On 16 November 2012, the Assistant Treasurer released draft legislation and explanatory material amending the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936. The proposed changes are a response to a number of recent judicial decisions that the Government believes have undermined the effective operation of Part IVA.
Part IVA applies where a taxpayer has obtained a 'tax benefit', directly or indirectly, from a 'scheme' in which a person participated for the sole or dominant purpose of securing a 'tax benefit' for the taxpayer. The primary changes proposed by the draft bill will recast the definition of a 'tax benefit'.
How will the definition of a 'tax benefit' be
affected?
The quantification of a tax benefit requires a comparison between
the tax consequences of the scheme under investigation and the tax
consequences that would have arisen, or might be expected to have
arisen, if an appropriate alternative scheme were pursued. This
alternative scheme is referred to as an 'alternative
postulate'. The difference between the tax consequences of the
scheme and the alternative postulate is a tax benefit obtained in
connection with the scheme.
The Government is concerned that alternative postulates suggested by the Commissioner of Taxation have been rejected as being unreasonable postulates on the basis that the tax costs involved in undertaking those postulates would have caused the parties to abandon the relevant scheme. Such a "do-nothing" alternative postulate eliminates any tax benefit, as currently defined. In this way, taxpayers are currently protected from Part IVA by doing the very thing that Part IVA was intended to counter – enter a scheme that reduces tax costs in a contrived, artificial manner.
Under the proposed changes, an alternative postulate must be one that could reasonably be expected to achieve the same non-tax effects (if any). Further, the proposed changes require tax costs to be disregarded in formulating an alternative postulate.
The intention of the changes is to redirect the focus of Part IVA to whether a person participated in a scheme for the sole or dominant purpose of tax avoidance (i.e. the "dominant purpose test").
Other proposed changes to Part IVA
Apart from the above identified changes, the other proposed changes
to Part IVA as outlined in the explanatory material include the
following:
- The insertion of an objects clause confirming that Part IVA is intended to counter schemes entered into with the relevant tax avoidance purposes;
- The avoidance of withholding tax will no longer be dealt with separately. Instead, withholding tax will be included within the list of other tax benefits to ensure that the amendments concerning assumptions that can be made in relation to alternative postulates apply equally to withholding tax benefits.
Application date
The proposed amendments to Part IVA will apply to schemes that were
entered into, or that were commenced to be carried out on or after
16 November 2012.
Interested parties are invited to comment to Treasury on the proposed changes by 19 December 2012.
Should you require further information on the above topic please contact the author or your Moore Stephens Relationship Partner.
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