The Federal Government has introduced draft legislation to amend the operation of Australia's general anti-avoidance tax provisions. The effect of the amendments will be to significantly broaden the circumstances in which the anti-avoidance rules can apply. Mainly this will occur by removing the ability for a taxpayer to argue that it would not have undertaken any transaction at all had it not conducted the transaction that was said to offend the anti-avoidance provisions.
The amendments will apply to schemes entered into or commenced to be carried out on or after 16 November 2012.
The current anti-avoidance rules
The anti-avoidance rules are designed to prevent the avoidance of tax in respect of the structuring of arrangements or transactions, which are aimed at exploiting the law to obtain a tax advantage not intended by the legislation.
The anti-avoidance rules may be applied where:
- a "scheme'"is identified
- a "tax benefit" has been obtained in connection with the scheme
- it is objectively concluded that the scheme was entered into for the "sole or dominant purpose" of enabling the taxpayer to obtain a tax benefit.
A "scheme" is widely defined to include agreements, arrangements and understandings. Court decisions have resulted in the Australian Tax Office (ATO) being able to define a scheme as including what might be thought commercially as only being a step or steps within a broader scheme.
Examples of a "tax benefit" include an amount not being included in assessable income, a deduction being allowed or a capital loss being incurred.
In determining whether the scheme was entered into for the sole or dominant purpose of obtaining a tax benefit, the ATO must consider several factors, including the manner in which the scheme was entered into and what the scheme achieved as a matter of substance.
If the ATO determines that the anti-avoidance rules apply, the Commissioner has the power to cancel the whole or part of the tax benefit.
Perceived problem with the current law
In several recent cases, taxpayers have successfully argued that they did not get a tax benefit because if the scheme had not been entered into, they would not have entered into another arrangement that attracted tax. Rather, they would have done nothing or would have deferred their arrangements indefinitely. On this basis they were able to establish that the Commissioner's "alternative postulate" (being that a transaction with the same commercial effect would have occurred but with a higher tax liability) was unreasonable.
Following the ATO's loss on this issue in RCI Pty Ltd v Federal Commissioner of Taxation  FCAFC 104, the Federal Government announced in March 2012 that it would amend the anti-avoidance provisions.
The proposed amendments
The amendments are intended to have the effect of "restoring" the dominant purpose test to its central role around which the anti-avoidance rules operate.
Under the amendments, when hypothesising alternative postulates to a scheme, the ATO will give consideration to other ways in which the taxpayer could reasonably be expected to achieve the same non-tax effects (if any) as it achieved from the scheme. If the same commercial outcomes could have been achieved via another route with a worse tax outcome, this will enable the ATO to demonstrate the existence of a tax benefit.
The new law enables the ATO to make the following assumptions in applying the anti-avoidance rules:
- in hypothesising whether a person would participate in an alternative to the scheme, it is to be assumed that the potential tax costs of the alternative would not be a factor in that person's decision-making
- where a scheme would achieve one or more non-tax effects for the taxpayer, assume that the participants would act with the intention of achieving for the taxpayer the same non-tax effects as the taxpayer achieved under the scheme.
To provide a "meaningful comparison", the tax consequences of the scheme should be compared with the tax consequences of an alternative scheme reasonably capable of achieving the same non-tax effects as the scheme.
The new provisions are intended to "counter tax avoidance". However, there is industry concern that the rules go far beyond that, as they will give the ATO much greater power in applying the anti-avoidance rules.
Taxpayers will be required to undertake an assessment of other ways in which to achieve the same commercial outcome, without taking into account the tax consequences. Accordingly if there is an alternative way in which to achieve the same result, which will give rise to a significant tax liability, then the ATO will have the ability to conclude the taxpayer obtained a tax benefit in connection with the scheme.
It will no longer be enough for taxpayers to argue they have not obtained a tax benefit because they would have done nothing had the scheme not been entered into. Now they will need to have strong evidence to support their commercial purpose in undertaking a particular scheme where there was an alternative which would have achieved the same commercial outcomes, with a higher tax exposure.
Naturally taxpayers regularly structure their affairs after careful consideration of the tax position. If a taxpayer can achieve the same commercial result with a reduced tax exposure in a way that is contemplated by the legislature, it is then illogical that such taxpayers would be penalised for making sensible commercial decisions.
Taxpayers will need strong contemporaneous evidence about their purpose for entering into a particular transaction. It is recommended that taxpayers have documentation describing the reasons and purpose of each step of a transaction, and why they determined not to proceed with the alternatives.
The new laws will apply to schemes entered into or "commenced to be carried out" on or after 16 November 2012. This means that the provisions may operate retrospectively to schemes entered into prior to 16 November, but which are commenced to be carried out from or after that date.
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.