Do taxpayers have to order their affairs so that they pay as
much tax as possible?
Until 1 March this year, the answer was no. However, since an
announcement that the government intends to amend the general
anti-avoidance rule made by Senator Arbib on his way out of the
Assistant Treasurer's office, the answer now is unclear.
Australia's general anti-avoidance rule, referred to as Part
IVA, was introduced in 1981. It was designed to combat what the
then Treasurer John Howard described as 'blatant, artificial or
contrived' schemes entered into for the sole or dominant
purpose of reducing tax. There was no suggestion at the time that
Part IVA was designed to prevent ordinary business planning. The
selection of one option out of a number of choices taking tax into
account was outside the scope of the rule.
As a matter of policy, it is difficult to dispute the
desirability of an anti-avoidance rule. A recent review concluded
that the UK should have its own rule to counteract
'abnormal' arrangements that are 'contrived to achieve
an abusive tax result'. The more difficult policy question
concerns the scope of the rule and the extent to which it should
inhibit tax planning.
Over the past 15 years, the ATO has had a remarkable run of
success relying on Part IVA. That success has not been limited to
transactions designed to reduce tax and devoid of a real commercial
purpose. Part IVA has also been applied to transactions that had an
overall clear commercial rationale, but where an aspect of the way
in which the transaction was implemented was explained by the
dominant, objective purpose of obtaining a tax benefit. This
expansion of the scope of Part IVA moved the late Justice Graham
Hill, one of its original architects, to observe that he doubted
that Parliament intended that Part IVA apply to the kinds of
transactions to which the courts have come to apply it.
The announced changes are a reaction to a handful of recent
court losses by the ATO. In those cases, the taxpayer proved that
it would not have entered into a transaction that would have
resulted in payment of the disputed tax. Unsurprisingly, the courts
concluded that a taxpayer should not pay tax on the basis of a
transaction that it would never have entered into.
The foreshadowed amendments will apparently reverse these
decisions. It seems likely that the ATO will instead be able to
impose tax if one of the possible ways in which the transaction
could have been implemented would have involved paying more tax,
whether or not that possibility was probable, or even likely. One
way of reading what is proposed is an anti-avoidance rule that can
be applied whenever there are a number of ways of effecting a
transaction and the taxpayer does not select the option that
results in payment of the most tax. Such an outcome cannot be
attractive for business investment. It certainly extends Part IVA
far beyond the originally stated policy.
The case for such an extension has not been established. The
recent UK review concluded that while the UK should have a
'moderate' anti-avoidance rule, it should not have a regime
similar to the current Part IVA because it would undermine the
ability of business and individuals to carry out sensible and
responsible tax planning.
While Senator Arbib's announcement says that the amendments
will be subject to extensive consultation, the outcome is
apparently such a foregone conclusion that the amendments will be
retrospective to the date of the announcement. That is the case
even though no draft amendment has been released.
This is a completely unsatisfactory way to make policy. Until we
have law, or even draft law, business is in a quandary—it
cannot predict what the tax outcomes of its commercial decisions
will be. The ATO cannot help as it cannot give tax rulings on
something that is not law. Transactions will likely be deferred
until the position is clarified—hardly an outcome which
assists the economy.
There is room for debate about the scope of our anti-avoidance
rule. However, a change to the underlying policy should be a
product of informed discussion, not a knee-jerk reaction to a few
unsurprising losses in court.
Andrew Mills is a director with tax advisory firm Greenwoods
& Freehills. Cameron Hanson is a partner and Hugh Paynter is a
senior associate practising in tax disputes at Freehills.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Greenwoods & Freehills are the winners of the 2011 BRW
Client Choice Awards.
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