation closes on Wednesday 19 December 2012, with HopgoodGanim assisting the Law Council of Australia to make a submission to Treasury on the proposed changes.