Australia: Anti-Avoidance revamp creates uncertainty

Last Updated: 3 July 2012
Article by Andrew Mills and Cameron Hanson

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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