Treasury releases amendments to general anti-avoidance rules

The Australian Treasury has released proposed amendments to the general anti-avoidance rule (GAAR) in relation to schemes entered into or commenced to be carried out on or after 16 November 2012. The GAAR has been tightened and taxpayers should have regard to the proposed amendments when considering significant transactions as the borderline between 'commercial transactions' and 'tax avoidance transactions' has become murkier.

Background

On 16 November 2012, the Australian Treasury issued Exposure Draft (ED) legislation containing proposed amendments to the GAAR in Part IVA of the Income Tax Assessment Act 1936(Cth) (1936 Act), as well as an Explanatory Memorandum (EM) to the ED legislation.  Amendment of the GAAR was announced by the Commonwealth Government on 1 March 2012. 

This was in response to a number of Court decisions in which the taxpayer had successfully argued that they did not obtain a 'tax benefit' as defined because, if they had not entered into or carried out the scheme in question, they would not have entered into an arrangement that attracted tax or would have entered into a different scheme that also would have avoided tax, because they would have deferred their arrangements indefinitely or because they would have done nothing at all.

In addition, the Commonwealth Government was concerned that the GAAR might not work effectively in relation to schemes that were part of broader commercial arrangements.

The Commonwealth Government intends to introduce the legislation in the Autumn 2013 sittings of Parliament and has invited public comment on the ED legislation. The amendments will apply to schemes entered into or commenced to be carried out on or after 16 November 2012 (rather than the originally announced start date of 1 March 2012).

Taxpayers should review proposed transactions having regard to the proposed amendments to Part IVA.

The main proposals

The GAAR in its current form requires a comparison between the 'scheme' which is said to have been entered into or carried out and an 'alternative postulate'. The comparison between the actual scheme and the alternative postulate serves to provide a basis:

• for identifying and quantifying the tax advantages obtained from the scheme; and
• upon which a conclusion about the purposes of the participants in the scheme can be drawn, having regard to the matters listed in current paragraph 177D(b) of the 1936 Act.

The centrepiece of the proposed amendments is the insertion of a new section 177CB. Proposed section 177CB provides that, in determining whether or not a tax benefit has been obtained on the basis of the alternative postulate, it is necessary to assume:

• that each person (whether or not a participant in the scheme) would have acted or refrained from acting, as the case requires, without regard to any person's liability (or potential liability) to tax or withholding tax in any year of income (paragraph 177CB(1)(a)); and
• if the scheme achieves, or would achieve, one or more non-tax effects for the taxpayer - that each person (whether or not a participant in the scheme) would have acted or refrained from acting, as the case requires, intending to achieve for the taxpayer:
  • the same 'non-tax effects' as the scheme achieves, or would achieve, for the taxpayer; and
  • all the other non-tax effects that were achieved, or would be achieved, for the taxpayer in connection with the scheme (paragraph 177CB(1)(b)); and

• if the scheme does not achieve, or would not achieve, any non-tax effects for the taxpayer - that all the events or circumstances that actually happened or existed, but did not form part of the scheme would still have happened or existed (paragraph 177CB(1)(c)).

The purpose of proposed section 177CB is to:

• restrict other alternatives that may have been to open to participants in the scheme with a more limited inquiry about other ways in which the taxpayer could reasonably have obtained the non-tax benefits (if any) that it achieves from, or in connection with, the scheme;
• address the rejection of alternative postulates put forward by the Commissioner of Taxation on the basis that the tax costs involved in undertaking those postulates would have resulted in the parties abandoning or deferring the schemes and the wider transactions of which they were a part;
• clarify the 'would have' and 'might reasonably be expected to' limbs in the definition of 'tax benefit' in subsection 177C(1).

The EM states that the proposed amendments are to address 'the technical deficiencies' revealed by recent Full Federal Court decisions 'in relation to the way in which Part IVA determined whether or not a tax advantage has been obtained in connection with an arrangement' and 'ensure that Part IVA is effective to counter tax avoidance' and to restore the dominant purpose test in section 177D as the 'fulcrum' upon which Part IVA turns.

Concluding comments

Taxpayers should monitor developments in relation to the amendments to the GAAR and have regard to the ED and the associated EM when considering significant transactions (including intra-group transactions or reorganisations) that have advantageous or curious tax consequences.