Australia: Proposed Reforms to Part IVA

Tax Brief
Last Updated: 7 January 2013
Article by Joshua Cardwell

On Friday 16 November, the Assistant Treasurer released the much-anticipated draft of legislation to amend Part IVA. These changes follow a number of defeats for the ATO which, the ATO said, demonstrated fundamental flaws in the existing design. Assuming they are enacted in their proposed form, the amendments will change several features of Part IVA but it remains to be seen whether the Courts will agree that they have the effects the government seeks. This Tax Brief examines what the new provisions change and how they are meant to work.

1 Background

The operative provision of Part IVA permits the Commissioner of Taxation to undertake various remedial actions, 'where a tax benefit has been obtained ... by a taxpayer in connection with a scheme to which this Part applies ... ' Typically, the most contentious part of any dispute involving Part IVA is the argument about whether a scheme was implemented with the sole or dominant purpose of avoiding tax, but every general anti-avoidance rule must also contain a second step – the part of the rule which describes what is to be taxed instead of the transaction which the taxpayer undertook, termed the 'counterfactual' or 'alternate postulate.'

Until recently, this second issue was rarely litigated but it has recently become one of the critical questions in a number of Part IVA cases.

The way that the substitute transaction is conceived under Part IVA as currently drafted is to impose tax on a substitute – referred to in the Act as the 'tax benefit' – that seems sufficiently likely. For example, in a case where an amount of income is omitted as a result of an impugned scheme, the substitute is the –

amount [that] would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out.

In other words, the mechanism in the current Pt IVA is to identify a sufficiently likely substitute transaction and impose on the taxpayer the tax outcome that it would have generated. This is obviously a very fraught process because it involves speculating about what the taxpayer might have done. The range of things that a taxpayer might have done – but didn't – is almost unbounded, and yet it is a vital step in the operation of Part IVA.

Until recently, ascertaining the counterfactual had not been an especially contentious step. Courts appear not to have been troubled by counsel for either side with detailed arguments about the shape of the relevant analogy. That naïve world came to an end during the AXA litigation where counsel for the Commissioner initially relied on the counterfactual set out in the appeal statement and then sought to add three additional counterfactuals, arguing that at least one of these must reasonably be expected to have taken place in the absence of the scheme. The procedural skirmishes in the case ultimately proved futile but they highlighted the importance that might follow from correctly or incorrectly identifying one or more counterfactuals.

Subsequent decisions in Futuris and RCI took the matter further. A great deal of time and effort went into trying to establish that there was no reasonable counterfactual – the alternatives being argued about were simply unreasonable or failed to accomplish the same commercial outcome.

2 The Press Release of 1 March 2012

It was against this background that the outgoing Assistant Treasurer, Senator Mark Arbib, announced on 1 March 2012 that Part IVA would be revised.

The main concern in the Press Release was about the way that the jurisprudence on the meaning of 'tax benefit' had developed:

In recent cases, some taxpayers have argued successfully that they did not get a 'tax benefit' because, without the scheme, they would not have entered into an arrangement that attracted tax, Senator Arbib said.

For example, they could have entered into another scheme that also avoided tax, deferred their arrangements indefinitely or done nothing at all.

The concern was that a taxpayer, found to have acted with a purpose of avoiding tax, could nevertheless escape the operation of Part IVA by relying on the tax benefit portion of the test. The Press Release was alluding to RCI where the 'do nothing' hypothesis was the basis of the Full Court's judgment:

... in our view, if the scheme in either of its manifestations had not been entered into or carried out, the reasonable expectation is that the relevant parties would have either abandoned the proposal, indefinitely deferred it, altered it so that it did not involve the transfer by RCI of its shares in [a subsidiary] to [another group company] or pursued one or more of the other alternatives referred to in the Information Memorandum; but they would not have proceeded to have RCI transfer its shares ... to [another group company] at a tax cost of $172 million.

On this view, RCI did not obtain the tax benefit it was alleged by the Commissioner to have obtained in connection with the scheme.

The other concern expressed in the Press Release was the idea that there is a defect in how Part IVA operates when examining abusive steps within a larger non-abusive transaction:

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 seems to be the ATO view that its failure in RCI demonstrates this problem.

3 The package of amendments

It is against this background that an Exposure Draft of amendments to Part IVA was released.

The Exposure Draft is disarmingly simple and, at the same time, inscrutably cryptic.

3.1 Re-ordering etc

The disarmingly simple parts of the draft involve the re-location, consolidation and renumbering of several parts of the existing text. For example,

  • some provisions (such as dates and rules about geography) which currently appear early in Part IVA are moved to the middle;
  • the rules dealing with withholding tax avoidance which had previously been isolated in a specific section are now consolidated with the other types and amounts of tax benefit;
  • one of the main provisions (s 177F) in the current law is divided into a number of subsections; and one of the main provisions (s 177F) in the current law is divided into a number of subsections; and
  • cross-references appearing elsewhere in the Act have to be adjusted as a consequence.

3.2 Objects clause

Another change which looks like it should be in the disarmingly simple category is the decision to add an 'objects' clause into the text to articulate its intended scope. Part IVA will now begin with the statement:

The object of this Part is to counter schemes (including schemes that are steps within or towards other schemes) that are entered into or carried out with an objectively ascertainable purpose of reducing the liability of a taxpayer to tax or withholding tax.

This passage explicitly addresses the concern in the Press Release about the need to ensure that Part IVA applies to 'steps within broader commercial arrangements.'

3.3 Influencing the speculation

The main substantive change to Part IVA effected by the draft is the insertion of a new provision the purpose of which is to intervene into the speculation into what might have happened, but didn't.

The new provision requires that the speculation be done under three new constraints.

Ignore tax considerations. First, in deciding what might have happened, the court is required to 'assume that each person ... would have acted ... without regard to any person's liability (or potential liability) to tax ... in any year of income.'

This provision is aimed squarely at the 'do nothing' problem. The logic behind this amendment is straightforward. One of the concerns with the existing drafting is that a problem arises when the size of the tax triggered by any alternatives is so large that they are, therefore, unlikely. If they are unlikely because they are potentially so expensive, under the existing provisions they cannot be the substitute to be taxed; only a substitute which is 'reasonably likely' is open. The draft amendment tries to exclude this argument by excluding the liability to tax from consideration when speculating about what might have happened but didn't. The speculation now has to be done 'without regard' to the amount of tax involved. It may still turn out to be the case that a person would not have done anything or would not have done anything yet, but that conclusion would have to be demonstrated by pointing to facts and circumstances other than the amount of tax involved.

Sometimes, excise the scheme. The draft requires a second interference with the speculation. The precise adjustment that is required varies depending upon whether or not the scheme achieves any 'non-tax effects for the taxpayer.'

Where the scheme achieves no 'non-tax effects' the court is required to 'assume that all events or circumstances that actually happened or existed but did not form part of the scheme would still have happened or existed.' This amendment appears to be directed at so-called 'paper schemes' or self-cancelling arrangements which involve no commercial outcome beyond the triggering of, say, a tax deduction or the omission of an amount of income. They are the most obvious category of avoidance – transactions which achieve only a tax consequence for the parties.

Construct a scheme with the same commercial goals. Where the scheme does achieve some 'non-tax effect' for the taxpayer, the court is instead required to assume that the relevant actors 'would have acted ... to achieve for the taxpayer the same non-tax effects' that were achieved by the scheme.

Both of these amendments attempt to constrain the speculation. In the blatant case, the court must assume that all the steps other than the contrived aspects still occurred. In the less blatant, but still apparently abusive, situation the court must instead assume that people tried to accomplish the same commercial outcomes as those that occurred. In short, in both cases, the draft is trying to insist that the speculation result in an outcome which looks substantially the same as the events that actually happened. It is likely that this will be a new area for dispute – identifying which of the commercial outcomes that actually happened have to appear in the substitute, and what is to happen when there is no other way of achieving the important commercial effects that the impugned scheme accomplished.

3.4 Completing the conceptual loop

The third adjustment to the speculation made by these amendments is an attempt to create a formal and structural link between the aspect of Part IVA which examines the relevant 'purpose' and this element which sets out the alternative that is to be taxed.

The thinking behind this adjustment points to the part of the rule which requires a finding to be made that –

... the person, or one of the persons, who entered into or carried out the scheme ... did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme ...

That finding must be based upon an analysis of the eight factors, listed in the legislation, that are indicative of artifice or contrivance. It is intuitively appealing to read this process as implicitly involving a finding about the substitute in coming to a conclusion about the taxpayer's purpose. The logic is this: there can only be a finding of a purpose of avoiding tax if the court has identified the tax position being avoided. And so when the court has concluded that a person had a purpose of avoiding tax, the court must implicitly also have identified what that avoided tax position was.

The draft inserts a provision which articulates this argument, though, interestingly, only in a case where the scheme achieves some 'non-tax effect' for the taxpayer – that is, in the less contrived class of cases. For these cases, the court must have regard to 'the [eight] matters to which regard must be had ... in deciding whether this Part applies to the scheme.'

This is perhaps the most cryptic of the amendments being proposed but it is intended to work as follows: the taxpayer is to be taxed on a substitute transaction, but that substitute now has to be constructed by examining the factors that are relevant in deciding whether an offensive purpose exists or which detract from that conclusion. These factors will show both the taxpayer's objective purpose and the alternate form in which the scheme could have been implemented and thus the transaction which is to be taxed instead.

4 Next steps

The exposure draft is being released for comment and will inevitably attract much attention. Part IVA is extremely contentious and any changes to it will be seen as only adding to the difficulties it presents for taxpayers and their advisers. That impression can only be heightened by the awareness that the Government is acting principally to stem the run of losses being sustained by the ATO in the courts. Any amendment designed to ensure that the ATO wins more Part IVA cases will automatically attract much criticism.

Interestingly, the Government has decided to try to pacify some complainants and has abandoned one feature of its March announcement which had caused much consternation – that the new provision would start from 1 March 2012. In the Press Release of 16 November, the Assistant Treasurer announced that 'the amendments will apply to arrangements that are entered into or commenced from today ... rather than from the original date of announcement, in recognition of the unique role that Part IVA plays in the income tax laws ...'

The government is seeking comments on the draft by Wednesday, 19 December 2012 and has announced that a formal Bill will be introduced into Parliament in early-to-mid 2013.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions