40 years of Australia's general anti-avoidance regime - A reflection on Part IVA June 2021
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40 years of Australia’s general anti- avoidance regime A reflection on Part IVA June 2021
40 years of Australia’s general anti-avoidance regime A reflection on Part IVA Contents Section Page 01 Introduction 3 02 Some history 4 03 Scheme 8 04 Types of “tax benefit” and non “tax benefit” 11 05 Finding the counterfactual 14 06 The Black Box of Part IVA – purpose 17 07 So where are we? 20 Appendix A 21 Appendix B 23 Authors / Contacts 24 40 years of Australia’s general anti-avoidance regime 2
01 Introduction
Part IVA of the Income Tax Assessment Act • consequently, the majority of Part IVA cases
1936 contains the general anti-avoidance rule, involve the preoccupations of individuals
commenced operation on the tax landscape and small businesses (income splitting,
ever since. The 40th anniversary of the tax-effective investment products and
commencement of Part IVA is a good time superannuation substitutes); cases involving
to review its past and consider its current large businesses tend to involve bespoke
impacts. commercial transactions and structures;
The focus of this paper is on one group of
• individuals and small business taxpayers
rarely win; large businesses have much more
taxpayers (large business taxpayers), on one
success against the ATO. For example, while
part of the world of tax disputes (litigated cases
the ATO sustained Part IVA determinations
where Part IVA has been relied upon) and on one
against Spotless, Consolidated Press,
part of Part IVA (the general provision enacted in
Citigroup, British American Tobacco and
1981). Our question is, how have large taxpayers
Orica, other large taxpayers have been
fared when Part IVA has been raised by the ATO,
successful against the ATO including BHP
and pursued in litigation? Of course, this is a very
Group, Fosters, James Hardie, Macquarie
small subset of all the disputes between the ATO
Group, News Corporation, Illinois Toolworks
and large taxpayers – few disputes are litigated,
and WD&HO Wills.
and the Part IVA element often falls away before
the dispute reaches the steps of the Court. But
we think the experience of large taxpayers in This paper below focus on the substantive
Part IVA litigation is worth examining because aspects of the provision rather than the
that experience should inform the way Part IVA administrative processes behind it – cases can
is handled outside that context. be won on the substance or the process, but our
attention is on the meaning and operation of the
rule, rather than whether it has been correctly
It is worth separating this group from
deployed. And we will also focus exclusively
other taxpayers because the experience of
on the general provisions of Part IVA, meaning
large taxpayers with Part IVA is somewhat
we will omit the dividend stripping regime, the
distinct: franking credit stripping provisions and the more
recently introduced multinational anti-avoidance
• the majority of Part IVA cases by number law (MAAL) and diverted profit tax (DPT)
involve individuals and small businesses; regimes.
there are only a handful of cases involving
large business taxpayers;
40 years of Australia’s general anti-avoidance regime 3
02 Some history
The demise of s. 260. It is part of Australian tax • annihilation: “the section does not, once it
folklore that Part IVA was enacted to address has done its job of voiding an arrangement,
deficiencies in s. 260 that were apparent provide a power to reconstruct what was
following a series of decisions by the High Court done, so as to arrive at a taxable situation.”
in the 1970s. Given that a large part of the value This was remarked upon in Peate, Europa Oil
of a general anti-abuse rule lies in its in terrorem and Gulland, Watson & Pincus.
effect, a general anti-abuse rule viewed by the
tax community as toothless was simply not
worth having. At first glance this list of purported defects may
seem plausible, but it is perplexing:
According to the drafters of Part IVA, the
jurisprudence on s. 260 created four major • The first criticism is odd. Surely a general
impediments on its proper functioning: anti-avoidance rule should not deny
taxpayers the benefit of choices offered
by the Act. The evidence of the oddness
• choice principle: “… section 260 will not apply
of the complaint is that Part IVA contains
to deny to taxpayers a right of choice of the
s. 177C(2), the only purpose of which is to
form of transaction to achieve a result if the
preserve the benefit of choices offered by
Principal Act itself lays open to them that
the Tax Acts.
form of transaction.” The allusion is the High
Court decision in Keighery; • The second complaint is also odd. The
drafter claimed that the design of s. 260
• role of purpose: “… the section is expressed
had miscarried because the rule was meant
in such a way that the purposes or motives of
to focus attention on the motives of the
the persons entering into an arrangement are
persons who entered into the arrangement,
not to be enquired into in deciding whether
but because of the Privy Council decision
the section applies to the arrangement.
in Newton’s case, the focus was instead on
Rather, the “purpose” of an arrangement is to
the design of the arrangement or structure.
be tested only by examining the effect of the
And yet when Part IVA was enacted, the
arrangement itself. The allusion is to the Privy
provisions did not direct attention back to
Council decision in Newton;
subjective motives. Instead, avoidance is
• all-or-nothing: “it is unclear whether an still to be found by examining the terms and
arrangement to which the section is found effects of the scheme: “Part IVA may be seen
to apply must be treated as wholly void or as effectuating in general anti-avoidance
whether it can be treated as only partly void, provisions of the income tax law a position
i.e., to the extent necessary to eliminate the akin to that which appears to emerge from
sought-after tax benefit.” The allusion is to the decision of the Privy Council in Newton
Cecil Bros;
40 years of Australia’s general anti-avoidance regime 4
... The essence of the views expressed and purpose of the relevant provisions of
in that case was that a tax avoidance the Covered Tax Agreement.” Sometimes,
situation covered by section 260 exists only governments want taxpayers to change their
if it can be predicated from looking at an behaviour and the bribe to do just this is
arrangement that it was implemented in that delivered by dangling a tax saving in front of
particular way so as to avoid tax.” the taxpayer’s nose.
• The third and fourth defects were
undoubtedly problems: s. 260 could Finally, it is worth commenting on the
annihilate a structure or transaction but history involving Part IVA and the do nothing
the provisions did not contain a power hypothesis. In February 2012, the Assistant
of reconstruction which would allow Treasurer announced a series of changes to Part
the revenue authority to substitute a IVA because of “a need to clarify its operation.”
different transaction and impose tax on it. The problem which required clarification was
Annihilating works well when the abuse is “in recent cases, some taxpayers have argued
entirely a tax avoidance scheme without successfully that they did not get a “tax benefit”
some other commercial purpose or is because, without the scheme, they would
directed towards the claiming of a deduction not have entered into an arrangement that
or a foreign tax credit. That said, something attracted tax … they could have … deferred their
more than annihilation is needed when arrangements indefinitely or done nothing at all.
income is missing, so it was no surprise that Such an outcome can potentially undermine the
Part IVA conferred on the revenue authority a overall effectiveness of Part IVA …”
reconstruction power. The surprise lies in the
2013 amendments which forgot that lesson This feature of Part IVA should not have
and reinstated the annihilation limitation. been a surprise that needed clarification. The
Explanatory Memorandum to s. 177E makes
The list of alleged defects of s. 260 is also clear that simply doing nothing was a likely
perplexing in what it omits: alternative and a known problem: “section 177E
is needed for situations where, for example,
although profits are in fact stripped from a
• False start doctrine: One curiosity is that the company, it may not be a reasonable hypothesis
list of defects did not refer to what is known that, but for the scheme, the profits would have
as the “false start” doctrine relied on by the been paid as dividends. But for the scheme
High Court in Mullens case. Section 260 was they would formally have remained in the
drafted so that it was enlivened only when company, at least for the time being …” In short,
a transaction or structure had the effect of if doing nothing was a problem, it had been a
“altering” a tax outcome. The implication problem since 1981, not a problem recently
was that the section could only address uncovered.
a taxpayer who made a false start and
then changed something; if the taxpayer’s
structure or transactions was established Stability. The general provisions of Part IVA
correctly at the outset, s. 260 could have no proved relatively stable for 30 years. From 1981
effect. to 2013:
• Abuse of the law: Nor was it seen as a • some substantive changes were made
defect that s. 260 contained no reference to affecting the list of types of tax benefit in s.
a structure or transaction being an abuse 177C – eg,
or misuse of a provision, or somehow - a rebate under s. 159TL (for a non-
contradicting the intention of the legislature, deductible personal superannuation
and no such limit was introduced by Part contribution) was added as a type of tax
IVA. Yet this is a key ingredient of the GAAR benefit in 1990, and removed in 1992;
for tax administration (s. 45-595 TAA 53) and
GAARs in other countries. It can be seen, for - avoidance of withholding tax (s. 177CA,
example, in the MLI: treaty benefits can be later moved to s. 177C(1)(bc)) was
denied if securing the benefit, “was one of added in 1997;
the principal purposes of any arrangement
or transaction … unless it is established that - the incurring of a capital loss (s. 177C(1)
granting that benefit in these circumstances (ba)) was added in 1999;
would be in accordance with the object
40 years of Australia’s general anti-avoidance regime 5
- the allowance of a foreign tax credit (s. Federal Court in November 2009; the ATO
177C(1)(bb)) was added in 1999; lost its appeal to the Full Federal Court in
April 2011.
- the enjoyment of a discount on a capital
gain was specifically mentioned as a • AXA Asia Pacific Holdings - decided against
potential tax benefit “to avoid doubt” in the ATO by a single judge of the Federal
1999 (s. 1777C(4)); Court in December 2009; the ATO lost its
appeal to the Full Court in November 2010;
- an exploration credit under the the ATO’s application for special leave to
exploration development incentive tax appeal to the High Court was denied in
offset in Div 418 was added in 2015 (s. March 2011.
177C(1)(bba);
• Futuris Corporation - decided against the
- an innovation tax offset under the VCLP ATO by a single judge of the Federal Court in
and ESVCLP regimes was added in 2017 August 2010; the ATO lost its appeal to the
(s. 177C(1)(faa); Full Court in March 2012.
- an R&D tax offset under Div 355 was • Noza Holdings Pty Ltd - decided against the
added in 2020 (s. 177C(1)(bd)); and ATO by a single judge of the Federal Court
in February 2011; the ATO did not pursue
- a tax refund under the corporate loss the Part IVA argument on appeal to the Full
carry back regime in Div 160 was added Court.
in 2013, repealed in 2014 and then re-
instated in 2020 (s. 177C(1)(baa)). • RCI Pty Ltd - decided in favour of the ATO
by a single judge of the Federal Court in
• there was some tinkering with the language September 2010; the taxpayer won its
of the exclusion from Part IVA offered in appeal to the Full Court in August 2011; the
s.177C(2) and s. 177C(2A) in 1998; and ATO’s application for special leave to appeal
to the High Court was denied in February
• the passage of the TLIP Bills in 1997 and 2012.
1998 required the updating of some cross-
references in Part IVA in 1998, and the The ATO was moved to seek the amendments to
renaming of “foreign tax credits” to “foreign try to counter the development, revealed in those
income tax offsets” required similar updating cases but also present in prior litigation, which
in 2007. showed the counterfactual chosen by the ATO
could be the basis for defeating an assessment
It was not until the passage of Tax Laws based on Part IVA. In the ATO’s view, correctly
Amendment (Countering Tax Avoidance and identifying the counterfactual was not meant to
Multinational Profit Shifting) Act 2013 that any be a key design aspect of Part IVA, a position
major revisions were made to the language and they set out in the application for special leave to
structure of Part IVA. This Act was prompted by appeal to the High Court in the AXA Asia Pacific
a series of cases all lost by the ATO: case:
• Ashwick (Qld) No 127 Pty Ltd - decided
against the ATO by a single judge of the
40 years of Australia’s general anti-avoidance regime 6In our submission, section 177C, the On one view, the need for the change was
obtaining by a taxpayer of a tax benefit in partly driven by the ATO as the ATO had tried
connection with the scheme, is intended to to convince the Courts to uphold amended
be a gateway provision rather than a major assessments based on hypotheses so unlikely,
forensic exercise. they would never have happened.
It is odd that the ATO should promote this view The last 2 major significant amendments to Part
to the Court since it was the ATO which first IVA were –
elevated the counter-factual to a position of
forensic prominence: on the 5th day of the trial in • the enactment of the MAAL (s. 177DA) in
the AXA Asia Pacific case, after all the evidence 2015 (and its subsequent refinement in
had been led and the taxpayer had made their 2018), with effect from 1 January 2016,
closing address, counsel for the ATO sought and
leave to add three additional counterfactuals
• the enactment of the DPT (ss. 177H–177R,
to the one advanced in their original case. Not
Div 145 of the Taxation Administration Act,
surprisingly this provoked strong resistance
and the Diverted Profits Tax Act 2017) in
from the taxpayer on procedural fairness
2017, with effect from 1 July 2017.
grounds. When that dispute was heard,
counsel for the ATO then abandoned the three
counterfactuals advanced orally, but then sought As noted above, these provisions are beyond the
to add a different counterfactual. If the change scope of this paper.
in emphasis surrounding counterfactuals is a
problem, it was evident here.
The other aspect of the 2013 amendments
worth noting is the way the problem posed
by these cases is presented. According to the
Minister’s Press Release of 1 March 2012,
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 … they could
have entered into another scheme that also
avoided tax, deferred their arrangements
indefinitely or done nothing at all.
40 years of Australia’s general anti-avoidance regime 703 Scheme
It is traditional to start the analysis of Part The reference in the definition of scheme in
IVA with the notion of a “scheme” – the subsection (1) … shall be read as including
Commissioner is empowered to make a reference to a unilateral scheme, plan,
determinations with respect to, “a scheme [to
proposal, action, course of action or course
which this Part applies] in connection with which
a tax benefit has been obtained. Today, one of conduct, as the case may be.
chooses a starting point with some trepidation;
in Hart, Gleeson CJ and McHugh J stated that Big or small? When Part IVA was first introduced
“the identification of the tax benefit, and the it was thought that the word “scheme” might
identification of the scheme, are inter-related”; prove a significant concept for two reasons. The
while Gummow and Hayne JJ then added the first was the role of “scheme” in the purpose test:
purpose component (“a scheme to which this the regime turned on a finding that someone,
Part applies”) saying, “all have their part to play “carried out the scheme … for the purpose of
in deciding whether the power given to the enabling a taxpayer … to obtain a tax benefit in
Commissioner by s 177F(1) can be exercised connection with the scheme …” so the intuition
[and] the various defined terms must be given was, the larger the scheme, the less likely it
operation in the interrelated way which s would be that securing a tax benefit could be
177F(1) requires.” But the circle has to be broken the sole or dominant objective of the scheme
somewhere. – too much else was being accomplished.
Hence taxpayers might find it worthwhile to
try to expand the scope of the “scheme” and
A “scheme” is defined in s. 177A(1) to mean:
resist claims by the ATO that the scheme was
(a) any agreement, arrangement, composed of just one or two steps, especially
understanding, promise or undertaking, if they seemed unappealing examined in
whether express or implied and whether isolation.
or not enforceable, or intended to be
enforceable, by legal proceedings; and There was an early indication in Peabody that
this intuition might be borne out. The High
(b) any scheme, plan, proposal, action,
Court drew a distinction between a scheme
course of action or course of conduct.
and something rather smaller – a part of a
scheme:
A nebulous term such as “scheme” was likely
adopted for the obvious reason that it extends
… it is possible, despite the very wide
to unilateral acts or decisions, something which
definition of a scheme, to conceive of a set
might prove a problem if a term like “transaction”
of circumstances which constitutes only
or “arrangement” had been used. That impression
part of a scheme and not a scheme in itself.
is confirmed in s. 177A(3) which provides –
40 years of Australia’s general anti-avoidance regime 8That will occur where the circumstances are Accurate or inaccurate? The second theory was
incapable of standing on their own without that any misstep by the ATO in delineating the
being “robbed of all practical meaning.” In metes and bounds of the “scheme” upon which
that event, it is not possible in our view to the determination was based might serve as the
say that those circumstances constitute a basis for a challenge under administrative law
scheme rather than part of a scheme merely doctrines. The revenue authority is empowered
because of the provision made by ss.177D to make a determination with respect to, “a
and 177A. scheme in connection with which a tax benefit
has been obtained …” and if the revenue
This led to the practice, well-established by the authority has identified the wrong scheme, then
time of Hart, of “the Commissioner [identifying] perhaps the determination was invalid, and
both a “wider scheme” and a “narrower if so, the assessment based upon the invalid
scheme”.” determination would also be invalid.
But the value of investing much time and effort Again, there were some early indications that
into challenging the scope of the scheme was this intuition might be borne out. For example,
largely exploded in Hart. The joint judgment of Hill J in the Federal Court in Peabody said,
Gummow and Hayne JJ insisted that people
have misread the passage: “Peabody appears It is abundantly clear that the determination,
to have been taken to decide more than it did.” which the Commissioner is authorised to
According to their Honours the passage just make under s. 177F must depend upon
quoted was not about scope of the scheme the scheme which he has identified. It is
but about whether the ATO could change the that scheme which has to be considered
scheme being advanced on appeal from the one by the Court when an objection decision
argued at first instance: is referred by a taxpayer to this Court…
This Court is confined to deciding whether
the Full Court of the Federal Court decided the Commissioner’s decision has been
that the Commissioner should be held to the affected by some error of law, whether the
“scheme” which he had identified at trial and Commissioner has addressed himself to
that, in an appeal against the disallowance the right issue or whether he has taken
of an objection to an assessment, the some extraneous factor into consideration
Commissioner could not seek to rely on only or failed to take into account some relevant
some of the steps or elements which had factor.
been identified as constituting the scheme,
as themselves constituting a scheme. The
Commissioner succeeded on this point in
his appeal to this Court.
40 years of Australia’s general anti-avoidance regime 9As it turned out, the jurisprudence on Part IVA “Scheme” in the counterfactual. Until the 2013
has denied any real significance to the term amendments, therefore, it seemed the term
“scheme.” The High Court said in Peabody “scheme” had no real substantive content, which
that, makes the 2013 amendments odd. Section
177CB(2) and (3) reconstruct the tax benefit
notion and do so around the term “scheme”:
… the erroneous identification by the
Commissioner of a scheme ... will • in some cases, the substitute state of affairs
result in the wrongful exercise of the upon which the taxpayer will be taxed will
discretion conferred by s. 177F(1) only if be, “... the events or circumstances that
... the Commissioner purports to cancel actually happened or existed (other than
[something which] is not a tax benefit within those that form part of the scheme).” This
the meaning of Pt IVA. That is unlikely to test bears a distinct resemblance to simple
be the case if the error goes to the mere annihilation. Having discarded s. 260 in 1981
detail of a scheme relied upon by the because annihilation alone is inadequate to
Commissioner. generate a taxable substitute in all cases, the
2013 measures revert to annihilation of the
The state of the jurisprudence, therefore, at “scheme”;
least until the 2013 amendments, seems to
be that the term “scheme” has almost no role
• in other cases, the substitute upon which
the taxpayer will be taxed is, “... a postulate
to play – any step or decision or transaction
that is a reasonable alternative to entering
or structure can be the “scheme” relied upon
into or carrying out the scheme” having
by the revenue authority and the taxpayer will
regard to the substance of what was actually
rarely gain much procedural advantage from
achieved. The second of the two tests
trying to demonstrate that the “scheme” or
focuses on constructing a commercial
schemes identified by the ATO should properly
substitute: find another transaction that
be understood as something else.
has similar commercial outcomes to the
“scheme”.
The drafting is odd – in s. 177CB(2), the
“scheme” is the offending element which must
be struck down and its tax impacts negated; in
s. 177CB(3), the “scheme” is now the transaction
which must replicated and its tax effects
reproduced. A second unresolved question
is whether the Courts will afford the word
“scheme” the same nebulous meaning in this
new context.
40 years of Australia’s general anti-avoidance regime 1004 Types of “tax benefit” and non “tax benefit”
The list. The term “tax benefit” is used in the Operation of Anti-Avoidance Provisions
Part IVA in two different senses; the meaning (2011) revisited the problem and recommended
being examined here is, the types of benefits change:
which a taxpayer might enjoy that are open to
adjustment under Part IVA. At the moment, the
Previous reviews have pointed out that
list in s. 177C has 9 entries:
the lack of a comprehensive and up-to-
• an amount not included in assessable date definition of tax benefit is a potential
income design flaw in the GAAR that encourages
creative tax planning and requires constant
• an allowable deduction
legislative vigilance (p. 5)
• a capital loss
• a loss carry back tax offset
A more comprehensive approach is used in
• a foreign income tax offset s. 45B(9) but just for the purposes of that
• an innovation tax offset section –
• an exploration credit
• not being liable to pay withholding tax on an … an amount of tax payable, or any other
amount amount payable under this Act … would … be
• an R&D tax offset. less than the amount that would have been
payable, or would be payable at a later time
…
These items are all components of an ultimate
tax liability, but they are not an exhaustive list
of things that might be valuable to a taxpayer, a Nevertheless, this approach of listing discrete
situation which seems fraught with danger for items has not been reformed and there seems
the ATO. The drawbacks in this approach were to be no great impetus for change. The omission
remarked upon by the Ralph Review in 1999 of any matters of administration and compliance
which recommended – is addressed to some extent in Div 45-P of the
Taxation Administration Act (which regulates
challenges to the PAYG system) so one area
6.3 Definition of “tax benefit” where the omission might matter is dealt with in
That the definition of a tax benefit be other ways.
expanded to cover any reduction or deferral
of tax payable, including through tax rebates But the problem of the list can appear in other
and credits or losses. places. Take for example, the old ATO ruling IT
2456 on the meaning of “tax benefit”. It takes
A 2011 Treasury discussion paper, Improving the view that a tax benefit can arise where the
40 years of Australia’s general anti-avoidance regime 11taxpayer’s transactions change the character of Exceptions. The closest Part IVA comes to
an amount included in income – setting out an explicit “choice principle” is in
s. 177C(2) and s. 177C(2A) which appear in the
a sharetrader … does not receive assessable provisions defining a “tax benefit.” Section 177C(2)
income through a sale of shares but says no tax benefit arises if the non-inclusion in
achieves much the same economic effect income, the allowance of the deduction, the capital
before tax by instead receiving dividends loss, the FITO, and so on –
… [and] a scheme by which the nature of
income is changed from property income to ... is attributable to the making of a
personal exertion income, trading income to declaration, agreement, election, selection or
property income or from interest income to choice, the giving of a notice or the exercise
non-interest income … of an option (expressly provided for by this
Act or the Income Tax Assessment Act 1997)
The ruling took the position that – by any person ...
although a scheme may not result in a This provision has been drafted extremely
reduction overall in the assessable income narrowly: it only protects the taxpayer if
of the taxpayer (and perhaps the assessable Parliament’s intention that a tax benefit should
income might even be greater under the survive challenge under Part IVA is made
scheme), a tax benefit for the purposes of manifest on the face of the legislation, and is
Part IVA may arise. delivered by the making of an election.
This approach had already been foreshadowed The narrowness of this drafting was made
in IT 2513 on margin lending: clear early in the life of Part IVA by Hartigan
J in TT87/153 and 199 and Commissioner of
… the dominant purpose was to convert what Taxation [1989] AATA 152. The taxpayer argued
would have been interest income in the hands his business structure – a company (as trustee
of the lender … into income in the nature of of a discretionary trust) providing the services
dividends … of the worker – was immune from Part IVA
because the tax system recognised the separate
existence of individuals and companies and trust
But because inter-corporate dividend estates, in effect giving him the choice whether
rebates were never on the list in s. 177C, to conduct his business personally and have
notwithstanding the ATO view in IT 2456, his income taxed in his own hands, or through
the better view is the only way for the ATO to a corporate trustee and have the income taxed
succeed in re-characterisation cases would be in the hands of the beneficiaries. His Honour
if the re-characterisation happened to involve pointed to the narrowness of the drafting:
the omission of some amount from assessable
income – a $7 dividend payment being collected
in lieu of $10 in interest. But even that possibility The lynch-pin of sub-section 177C(2) is
fell away in the early 2000’s after intercorporate undoubtedly the words “expressly provided”.
dividends were brought into the franking system The clear intention of those words and the
(and the inter-corporate dividend rebate system structure of the ITAA itself is that it is not
was switched off) – there is no omission of sufficient that the ITAA merely recognize that
income where a $7 dividend payment is now there are certain legal relationships which
accompanied by a $3 franking credit added might produce an effect on the income of
to assessable income. Again, this particular a taxpayer but rather, the ITAA must itself
omission is now addressed in ss. 177EA expressly give a choice which has the result,
and 177EB (which regulate the enjoyment of when taken advantage of, of producing
franking credits) so this manifestation of a re- a tax benefit… The mere fact that the Act
characterisation dilemma is dealt with in other recognises that there are such things as
ways. But the more general point still remains: trusts, partnerships and so forth, and then
there are things taxpayers value that do not provides how those trusts and partnerships
appear on the list, and so cannot be challenged should be taxed, does not mean that the
as amounting to a tax benefit. mechanism is one expressly provided for by
the Act for the purposes of s.177C(2)(a)(i)).
40 years of Australia’s general anti-avoidance regime 12Consequently, many tax incentives are not The Full Court’s position is consistent with the
automatically protected from Part IVA even limitation on s. 177C(2) that, even if the tax
though they work by dangling a tax saving in benefit involves an election etc, the transaction
front of the taxpayer to induce a response. So, is immune only if the taxpayer did not have to
for example, a decision to rollover a taxable gain go to some trouble to bring about the conditions
to a different person or subsequent period is which would entitle it to the benefit –
usually protected because these regimes typically
operate through an election, while the deduction
… the scheme was not entered into or
for a contribution to a superannuation fund (s.
carried out by any person for the purpose of
290-150) or a charitable organisation (s. 30-15)
creating any circumstance or state of affairs
is not because no election is involved in claiming
the existence of which is necessary to
the deduction under Div 290 or Div 30.
enable the declaration, agreement, election,
selection, choice, notice or option to be made,
But even where an express election is involved, given or exercised, as the case may be…
s. 177C(2) and the fact of an election do not
serve as a “get-out-of-jail-free” card, as seen
The evidence of the cases is, while s. 177C(2)
in the Macquarie Bank (Mongoose) case. The
and s. 177C(2A) have been raised by taxpayers
case involved a foreign-incorporated company
many times, the section has not proved to
which became a member of the Macquarie
be a promising route for escaping a Part IVA
consolidated group, with the effect that the tax
assessment.
cost of its assets was re-set from their historical
cost (and a smaller gain was made by the
company when the assets were sold). Edmonds
J at first instance considered the transaction
should be immune from challenge:
the real problem for the Commissioner in
the present case is that he seeks to cancel,
in reliance on the provisions of Pt IVA, tax
consequences intended by Parliament to be
conferred on a company, such as [the foreign
company], joining a consolidated group
irrespective of whether it, or other persons,
had as its or their purpose in joining, taking
advantage of those consequences.
On appeal, the Full Court took rather a different
view:
Pt IVA is not inconsistent with the purposes
or policy of [the consolidation regime]. The
benefits of [consolidation] are available to
those who choose to take advantage of
them. However, the mere fact that an entity
joins a consolidated group is not of itself
sufficient to preclude the operation of Pt
IVA in relation to the actions of that entity if
the prerequisites of Pt IVA are satisfied. If it
were, the general anti-avoidance purpose of
Pt IVA would be frustrated.
40 years of Australia’s general anti-avoidance regime 1305 Finding the counterfactual
The consequence of the ATO sustaining a Kleinschmidt stake, the Peabody family acquired
determination made under s. 177F is that the a shelf company (Loftway) which raised the
set of tax consequences which the taxpayer had necessary funding from Westpac – rather than
been asserting is struck down – its attempt to borrow the necessary $8.6m from Westpac at an
keep some amount out of assessable income interest rate of 18%, Westpac subscribed $8.6m
has not succeeded, the attempt to claim the for 11% redeemable preference shares issued by
deduction has failed, and so on. That is step Loftway. The ATO issued amended assessments
1 to a Part IVA dispute; Step 2 is, what to the beneficiaries of the Peabody Family Trust
happens now? on the theory that, if the actual scheme had not
been implemented, TEP Holdings would have
The amount to be included, made non- purchased the Kleinschmidt shares and sold
deductible, etc is derived from the definition them intact to the float vehicle – in other words,
of “tax benefit” and the drafting requires a in the alternative world, (i) the identity of the
prediction; in the case of missing income, the buyer changes from Loftway to TEP Holdings
and (ii) the devaluation of the shares is replaced
amount of the tax benefit is –
by a simple sale, but (iii) the manner of financing
the acquisition “was not contested by the
[the] amount not … included in the assessable Commissioner.” So the ATO had to find a way for
income of the taxpayer of a year of income the substituted buyer, TEP Holdings acting as
[which] would have been included, or might a trustee, to be able to raise finance by issuing
reasonably be expected to have been redeemable preference shares, a commercial
included, in the assessable income of the impossibility:
taxpayer of that year of income if the scheme
had not been entered into or carried out;
any uncertainty as to the entitlement of TEP
Holdings to a rebate in respect of dividends
A similar model was used for allowable upon those shares made it unlikely that
deductions and other classes of tax benefit, and TEP Holdings would have been chosen as
still remains in the legislation. the purchaser of the shares… There is no
reason to suppose, and the Commissioner
Peabody is a case decided on the counter- was unable to demonstrate, that, had the
factual, although it is not usually conceptualised devaluation not taken place and had that
in that way. The Pozzolanic group was owned profit been made by Loftway, it would have
62% by the Peabody family (TEP Holdings Pty flowed, or could reasonably be expected to
Ltd held the stake as trustee of the Peabody have flowed, to TEP Holdings and hence to
Family Trust) with the remaining 38% held by Mrs Peabody.
Kleinschmidt. In order to buy (and neutralise) the
40 years of Australia’s general anti-avoidance regime 14Apart from Peabody, from 1981 to 2009, the that if the actual transactions had not been
prediction model had provoked only a handful implemented, the taxpayer would (or probably
of skirmishes in the decided cases, mostly would) still have made a loan of the same
involving deductions: Lenzo is an example. In amount, on the same terms, to the same
that case, the taxpayer managed to convince bank, and at the same interest rate, but done
the Court that in the speculative world that so in Melbourne. That seems unlikely when
did not happen, the taxpayer would have done interest rates being offered by EPBCL “was
something very similar to the transactions that approximately 4 per cent below the Australian
did happen. Sackville J accepted the taxpayer’s bank bill buying rate.” An alternative (perhaps
argument that applying a prediction model can more likely) based on the prediction test
sometimes lead to the same outcome (and thus may have seen the ATO issuing an amended
no tax benefit): assessment seeking tax from Spotless on
Australian-source interest, calculated at a rate
close to 17%.
The taxpayer can satisfy the onus of
showing that he or she has not obtained a
tax benefit in connection with a scheme if But from 2009, the prediction model started
he or she would have undertaken or might coming under serious pressure, as seen in
reasonably be expected to have undertaken Ashwick, AXA Asia Pacific Holdings, Futuris
a particular activity in lieu of the scheme; Corporation, Noza Holdings Pty Ltd and RCI Pty
and the activity would or might reasonably Ltd. Once the spotlight was shone on prediction,
be expected to have resulted in an allowable it became apparent just how hard it might be to
deduction of the same kind as the deduction make this test operative: it requires speculating
claimed by the taxpayer in consequence of about what the taxpayer might have done,
the scheme but the range of things that a taxpayer might
have done – but didn’t – is almost unbounded.
Secondly, the cases showed there was not a lot
The same argument was advanced and
of room for error: a tax benefit can only arise
accepted in Trail Bros (although the Full Federal
if an alternative exists which involves more
held against the taxpayer on the basis that it
income, fewer deductions, etc in a particular
had not led sufficient evidence of “a sufficiently
income year but the amount must not be so high
reliable alternative postulate that … discharged
that it becomes implausible for that very reason.
[the taxpayer’s] contractual obligations … in a
So, the ATO must work within this confined
way that was fully deductible”).
range: the alternative world must involve one or
more alternative transactions which trigger more
But with regard to missing income cases, tax, but not so much more that they become
the issue often went unnoticed. For example, unrealistic. While the ATO appeared to have
in Spotless Services, the taxpayer invested some leeway inside that range, the Full Federal
its $40m with European Pacific Banking Court in RCI seemed to set the bar higher,
Company Limited at an interest rate of 13.3% referring to the current law as requiring –
and derived interest of $2,670,663 (which had
been subject to withholding tax of $103,230
… an objective enquiry and determination
in the Cook Islands) and interest of $295,688
amongst alternative possibilities as to
(also subject to withholding tax of $11,469).
which is the most reliable prediction, that
The amended assessment issued by the ATO
is, what RCI might reasonably be expected
treated the interest received by Spotless as
to have done if it had not entered into the
assessable income instead of exempt income.
scheme.
The assessment based on the ATO’s asserted
counterfactual:
Having decided to move away from prediction,
the legislation might have chosen any one of a
… if the scheme had not been entered
number of paths: the taxpayer might instead be
into the taxpayer would have entered into
assessed on:
the relevant contract in Australia, and the
interest income derived from the agreement • the tax consequences of the situation being
would have been derived from Australia, and avoided: just impose the tax they were trying
would thus have been assessable income in so hard to avoid;
the hands of the taxpayer …
• adjusted reality: impose tax on the things
In other words, the ATO took the position the taxpayer actually did, but with some
40 years of Australia’s general anti-avoidance regime 15elements of what they did adjusted, removed The Explanatory Memorandum to the 2013
or varied (a version of annihilation); changes takes a rather different view: it says
the annihilation approach will be enlivened in
• commercial resemblance: impose tax on cases where, “the scheme in question does
a transaction or structure which looks like not produce any material non-tax results
what the taxpayer did; or or consequences for the taxpayer [and for]
schemes that shelter economic gains already
• the presumed legislative outcome: if tax
in existence.” These are situations where an
avoidance means the tax outcome does
annihilation approach will work, but it is not
not match what Parliament intended, then
obvious why the language of the statute means
impose the tax that Parliament intended.
the annihilation approach must be enlivened
for these cases and is only enlivened for these
No doubt there are other theoretical options, cases.
but as it turned out, the government could not
settle on just one. Indeed, the government could
And with respect to constructing a commercial
not even bring itself to repeal the offending
substitute, the Explanatory Memorandum
provision. Instead, the former prediction test
adopts the same line of thinking: the
(“the amount that would have been ... but for
reconstruction of a commercially-similar
...”) was left intact but now supplemented (or
transaction will be triggered for, “a scheme
perhaps substituted) by two new tests:
that achieves substantive non-tax results
• in some cases, the substitute state of affairs and consequences [and a] scheme ... that
upon which the taxpayer will be taxed is, “... both produces and shelters economic gains.”
the events or circumstances that actually Again, while constructing a new transaction
happened or existed (other than those that is necessary for cases where an annihilation
form part of the scheme)” approach will not work; it is not obvious that the
language of the statute enlivens commercial
• in other cases, the substitute upon which resemblance in those situations.
the taxpayer will be taxed is, “... a postulate
that is a reasonable alternative to entering
The 2013 drafting has yet to be tested by an
into or carrying out the scheme” having
Australian court, but it is a curious episode in the
regard to the substance of what was actually
development of Part IVA. Having railed against
achieved.
the problems of s. 177C, no-one expected
the offending provision to remain in the
The first of the two tests bears a distinct legislation. This cosmetic blemish is probably
resemblance to simple annihilation. inconsequential – it has perhaps supplanted
entirely by s. 177CB as the foundation for finding
Which of the two rules is applied is not the counterfactual.
elective; the statute says they are enlivened in
different circumstances: the annihilation rule
is triggered in cases where, “a tax effect would
have occurred if the scheme had not been
entered into or carried out ...”; the commercial
resemblance rule is enlivened where, “a tax
effect might reasonably be expected to have
occurred if the scheme had not been entered
into or carried out ...” Again, this is an odd
formulation because the new rules are triggered
still using a prediction-based paradigm: where
one can be confident that something would
have happened absent the scheme, the remedy
is annihilation; where one must speculate about
what might be expected to happen absent
the scheme, the remedy is reconstruction of a
commercially similar transaction.
40 years of Australia’s general anti-avoidance regime 1606 The Black Box of Part IVA – purpose
The black box at the heart of Part IVA is the There are several points that one can make
purpose element, expressed in s. 177D(1) – Part about the use of the word “purpose” in the
IVA only applies where, context of Part IVA. First, the phrase, “it would
be concluded ... that” was meant to invoke an
... it would be concluded ... that [a] person ... idea that is to objectively ascertained. In Vincent,
who entered into or carried out the scheme or the Court was very clear that the “purpose”
any part of the scheme did so for the purpose they are seeking is something to be imputed
of ... enabling a taxpayer ... to obtain a tax to an actor, despite the actor’s own personal
benefit in connection with the scheme ... motivations:
This test is elaborated by s. 177A(5) which In this case I have already found … that the
provides that this test refers to “a scheme … obtaining of a tax deduction was not Ms
being entered into or carried out by a person Vincent’s dominant purpose in entering into
for a particular purpose [and] for 2 or more the project. That finding however does not
purposes of which that particular purpose is the obstruct the application of Part IVA to Ms
dominant purpose. Vincent’s claimed deduction. The purpose
which must be found in order to attract the
application of Part IVA under s. 177D(b)
The use of the word “purpose” conveys to most is that which a reasonable person would
lawyers ideas about someone’s conscious state conclude was the dominant purpose of
of mind. The obvious analogy is with the concept one or more of the persons entering into
of mens rea in criminal law: the conscious the scheme. That is to say, it is an objective
intent or plan of one or more of the persons purpose attributed to them.
involved, to bring about an intended outcome. It
is essentially an internal matter, though it might
Secondly, while the section directs the reader
be proved without evidence from, indeed despite
to find the purpose of, “the person, or one of
the protestations of, the alleged actor.
the persons, who entered into or carried out
the scheme or any part of the scheme ...”, the
Australian Courts have grappled with section does not directly allude to finding the
differentiating several words with similar import subjective purpose of some persons (albeit
– distinguishing intention from motive from objectively ascertained). Instead, the structure of
object from purpose – and in the context of Part the section, directs attention away from human
IVA, the word “purpose” has proved especially motivations and towards observations about
unhelpful because it probably does not capture artifice and contrivance in the structures and
what the drafters thought they were enacting, transactions. This was explicit in the Explanatory
and it is very prone to leading readers astray. Memorandum to the 1981 Bill which insists that,
40 years of Australia’s general anti-avoidance regime 17“a tax avoidance situation ... exists only if it can taxpayer, or for any person referred to in
be predicated from looking at an arrangement paragraph (f), of the scheme having been
that it was implemented in that particular entered into or carried out;
way so as to avoid tax.” Other passages in
the Explanatory Memorandum are consistent (h) the nature of any connection (whether of
with this idea that Part IVA was meant to a business, family or other nature) between
direct attention away from human motivations the relevant taxpayer and any person
and towards observations about artifice and referred to in paragraph (f).
contrivance in structures and transactions:
These are observable matters – they pose
The proposed new Part IVA ... is designed questions about what and how, not why. The ATO’s
to ... provide ... an effective general measure Practice Statement 2005/24 captures this well:
against those tax avoidance arrangements
that ... are blatant, artificial or contrived. 129. The eight factors in subsection 177D(2)
In other words, the new provisions are consist of three overlapping sets.
designed to apply ... on an objective view
of the particular arrangement and its The first set is about how the scheme
surrounding circumstances ... was implemented: how its results were
obtained. It comprises the first three factors
in paragraphs (a), (b) and (c) of subsection
Thirdly, the search for “purpose” is meant to be 177D(2) and deals with manner, form and
constrained; it is not a search at large. Rather, a substance, and timing.
finding of purpose is meant to be based on, and
only on, an examination of the eight items listed The second set comprises the next four
in s. 177D(2). The obvious plan of the drafters factors in paragraphs (d), (e), (f) and (g)
was to identify a list of facts and circumstances of subsection 177D(2) and deals with the
which probably spoke of tax avoidance, so effects of the scheme: the tax results,
that a finding of purpose would be largely financial changes, and other consequences
self-executing. The finding was meant to be of the scheme.
based on (“... to have regard to ...”) observations
about: The third set is the eighth factor in paragraph
(h) of subsection 177D(2) which deals
(a) the manner in which the scheme was with the nature of any connection between
entered into or carried out; the taxpayer and other parties (emphasis
added).
(b) the form and substance of the
scheme;
Courts have subsequently drawn attention to
(c) the time at which the scheme was two matters: the list is exhaustive, and it does
entered into and the length of the period not include any reference to the taxpayer’s own
during which the scheme was carried view of what it is trying to achieve. As the High
out; Court put it in Hart,
(d) the result in relation to the operation
of this Act that, but for this Part, would be [Section 177D(2)] requires the drawing of
achieved by the scheme; a conclusion about purpose from the eight
identified objective matters; it does not
(e) any change in the financial position of require, or even permit, any inquiry into the
the relevant taxpayer that has resulted, will subjective motives of the relevant taxpayers
result, or may reasonably be expected to or others who entered into or carried out the
result, from the scheme; scheme or any part of it.
(f) any change in the financial position of any
person who has, or has had, any connection The hope of the drafters was that a conclusion
(whether of a business, family or other could be drawn simply by focusing on
nature) with the relevant taxpayer, being a observable facts and circumstances. But as
change that has resulted, will result or may Gageler J said in Mills (a s.177EA case), for
reasonably be expected to result, from the many factors, the “probative value for the
scheme; purpose of answering the question … is elusive”.
To take an example, what conclusion of purpose
(g) any other consequence for the relevant is one meant to infer from a sale and leaseback,
40 years of Australia’s general anti-avoidance regime 18signed on Thursday, at 4:57 PM, taking 30 and appropriate. In some cases, the actual
minutes, involving the disposal of an asset, the parties to a scheme subjectively may not
receipt of sale proceeds, the taking on of an have any purpose, independent of that of
obligation to pay rent and entered into with a a professional advisor, in relation to the
person unrelated to the taxpayer? scheme or part of the scheme, but that does
not defeat the operation of s 177D. If, in
It seems a fair assessment of the decided cases the present case, there had been evidence
that the courts have not found this formula which showed that no director or employee
produces a self-executing provision. Debates of any member of the Group had ever heard
about “purpose” still seem to be fought out of [the provision which it was hoped would
around the motives of taxpayers and their be avoided], that would not conclude the
advisers. No doubt the hope of the drafters was matter in favour of the taxpayer. One of the
that the itemisation of these matters defining the reasons for making s 177D turn upon the
scope of Part IVA may serve as a ‘proxy’ for the objective matters listed in the section, it may
need to look deep into the minds of taxpayers be inferred, was to avoid the consequence
or their advisers, but this approach of finding that the operation of Pt IVA depends upon
meaning from events is hard to sustain. the fiscal awareness of a taxpayer.
In part, that is because the observable factors The passage smacks of an interrogation
were intended to apply to a broad range of of subjective purposes; whether that is the
transactions. As a result, by definition, they may subjective purpose of the taxpayer, or of
be irrelevant or simply uninformative in certain their advisers, should be beside the point.
circumstances. This means, that in weighing The subjective purpose of neither should be
the factors, courts tend to dwell on one or relevant; the enquiry should be into the degree of
two ‘colourable’ circumstance and dismiss all contrivance of the structures and transactions
others as “neutral”. And our courts have yet to put in place: who did what and when and how;
decide just what significance attaches to these not why.
circumstances: is the fact that the “length of
time” was short evidence of contrivance, virtue One can’t help wondering if the drafters’
or is it simply irrelevant? The significance to be objective was not doomed from the start by
ascribed to the eight factors has to be inferred the decision to use the word “purpose” in the
from the context of the scheme; their meaning section. Perhaps they might have come closer to
and significance might be self-evident in some their goal if the text had read, “this Part applies
cases but in most it is not. to a scheme if, having regard to the matters
in subsection (2), the scheme is [excessively /
And in hindsight, it seems that lawyers simply sufficiently / to any extent] blatant, artificial or
cannot abandon the search for subjective contrived.”
motives: taxpayers and their advisers still fear
the incautious letter or email, the injudicious
instructions to advisers, and the unguarded
answer under cross-examination. And taxpayers
still place great reliance on trying to substantiate
claims that the transaction was done “for estate
planning purposes” or “for asset protection.” It
seems, despite protestations that the subjective
motives of players are not relevant and cannot
be pursued, taxpayers and the courts can’t help
themselves. That is because taxpayers and the
Commissioner appear to form the view that the
‘subjective’ is informative of the ‘objective’. For
example much of the argument in Consolidated
Press revolved about the relevance of the plans
and advice of the taxpayer’s advisers:
Attributing the purpose of a professional
advisor to one or more of the corporate
parties in the present case is both possible
40 years of Australia’s general anti-avoidance regime 1907 So where are we?
In Purcell’s case in 1920, Knox CJ said of s. 53
of the Income Tax Assessment Act 1915 that the
words of the general anti-avoidance rule in that
Act must be read with insight and care, because
if they were taken at face value, few transactions
could escape unscathed:
[Section 53] if construed literally, would
extend to every transaction whether
voluntary or for value which had the effect of
reducing the income of any taxpayer.
That warning remains equally valid in the world
of Part IVA: not everything which taxpayers
might wish to enjoy will amount to a tax benefit,
not every amended assessment issued by the
ATO will be based on the appropriate counter-
factual, and most importantly, “purpose” is not
really about purpose!
40 years of Australia’s general anti-avoidance regime 20Appendix A
Major legislation and principal impacts
Income Tax Laws Amendment Act (No. 2) 1981 (Act No 110 of 1981)
Received Royal Assent on 24 June 1981
• Switches off s 260 for “any contract, agreement or arrangement made or entered into after 27 May
1981”
• Applies Part IVA to, “any scheme that has been or is entered into after 27 May 1981...” and to “and to
any scheme that has been … commenced to be carried out after that date (other than a scheme that
was entered into on or before that date)…”
Taxation Law Amendment Act (No. 3) 1998 (Act No 47 of 1998)
Received Royal Assent on 23 June 1998
• Inserted s. 177EA into Part IVA
• Amendments apply to dividends paid after 7.30 pm on 13 May 1997 (except for dividends paid by a
listed public company which were declared before that time)
New Business Tax System (Consolidation) Act (No 1) 2002 (Act No 68 of 2002)
Received Royal Assent on 22 August 2002
• Inserted s. 177EB into Part IVA
Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Act No 101
of 2013)
Received Royal Assent on 29 June 2013
• Moves withholding tax to s.177C(1)(bc)
• Adds s. 177CB
• Re-orders the text of s. 177D to put
- the purpose component of Part IVA into s. 177D(1)
- the list of 8 factors into s. 177D(2)
• Amendments apply to, “all schemes except schemes that were entered into, or that were
commenced to be carried out, on or before 15 November 2012”
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