Dear Members and Associates
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Proposed changes to Part IVA
Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013
It’s hard to believe that it’s been almost a year since the proposed amendments to Part IVA were announced, but after many submissions,
the Assistant Treasurer has finally introduced the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 into Parliament.
Readers will be aware that Part IVA of the Income Tax Assessment Act 1936 gives the Commissioner the power to set aside a scheme that had the purpose or effect
of providing a tax benefit to an entity where the sole or main purpose of the scheme was to secure that benefit.
For some time now, the Tax Office has lamented the shortcomings of this, our principal anti-avoidance measure — notably the ability of taxpayers to escape the operation of Part IVA by arguing that
no ‘tax benefit’ had been obtained. (See, for example, the decisions in FCT v AXA Asia Pacific Holdings Ltd (2010) 81 ATR 180, Futuris Corporation Ltd v FCT  FCAFC 32 and RCI Pty Ltd v FCT  FCAFC 104.)
The draft Explanatory Memorandum describes the amendments as necessary to correct deficiencies arising from interpretation of the current law. It appears however that the changes
go much further than this. For example, the proposed amendments seek to address circumstances that the courts have determined ought not to be covered by the current law — so in reality,
the amendments have been introduced to address perceived inefficiencies that the government has decided to address on a policy basis — that is, to expand the operation of Part IVA to situations
it was never intended to cover.
An Exposure Draft of the provisions was released for comment in November 2012 for comment
The core of the change centres on the amount of the tax benefit (being the amount on which tax is to be imposed).
This is currently determined under s 177C which asks the question: what amount would have been, or might reasonably be
expected to have been included in income or allowed as a deduction if the scheme had not been undertaken.
The Explanatory Memorandum (click here to view) describes this as an open-ended inquiry into what, if anything, the taxpayer might reasonably have done if it had not participated in the scheme.
So the proposed amendments are intended to target perceived deficiencies in s 177C, and the way it interacts with other elements of Pt IVA, particularly s 177D. The proposed amendments seek to
reinforce the view that the two limbs of the tax benefit element of Pt IVA in s 177C(1) — i.e. the ‘would have’ and ‘might reasonably be expected to have’ limbs — are alternative tests.
In other words there is not just one test that merely spans a spectrum of likelihood.
The way this has been achieved in the new bill is to add a new section to the legislation, namely s 177CB, which expands the enquiry
to one based on one of two directions:
‘… a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme), or
a postulate that is a reasonable alternative to entering into or carrying out the scheme.’
The legislation does not have an explicit rule explaining when either constraint is to be applied but some guiding principles can be derived from the EM:
- Where the scheme reflects the overall transaction, and it has no non-tax results for the taxpayer, the first limb is to be applied to ‘annihilate’ the scheme and the second limb is then applied to the remaining elements of the transaction;
- Where the scheme has no non-tax results and the broader transaction ‘remains effective’ without the scheme — it is a first limb ‘annihilation’ case;
- Where the scheme is ‘integral’/ ‘intertwined’ with a broader transaction because it ‘facilitates’ it ‘in some way’, then a second limb ‘reconstruction’ of the broader transaction to produce a reasonable counterfactual is required but that reconstruction would be ‘limited by the role the scheme plays in [the] transaction.’
There are three requirements in the proposed s 177CB to determine whether or not an alternative will be regarded as a ‘reasonable alternative’ under the second limb:
- a requirement to have ‘particular regard’ to ‘the substance of the scheme’
- a requirement to have ‘particular regard’ to ‘any result or consequence for the taxpayer that is or would be achieved by the scheme’ other than its tax consequences, and
- a requirement to ‘disregard any result in relation to the operation of this Act’ — in other words, the tax consequences of the alternative transaction for the taxpayer and anyone else are specifically to be ignored.
Anthony van der Westhuysen
Melbourne March 2013