|
Tax-avoidance after Spotless
Jamie Stephenson
Law and Bills Digest Group
30 June 1997
Contents
Major Issues Summary
Introduction
An Outline of the Operation of Part IVA
The Relevant Provisions in the Income Tax Assessment
Act 1936
The Role of 'Dominant Purpose' when Considering the
Operation of Part IVA
The Matters to be Taken into Account when Ascertaining
Dominant Purpose in Light of the High Court's Judgment in the Spotless
Services Case
The Relationship Between Identification of the Relevant
Scheme, Dominant Purpose and the Obtaining of a Tax Benefit
The Possible Application of Part IVA to Commercial
Transactions with a Significant Tax Benefit and to Transactions Generally
Limits to the Operation of Part IVA
The Difficulties in Providing Express Limitations
to Part IVA
The Possibility of Obtaining a Ruling from the Commissioner
The Implications of Extending Part IVA to Australia's
Withholding Tax Regime
Whether Part IVA is a Disincentive for Foreign
Investment in Australia or for Australian Investment Overseas
Conclusion
Endnotes
One of the most important attributes of an equitable tax system is that
taxpayers are unable to avoid the imposition of tax through the use of
artificial or contrived arrangements. The Australian taxation system attempts
to achieve this by specific and general anti-avoidance provisions. These
provisions necessarily add to the complexities of tax legislation and
result in increasing compliance costs to taxpayers particularly in a self-assessment
tax system.
The general anti-avoidance provisions of the Income Tax Assessment
Act 1936 are contained in Part IVA which was introduced in 1981 by
the then Treasurer, The Hon John Howard, in order to overcome the limitations
of section 260 (the then anti-avoidance provision) by striking 'down blatant,
artificial or contrived arrangements'. Section 260 had been criticised
for having too limited a scope and therefore not being effective in stemming
anti-avoidance behaviour.
Part IVA is drafted in wide terms and gives a large degree of discretion
to the Commissioner of Taxation to disregard an arrangement and either
include an amount in a taxpayer's assessable income or to disallow a deduction.
These provisions whilst intended to prevent the erosion of the income
tax base generally, were designed to ensure that they are not impediments
to genuine commercial and financial transactions entered into with a view
to making profits.
Anti-avoidance laws attempt to strike a balance between the interests
of revenue and taxpayers. The recent decision of the High Court in the
Spotless case, which indicated the potential for a wide interpretation
of the provisions of Part IVA, appears to have tilted the balance in favour
of the Australian Taxation Office (the 'ATO'). The High Court held that
the mere fact that a transaction can be justified as a rational commercial
decision will not of itself be sufficient to avoid the operation of the
anti-avoidance provisions in Part IVA. The obtaining of a tax benefit
on its own may not attract Part IVA but if the whole transaction made
'no sense' without the tax benefit then, Spotless states, Part
IVA may apply.
The implications of the Spotless decision are that Part IVA will
need to be considered in a greater number of commercial transactions,
given that taxation considerations are important in most commercial decisions.
This decision has caused some concern in the business community. For
example, the Law Council of Australia in its 12 June 1997 media release
highlighted the imbalance caused by the application of the wide interpretation
of Part IVA in the Spotless decision to loan arrangements entered
into by small business to reduce borrowing costs.(1)
This is the first time, since the High Court Spotless
case, that the ATO has sought to apply anti-avoidance provisions to common
- and legitimate - business arrangements, despite assurances to the contrary.
Part IVA should be used against tax avoidance arrangements which have
no commercial substance. It should not be used, particularly just prior
to the end of the financial year, to frighten taxpayers and banks who
enter into normal and proper commercial arrangements with respect to
the repayment of money borrowed for commercial purposes.
On the other hand what constitutes 'normal and proper commercial arrangements'
are often in the eye of the beholder.
The paper commences with an outline of the operation of the general
anti-avoidance provisions contained in Part IVA of the Income Tax Assessment
Act 1936 ('the Act') together with a review of the relevant statutory
provisions.
The three necessary prerequisites for the Taxation Commissioner to have
a discretion to cancel a tax benefit obtained by a taxpayer are considered;
namely that there is a scheme entered into after 27 May 1981, having regard
to a number of specified matters it can be concluded that the scheme was
entered into or carried out with the sole or dominant purpose of obtaining
a tax benefit and thirdly that the taxpayer did in fact obtain a tax benefit.
The terms 'scheme' and 'tax benefit' are defined in the Act.
The role of 'dominant purpose' as being one of the essential preconditions
to the operation of Part IVA is examined in more detail together with
an analysis of the judgment of the High Court in the Spotless Services
Case(2) and its implications in relation to the dominant purpose test.
The matters to be taken into account when ascertaining purpose in light
of the High Court's judgment are also considered.
The relationship between identification of the relevant scheme and the
test of dominant purpose is analysed. The application of Part IVA to commercial
transactions with a significant tax benefit and to commercial transactions
more generally is also considered. The paper goes on to analyse the possible
limits to the operation of Part IVA, including possible limitations arising
out of the Courts' interpretation of the definition of 'tax benefit'.
The difficulties in finding a balance between certainty of operation
of the taxation laws and also retaining the effectiveness of the general
anti-avoidance provisions is discussed. Part IVA was introduced to overcome
the limitations of section 260 (the predecessor section to Part IVA).
The judicial interpretation of section 260 and the limits to the section
are considered.
Finally, the paper examines the implications of the proposed extension
of Part IVA to Australia's withholding tax regime as announced by the
Treasurer in the budget speech and considers whether Part IVA is a disincentive
for foreign investment in Australia or Australian investment overseas.
The general anti-avoidance provisions which are contained in Part IVA
of the Act comprise sections 177A to 177G and were introduced in 1981.(3)
In order that Part IVA may apply to a taxpayer there are three preconditions:
a) there must be a scheme (as defined by the Act) entered into after
27 May 1981;
b) having regard to a number of specified matters, the scheme must be
entered into or carried out with the sole or dominant purpose of obtaining
a tax benefit; and
c) the taxpayer must obtain a tax benefit as defined.
If these three matters are satisfied, Part IVA applies and the Commissioner
has a discretion to cancel either the whole or part of the tax benefit
by either including the amount of the relevant tax benefit in the taxpayer's
assessable income or by disallowing a deduction to the taxpayer equal
to the amount of the tax benefit. Part IVA is conditional on the Commissioner
exercising his or her discretion.(4)
The Commissioner's discretion is only to cancel the tax benefit if the
three preconditions exist as objective facts. The Commissioner has no
discretion in relation to the existence of the three preconditions which
must be determined objectively.(5)
Part IVA was introduced to replace section 260 which in 1981 was the
current anti-avoidance provision. As a result of the introduction of Part
IVA, section 260 only applies to contracts, agreements or arrangements
entered into before 28 May 1981. Prior to 1981, section 260 had operated
unamended since the introduction of the Act. A provision identical to
section 260 was also contained within the Income Tax Assessment Act 1915
and the Income Tax Assessment Act 1922.(6)
An understanding of section 260 is important given that Part IVA was
introduced to overcome the limitations of section 260. The judicial interpretation
of section 260 had imposed a number of limitations on the operation of
the section, although it is interesting that after the introduction of
Part IVA the Courts construed section 260 more widely.(7)
The specific anti-avoidance provisions contained within the Act will
apply in priority to Part IVA. Part IVA will apply only after all other
provisions in the Act have had potential operation. Examples of specific
anti-avoidance provisions are section 80DA which applies in relation to
the carrying forward of company losses and sections 82KH to 82KL which
apply in relation to schemes involving contrived deduction arrangements.
At the time of the introduction of Part IVA on 27 May 1981, the then
Treasurer The Hon John Howard stated in the second reading speech(8) that:
The proposed provisions - embodied in a new Part IVA of the
Income Tax Assessment Act 1936 - seek to give effect to a policy that
such measures ought to strike down blatant, artificial or contrived arrangements,
but not cast unnecessary inhibitions on normal commercial transactions
by which taxpayers legitimately take advantage of opportunities available
for the arrangement of their affairs.
...
Some writers on the subject suggest that tax avoidance involves conduct
entered into for the sole or dominant purpose of obtaining a particular
tax advantage.
That description could be expected to cover the types of tax avoidance
that, again using the language of social or political or debate, are
blatant artificial or contrived, and which are indeed intended to be
covered by this Bill.
But it is also apt to describe other arrangements, including some
family arrangements, which are beyond the appropriate scope of general
anti-avoidance measures and ought if need be, to be dealt with by specific
measures.
In order to confine the scope of the proposed provisions to schemes
of the 'blatant' or 'paper' variety, the measures in this Bill are expressed
so as to render ineffective a scheme whereby a tax benefit is obtained
and an objective examination, having regard to the scheme itself and
to its surrounding circumstances and practicable results, leads to the
conclusion that the scheme was entered into for the sole or dominant
purpose of obtaining a tax benefit.
In the explanatory memorandum to the Income Tax Laws Amendment Bill
(No 2), No.110 of 1981, the Treasurer stated Part IVA was designed to
apply to blatant, artificial or contrived arrangements but that arrangements
of a normal business or family kind, including those of a tax planning
nature will be beyond the scope of Part IVA.
Notwithstanding the Treasurer's statement in the second reading speech
and the explanatory memorandum, it appears that the operation of Part
IVA is not necessarily confined to the circumstances set out in the speech.
As an example, it is unclear from the terms of Part IVA that it will not
apply to trust arrangements where income is distributed to family members
and to arrangements designed to ensure the maximum deductibility of interest
on borrowings by family businesses.
Section 177D prescribes the circumstances in which Part IVA will apply
as follows:
This Part applies to any scheme that has been or is entered
into after 27 May 1981, and to any scheme that has been or is carried
out or commenced to be carried out after that date (other than a scheme
that was entered into on or before that date), whether the scheme has
been or is entered into or carried out in Australia or outside Australia
or partly in Australia and partly outside Australia, where-
(a) taxpayer (in this section referred to as the 'relevant taxpayer')
has obtained, or would but for section 177F obtain, a tax benefit in
connection with the scheme; and
(b) having regard to-
- the manner in which the scheme was entered into or carried out;
- the form and substance of the scheme;
- the time at which the scheme was entered into and the length of
the period during which the scheme was carried out;
- the result in relation to the operation of this Act that, but for
this Part, would be achieved by the scheme;
- any change in the financial position of the relevant taxpayer that
has resulted, will result, or may reasonably be expected to result
, from the scheme;
- any change in the financial position of any person who has, or has
had, any connection (whether of a business, family or other nature)
with the relevant taxpayer, being a change that has resulted, will
result or may reasonably be expected to result from the scheme;
- any other consequence for the relevant taxpayer, or for any person
referred to in subparagraph (vi), of the scheme having been entered
into or carried out; and
- the nature of any connection (whether of a business, family or other
nature) between the relevant taxpayer and any person referred to in
subparagraph (vi),
it would be concluded that the person, or one of the persons, who entered
into or carried out the scheme or any part of the scheme did so for the
purpose of enabling the relevant taxpayer to obtain a tax benefit in connection
with the scheme or of enabling the relevant taxpayer and another taxpayer
or other taxpayers each to obtain a tax benefit in connection with the
scheme (whether or not that person who entered into or carried out the
scheme or any part of the scheme is the relevant taxpayer or is the other
taxpayer or one of the other taxpayers).
Section 177A(1) provides that in Part IVA, unless the contrary intention
appears, 'scheme' means:
a) any agreement, arrangement, understanding, promise or undertaking,
whether express or implied and whether or not enforceable, or intended
to be enforceable, by legal proceedings; and
b) any scheme, plan, proposal, action, course of action or course of
conduct.
The definition of scheme is expanded by section 177A(3) which expressly
includes a unilateral scheme.
Section 177A(5) provides that:
A reference in this Part to a scheme or a part of a scheme
being entered into or carried out by a person for a particular purpose
shall be read as including a reference to the scheme or the part of the
scheme being entered into or carried out by the person for two or more
purposes of which that particular purpose is the dominant purpose.
Section 177C(1) defines the obtaining by a taxpayer of a tax benefit
in connection with a scheme as follows:
a) an amount not being included in the assessable income of the taxpayer
of a year of income where that amount 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; or
b) a deduction being allowable to the taxpayer in relation to a year
of income where the whole or a part of that deduction would not have been
allowable, or might reasonably be expected not to have been allowable,
to the taxpayer in relation to that year of income if the scheme had not
been entered into or carried out.
The amount of the tax benefit is defined in section 177C(1) as being
the amount included in the taxpayer's assessable income or the amount
of the whole or part of the deduction.
The Commissioner's discretion to cancel the tax benefit is contained
in section 177F of the Act.
When considering the operation of Part IVA, the relevant purpose is
to be ascertained objectively by reference to the matters specified in
section 177D(b)(i) to (viii). These matters are the only matters which
may be considered. The subjective purpose or intent of a person to obtain
a tax benefit is not referred to as a factor to be taken into account
and is irrelevant. It is no defence that the taxpayer is either innocent
or ignorant. As stated by the majority judgment of the High Court in the
Spotless Services Case the question is whether, having regard,
as objective facts, to the matters answering the description in paragraph
(b), a reasonable person would conclude that the taxpayers entered into
or carried out the scheme for the dominant purpose of enabling the taxpayers
to obtain a tax benefit in connection with the scheme.
It is only necessary that one of the persons who entered into or carried
out the scheme (or any part of the scheme) did so with the requisite purpose.
It is not necessary that all participants to the scheme have the necessary
purpose. Furthermore it is not necessary that the person who actually
obtained the tax benefit be involved in all aspects of the scheme, be
the instigator of the scheme or be the person with the requisite purpose.
It is however necessary that the relevant taxpayer subject to the operation
of Part IVA be the person who actually obtained the tax benefit, although
there does not however need to be an exact correspondence between the
tax benefit which was obtained and that which was intended to be obtained.
The matters to be taken into account when determining the sole or dominant
purpose contained in section 177D(b)(i) to (viii). These matters are discussed
below.
(i) The manner in which the scheme was entered into or carried out
Relevant factors under this category include the way in which
the particular scheme in question was established including the method
or procedure. The background of the scheme and the alternative purposes
which could objectively be attributed to the taxpayer in entering into
the scheme are also to be considered. It would also be relevant if the
scheme which the taxpayer entered into was promoted by an entrepreneur
such as a merchant bank. The way in which the taxpayer operated before
and after the scheme and commercial practices more generally may also
be relevant.
(ii) The form and substance of the scheme.
Whether the scheme is a one off situation or a business like
transaction carried out for a substantial period of time are relevant
factors. It is also clear that the 'choice principle' discussed below
has no application in relation to Part IVA.
(iii) The time at which the scheme was entered into and the length of
the period during which the scheme was carried out.
In this regard it may be relevant if the scheme was carried
out immediately before the close of the financial year.
(iv) The result in relation to the operation of this Act that, but for
this Part, would be achieved by the scheme.
The result which would arise out of the normal operation of
the Act excluding the possible application of Part IVA is relevant as
is the result which would arise if the scheme had not been entered into.
(v) Any change in the financial position of the relevant taxpayer that
has resulted, will result, or may reasonably be expected to result, from
the scheme.
It would appear to be relevant under this category if the taxpayer
was able to claim a deduction in circumstances where no actual payment
has been made and his or her net assets remained constant.
(vi) Any change in the financial position of any person who has, or
has had, any connection (whether of a business, family or other nature)
with the relevant taxpayer, being a change that has resulted, will result
or may reasonably be expected to result from the scheme, a connection
of any other nature is sufficient.
The person does not need to have any connection with the taxpayer
of a business or family kind.
(vii) Any other consequence for the relevant taxpayer, or for any person
referred to in subparagraph (vi), of the scheme having been entered into
or carried out.
Where arrangements have been made between related parties it
is necessary to pay particular regard to whether the documentation accurately
reflects what the parties contemplate will occur and whether expressed
reasons for a particular course of action are to be taken at face value.(9)
(viii) The nature of any connection (whether of a business, family or
other nature) between the relevant taxpayer and any person referred to
in subparagraph (vi).
Given the reference to 'any connection' it is likely that the
links which may be considered under this subparagraph may be extremely
wide.
It is necessary for the Commissioner to consider each of the matters
referred to in paragraphs 177D(b)(i) to (viii), however it is permissible
for him or her to conclude that having regard to a particular matter if
the Commissioner sees nothing to assist him or her to conclude whether
or not the requisite purpose existed.
In September 1986, Spotless Services Limited and Spotless Finance Pty
Limited ('the Spotless companies') had approximately $40 million of surplus
funds which they decided to place on deposit in the Cook Islands. The
investment had been promoted in Australia by a merchant bank and the Spotless
companies had been approached about the investment by the merchant bank.
Importantly, the rate of interest obtained by the Spotless companies in
the Cook Islands was approximately 4% lower than the interest rate which
could have been obtained by investing the funds on deposit in Australia.
The investment was secured by a letter of credit issued by the Midland
Bank plc.
The Spotless companies had also considered other investment alternatives
including a similar kind of investment to be made in Hong Kong. This investment
was also suggested by a merchant bank. This proposal involved a tax clearance
certificate being granted by the Commissioner. After discussions with
their legal advisers, the Spotless companies decided not to proceed with
the investment in Hong Kong.
The Spotless companies claimed that the interest they derived from the
monies on the deposit in the Cook Islands was exempt from income tax pursuant
to section 23(q) of the Act on the basis that the interest had been derived
from a source outside Australia and Papua New Guinea and that withholding
tax had been paid on the interest in the Cook Islands. At that time section
23(q) (which has since been repealed) provided that income derived by
a resident from sources out of Australia was exempt income, provided that
there was a liability for tax in the country where that income was derived
and the Commissioner was satisfied that tax had been paid or would be
paid.
The Commissioner asserted that the taxpayers had obtained a tax benefit
in connection with a scheme to which Part IVA of the Act applied, namely,
that the interest would have been included or might reasonably be expected
to have been included in the taxpayers' assessable income if the scheme
had not been entered into or carried out.
The Spotless companies were successful both at first instance before
Lockhart J(10) and before the Full Federal Court.(11) However on appeal
to the High Court the Commissioner succeeded in establishing that Part
IVA applied. The High Court's judgment was handed down on 3 December 1996.
Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ handed down the
joint majority judgment. McHugh J also agreed that the appeals should
be allowed, however on the basis that the case involved a very special
set of facts.
The majority judgment of the High Court appeared to accept the formulation
of the relevant scheme identified by Cooper J in the Full Federal Court.
Cooper J identified the scheme as being the proposal of the taxpayer to
invest $40 million on deposit in the Cook Islands and to pay the Cook
Islands withholding tax on the interest earned, and the taking of all
necessary steps to implement the proposal.
The High Court found that the taxpayers had the requisite purpose in
connection with the scheme. A person may enter into or carry out a scheme
within the meaning of Part IVA, for the dominant purpose of enabling the
relevant taxpayer to obtain a tax benefit where that dominant purpose
is consistent with the pursuit of commercial gain in the course of carrying
on a business. The majority stated that there was no dichotomy between
the obtaining of a tax benefit as the dominant purpose of the taxpayers
in making the investment on the one hand and a rational commercial decision
on the other. The adoption of one particular form over another may be
influenced by tax considerations and a particular course of action may
be both tax driven and bear the character of a rational commercial decision.
Accordingly it is clear that the mere fact that a transaction can be justified
as a rational commercial decision will not of itself be sufficient to
avoid the operation of Part IVA.
The High Court held that in its ordinary meaning dominant indicates
that purpose which was the ruling, prevailing or most influential purpose.
The High Court held that notwithstanding that the taxpayers took steps
to maximise their after tax return, it was still possible for them to
do so in a manner indicating the presence of a dominant purpose to obtain
a tax benefit.
One interpretation of this aspect of the High Court's judgment is that
where a person has a number of purposes in entering into an arrangement
and one of the those purposes is to obtain a tax benefit, it is possible
for that purpose to be the dominant purpose notwithstanding that it does
not constitute more than 50% of the overall purpose. Given the importance
of taxation considerations in most commercial transactions and the fact
that generally a taxpayer has a number of purposes in entering into a
particular transaction, the meaning given to 'dominant' by the High Court,
may mean that it is relatively easy to conclude that a taxpayer has the
necessary purpose such that Part IVA applies.
The majority judgment of the High Court also noted that the operation
of Part IVA is not limited to the diversion of an existing income stream
in such a way that it would not attract tax. After the introduction of
Part IVA in 1981, it had been thought by many advisers that that operation
of Part IVA was limited to these circumstances.
The terms of section 177D(b)(i) to (viii) bear upon the manner in which
the scheme was entered into and the form and substance of the scheme.
The High Court held that in the context in which they appear in section
177D(b)(i), the terms manner and entered into are not given any restricted
meaning. 'Manner' includes consideration of the way in which the particular
scheme in question was established, including the method or procedure.
The majority stated that the question was whether, having regard, as objective
facts, to the matters answering the description in paragraph (b), a reasonable
person would conclude that the taxpayers entered into or carried out the
scheme for the dominant purpose of enabling the taxpayers to obtain a
tax benefit in connection with the scheme.
The High Court relied on the fact that the interest rate earned on the
investment in the Cook Islands was approximately 4 per cent below the
applicable bank rates available in Australia and concluded that the form
and substance of the proposal had been to take steps to ensure that the
source of the interest was located in the Cook Islands. In those circumstances
it could be objectively concluded that the taxpayers in entering into
and carrying out the particular scheme had, as their most influential
and prevailing or ruling purpose, and thus their dominant purpose, the
obtaining of a tax benefit.
The commercially unattractive interest rate was more than offset by
the exemption from Australian income tax. This collateral tax advantage
was the key to the whole transaction and gave it its particular commercial
attraction. Without that tax benefit the proposal would have made no sense
and would not have been undertaken. Although the Spotless companies were
concerned with obtaining adequate security for the investment, viewed
objectively, it was the obtaining of the tax benefit which directed the
taxpayers in taking steps they otherwise would not have taken by entering
into the scheme.
The majority of the High Court went on to conclude that the Spotless
companies also obtained a tax benefit. The reasonable expectation was
that, in the absence of any other acceptable alternative proposal for
off-shore investment at interest, the taxpayers would have invested the
funds for the balance of the financial year in Australia. The amount derived
from that investment would then have been included in the assessable income
of the taxpayers. It could reasonably be concluded that the amount the
taxpayers would have received on the Australian investment would have
been not less than the amount of interest in fact received from the investment
in the Cook Islands. Accordingly the High Court found that there was no
error adverse to the taxpayers in identifying the amount of the tax benefit
as an amount equal to the interest less the Cook Islands withholding tax.
While not expressly stated in the majority judgment, it follows that
in the Spotless Services Case the amount of the tax benefit under
Part IVA could have been greater than that identified by the Commissioner.
While the Commissioner identified the tax benefit as being the net interest
from the Cook Islands, it appears that it would have been legitimate for
the Commissioner to identify the tax benefit as being the amount which
would have received as interest had the funds been invested in Australia.
If such an amount had been identified as the tax benefit, the ultimate
position of the taxpayers after the operation of Part IVA would be worse
than if the funds had been invested in Australia. The taxpayers would
have been taxed as if the funds were invested in Australia, however would
only have received the lower Cook Islands interest rate on the investment
of the funds.
The High Court held that Part IVA is to be construed and applied according
to its terms and not according to old arguments concerning United Kingdom
tax legislation. The principle that taxpayers are entitled to order their
affairs to minimise tax(12) has no relevance in relation to Part IVA.
Mr Justice McHugh held in a separate judgment that the elaborate nature
of the scheme lead to the conclusion that its purpose was to enable the
taxpayer to obtain a tax benefit, however he stated that such a conclusion
would seldom if ever be drawn if no more than a change of business or
investment produced a tax benefit.
Given the very wide definition of 'scheme' contained in section 177A(1)
of the Act it will be relatively easy for the Commissioner to find that
a scheme exists. It may, however, be more difficult to determine what
the relevant scheme was for the purposes of Part IVA, especially given
that it is possible that a transaction may constitute several schemes
for the purposes of the Part. The particularisation of the scheme is important
as it sets the parameters for determining whether the taxpayer obtained
a tax benefit in connection with the scheme and whether a person entered
into or carried out the scheme (or any part of the scheme) for the purpose
of enabling the relevant taxpayer to obtain a tax benefit in connection
with the scheme.
Both section 177A(5) and section 177D refer to purpose in relation to
part of a scheme. The author's view is that this means that a person can
have the necessary purpose when he or she only participates in part of
the scheme as opposed to the interpretation that a person need only have
the relevant purpose in relation to part of the scheme.
It is clear that when determining whether the taxpayer obtained a tax
benefit, there must be a tax benefit in connection with a scheme, not
merely in connection with part of a scheme. The first significant litigation
on the operation of Part IVA was the case of Federal Commissioner
of Taxation v Peabody(13). The High Court in that case noted that
part of a scheme, which cannot be regarded as a scheme in itself, although
entered into or carried out by a person with the requisite purpose, cannot
give rise to a tax benefit for the purposes of Part IVA. This conclusion
follows from the wording of section 177C which links the definition of
tax benefit to the identification of a scheme.
When determining what constitutes a scheme, the High Court in Peabody's
Case held that while it was possible for a step or steps in a wider
scheme to comprise a separate narrower scheme, it was important that those
isolated steps did of themselves constitute a scheme.(14) The High Court
noted that Part IVA does not provide that a scheme includes part of a
scheme and held that it was possible, despite the very wide definition
of a scheme, to conceive of a set of circumstances which constitutes only
part of a scheme and not a scheme in itself. That will occur where the
circumstances are incapable of standing on their own without being robbed
of all practical meaning.(15)
It is clear from the judgment of the High Court in Peabody's Case
that the Commissioner can reformulate the definition of scheme. Even if
the Court decides upon a different definition of scheme to that put forward
by the Commissioner, this does not necessarily mean that Part IVA has
no application. The Court will go on to consider if there is the necessary
purpose and tax benefit in connection with the proper definition of the
scheme. An error by the Commissioner in the identification of a scheme
as being one to which Part IVA applies or an error regarding the connection
of a tax benefit with such a scheme will only result in the wrongful exercise
of the discretion conferred by section 177F if the tax benefit which the
Commissioner purports to cancel is not a tax benefit within the meaning
of Part IVA.(16) The crucial question in relation to the identification
of the scheme is whether a tax benefit which the Commissioner has purported
to cancel is in fact a tax benefit obtained in connection with a Part
IVA scheme and so susceptible to cancellation at the discretion of the
Commissioner.
The High Court in Peabody's Case also held that the Commissioner
is entitled to put his or her case in alternative ways and to put forward
a number of alternative identifications of the relevant scheme, although
he or she may be required to supply particulars of the scheme or schemes
relied upon.(17) The Commissioner is entitled to rely upon a narrower
scheme within a wider scheme which has been identified as meeting the
requirements of Part IVA, provided that it causes no undue embarrassment
or surprise to the other side. If it does cause embarrassment or surprise
to the other side, the situation may be cured by an amendment, provided
the interests of justice allow such a course.(18)
The High Court's interpretation of Part IVA in the Spotless Services
Case gives the Part a potentially very wide application. It is clear
that the mere fact that a transaction can be justified as a rational commercial
decision will not of itself be sufficient to avoid the operation of Part
IVA. However the mere fact that a taxpayer obtains a tax benefit in connections
with a transaction is not of itself sufficient to fall within the Part.
It appears that a transaction is arguably outside the scope of Part
IVA, if after having regard to the eight factors set out in section 177D(b)(i)
to (viii) that the transaction makes sense, will stand alone or is justifiable
without any tax benefit obtained and the tax benefit merely makes the
transaction more attractive. Alternatively if having regard to the eight
factors set out in section 177D(b)(i) to (viii) the transaction makes
'no sense' without the tax benefit it is possible that the Part will apply.
Adopting the language of the High Court in the Spotless Services Case
it is necessary to determine if it was the 'collateral tax advantage which
provided the key to the whole transaction' and without that benefit the
proposal would have made 'no sense'.
In order to make these determinations it is sometimes necessary to compare
the transaction with a normal or ordinary transaction. For example in
the Spotless Services Case the High Court compared the interest
rate that was obtained on the investment in the Cook Islands with the
interest rate the Spotless companies would have obtained on investing
the funds in Australia in Australian bank bills. In some cases such as
the Spotless Services Case involving the investment of funds at
fixed interest, it is relatively easy to make such comparisons, however
in more complicated transactions such comparisons may not be so easy to
make.
An example of a case where Part IVA was held not to apply notwithstanding
that a tax benefit was obtained is WD & HO Wills (Australia) Pty
Limited v Commissioner of Taxation,(19) although the judgment was
handed down before the judgment of the High Court in the Spotless Services
Case. Sackville J considered a scheme involving an offshore captive
insurer.(20) Sackville J concluded that objectively having regard to the
eight factors set out in section 177D(b), the parties to the scheme identified
by the Commissioner (namely the taxpayer parent company and its subsidiary
captive insurer) had a number of purposes including the inability to obtain
the insurance on the general market. Sackville J concluded that any tax
benefit obtained by the taxpayer as a result of the scheme was merely
incidental to the other non tax objectives.(21) Disregarding the tax benefits,
the proposal still made sense for non-tax reasons.
At the end of the day, whether or not Part IVA will apply in any given
case is a question of fact and will detailed examination of all the matters
to be taken into account under section 177D.
Part IVA contains a number of express limitations to the operation of
Part IVA. Section 177C(2) excludes from the definition of tax benefit
an amount not included in the assessable income of a taxpayer, or an amount
allowed as a deduction to a taxpayer, where the taxpayer makes a declaration,
election or selection, or gives notice or exercises an option expressly
provided for by the Act. The section 177C(2) exclusion does not apply
where the scheme was entered into or carried out by any person for the
purpose of creating any circumstance or state of affairs the existence
of which is necessary to enable the declaration, election, selection,
notice or option to be made, given or exercised.
Section 177D(2) provides that Part IVA is not to be taken to affect
the operation of Division 16C of Part III which provides for the primary
producer income equalisation deposits scheme.
Given the definition of tax benefit contained in section 177C, Part
IVA will not apply to schemes which result in the increase in the amount
of a rebate or credit. Similarly Part IVA would not apply to a scheme
relating to tax rates, such as for example a scheme to ensure that a minor
is taxed at ordinary rates rather than the higher rates under Division
6AA or a scheme relating to the status of a company.(22) Schemes to circumvent
the tax instalment provisions would also fall outside Part IVA. In addition
as is discussed below, Part IVA as currently drafted will not apply to
schemes that reduce withholding tax.
The explanatory memorandum to the Income Tax Amendment Bill (No.2) of
1981 at page 10 stated:
In other words Part IVA applies only in relation to things
that go to make up a person's taxable income and not to rebates of or
credits against the tax on a person's taxable income . Withholding taxes,
being taxes that are not based on the difference between assessable income
and allowable deductions will also be outside the scope of Part IVA.
It is possible that the scope of Part IVA may be limited given the definition
of tax benefit contained in section 177C. Broadly section 177C defines
the tax benefit as being the amount of the assessable income which would
have been included in the taxpayer's assessable income or the amount of
the allowable deduction which would not have been allowed to the taxpayer
in relation to the year of income if the scheme had not been entered into
or carried out.
Accordingly in order for there to be tax benefit it is necessary to
establish what would have happened if the scheme had not been entered
into or carried out. If there is a clear pre-existing course of conduct
there may not be any difficulties in establishing this. If, however, there
is no pre-existing, course of conduct there may be difficulties in the
Commissioner establishing that an amount might reasonably have been expected
to have been included in the taxpayer's assessable income or that an amount
might reasonably be expected not to have been an allowed deduction if
the scheme had not been entered into or carried out.
The High Court in Peabody's Case held that reasonable expectation
for the purposes of the definition of tax benefit requires more than a
possibility. It involves a prediction of the events that would have occurred
if the scheme had not been entered into or carried out and the prediction
must be sufficiently reliable for it to be regarded as reasonable.(23)
Difficulties arise in establishing that the taxpayer has obtained a
tax benefit where there are discretionary powers vested either in the
directors of a company in respect of dividends or in the trustees of a
discretionary trust. In these circumstances it is difficult to determine
whether or not an amount might reasonably be expected to have been included
in the assessable income of an object of the discretionary power or of
a shareholder.
The trustee of a discretionary trust may choose to distribute income
to a beneficiary who has tax losses or no other income, rather than distribute
income to other beneficiaries who have other assessable income. While
it is possible that such action would constitute a scheme and would also
satisfy the purpose requirement, it may be difficult to identify 'an amount
that would have been included, or might reasonably have been included'
in the assessable income of the taxpayer if the trustee had not exercised
the discretion in that way.
In Peabody's Case the taxpayer was a beneficiary under a discretionary
trust. The High Court held that the taxpayer did not obtain a tax benefit
because it could not reasonably be expected that if the scheme had not
taken place that the profit would have flowed to the trustee and to the
taxpayer in that year of income. In these circumstances it could not be
said that there was an amount which would have been included or might
reasonably have been expected to have been included in the taxpayer's
assessable income had the scheme not taken place.
Given the wide definition of 'scheme' contained in section 177A, it
is unlikely that there will be significant limitations imposed on the
operation of Part IVA arising from the necessity to identify a scheme.
Part IVA has, potentially, very wide application, however, there is
no clear expression of this in Part IVA. As an example it is common practice
to use trust, company or partnership arrangements in order to distribute
income within a family in order to reduce tax as a result of the progressive
tax rates. In these cases it is possible that the three preconditions
to the operation of Part IVA would be satisfied. In many transactions
the three preconditions to the application of Part IVA will be satisfied
and the Commissioner will have a discretion to cancel the tax benefit
obtained by the taxpayer. In light of the High Court's interpretation
of Part IVA in the Spotless Services Case, Part IVA potentially
applies to schemes other than those of the blatant or paper variety to
which the Second Reading speech stated that the Part was directed. There
are also clear statements in both the Second Reading Speech and the explanatory
memorandum that schemes explained on the basis of ordinary business and
family dealings will not be within the terms of section 177D, however
there is no clear expression of this in Part IVA. Section 177F gives no
guidance as to when the Commissioner will exercise his or her discretion
to cancel a tax benefit and taxpayers may be under some uncertainty as
to whether Part IVA will be applied. It would be unconducive to investment
and other business activity if taxpayers are left in a position of uncertainty
as to their tax position, although the need to effectively counter tax
avoidance also needs to be considered.
There are difficulties in drafting anti-avoidance provisions wide enough
to be effective, but not so wide as to apply to every transaction. While
the wide grant of discretion contained in Part IVA may give rise to uncertainty,
the grant of discretion may be necessary for Part IVA to be in these terms
in order for the provisions to be effective. There may for example be
difficulties in including a provision in Part IVA that the Part will not
apply generally in circumstances where the Act has given a specific concession,
as this may allow the Courts to interpret Part IVA in such as way as to
allow the operation of the 'choice' principle (discussed below) which
effectively neutralised the operation of section 260, the predecessor
to Part IVA.
Part IVA was enacted in order to overcome the deficiencies of the old
section 260(24) and it is useful to consider the deficiencies in the old
section 260 when considering Part IVA. The explanatory memorandum to Part
IVA, noted that in accordance with the judicial interpretation of section
260 at that time, there were four major limitations to the scope of section
260 to which Part IVA was directed. These limitations were stated as follows:
a) The 'choice principle' was held to apply in relation to section 260.
The 'choice principle' was an interpretative rule according to which section
260 did not apply to deny to taxpayers a right of choice of the form of
transaction to achieve a result if the Act gave the option of that form
of transaction. Under the choice principle, section 260 was interpreted
as protecting the general provisions of the Act from frustration, but
not as operating to deny the taxpayer any right of choice between alternatives
which the Act itself lays open to him or her.(25)
b) Section 260 was expressed in such a way that the purposes or motives
of the persons entering into the arrangement were not to be considered
when deciding whether the section applied to the arrangement. The 'purpose'
of an arrangement was to be tested only by examining the effect of the
arrangement itself.
c) It was unclear whether an arrangement to which section 260 was found
to apply must be treated as wholly void or whether it can be treated as
only partly void, that is to the extent necessary to eliminate the sought-after
tax benefit.
d) Once it had done its job of voiding an arrangement, section 260 did
not provide a power to reconstruct what was done, so as to arrive at a
taxable situation.
Furthermore section 260 did not operate to deny a taxpayer a deduction
for an outgoing which was otherwise deductible under section 51.(26)
It is arguable that in order for Part IVA to overcome the limitations
of section 260 identified above it was necessary for the Part to be drafted
in the wide terms in which it was enacted.
As discussed above, Part IVA has potential application to a wide range
of transactions. While it is unlikely that the Commissioner will seek
to apply Part IVA in all the circumstances in which he or she is entitled
to under the terms of the Part, taxpayers may still be left in a position
of some uncertainty. One possibility to minimise any uncertainty may be
for the Commissioner to give some indication of the circumstances in which
he or she will seek to exercise the discretion.
The Commissioner has indicated in general terms that he or she will
seek to apply the judgment of the High Court in the Spotless Services
Case only in artificial, blatant and contrived situations.(27) It
may, however, be appropriate for the Commissioner to indicate with more
specificity the types of transactions in which he or she will seek to
apply Part IVA and the circumstances in which Part IVA will not be applied.
In the second reading speech the Treasurer stated that:
But I do assert that taxpayers who simply take advantage of
concessions for the purposes for which they were put in the law cannot
and will not be affected by the new provisions. Specifically, for example,
Part IVA will not deny to people who simply respond to our concessions
for investment in Australian films the benefit of the tax advantages that
are part of those concessions. But I think it incontrovertible that blatant
misuse of those and other 'incentive' concessions ought to be within the
scope of Part IVA. A general anti-avoidance provision would be of little
worth if it could not be used to prevent unintended exploitation of such
concessions in the law, or to operate as a back up to a specific anti-avoidance
provision in circumstances where a taxpayer has tailored arrangements
so that the provision is circumvented in form but not in substance.
There are, however, no express provisions contained in Part IVA to the
effect that taxpayers who simply take advantage of concessions for the
purposes for which they were included in the Act will not be within the
Part. In areas where the Act has given specific concessions as a matter
of policy (for example infrastructure financing) it may be appropriate
for the Commissioner to give a ruling that will not seek to apply Part
IVA to areas where as a matter of policy a specific concession has been
granted.(28) It is also possible for a taxpayer is to request a private
ruling from the Commissioner in relation to the proposed arrangements.
The Commissioner will examine the issue as if the facts which the taxpayer
has provided have actually occurred. A private ruling is specific to the
particular taxpayer and the particular transaction, act or event. There
is also a system of public rulings which sets out the Commissioner's opinion
as to the way in which a tax law applies to a person or class of persons
in relation to an arrangement or a class of arrangements.
It should be remembered however that the Commissioner has stated in
Taxation Ruling 1 that a public ruling cannot supplant the terms of the
law and does not have the effect of an estoppel against the operation
of the law, although the Commissioner will generally treat the ruling
as administratively binding.
In the Treasurer's budget speech of 20 August 1996, the following statement
was made:
From tonight, the general anti-avoidance provisions of the
income tax law - Part IVA will be extended so that they can apply to Australia's
withholding tax regime.
Other amendments to the withholding tax provisions will further assist
in preventing tax avoidance. These measures do not signal any change
in the Government's policy regarding withholding taxes.
As Part IVA is currently drafted, the definition of tax benefit contained
in section 177C would not apply to schemes that reduce withholding tax.
The withholding tax system is a means of collecting tax from a third party
(usually the person making the payment to the person deriving the income)
with the tax collected being credited to the taxpayer who bears the liability
for the tax. In general terms, section 128D excludes from assessable income
of a person certain income subject to withholding tax. Accordingly withholding
tax is a final tax to be deducted by the payer and borne by the recipient.
A non-resident whose income includes a dividend, interest or a royalty
from which withholding tax has been deducted is entitled to a credit against
the withholding tax liability imposed by Division 11A of the Act. Often
the credit equals the withholding tax liability and accordingly the tax
liability is extinguished.
As the obligation to pay withholding tax is not imposed on the person
who derives the income, a scheme to relieve a person of an obligation
to pay withholding tax would not result in a reduction of that person's
assessable income and accordingly there would not be a tax benefit as
defined in section 177C(1). Interest or dividends subject to withholding
tax are not 'assessable income' to the person who has the obligation to
pay the withholding tax.
Assume that an Australian bank pays interest to a non-resident of Australia
and that a scheme is adopted under which no withholding tax is required
to be paid by that Australian bank. As the law is currently drafted the
Australian bank has not obtained a tax benefit as there is no reduction
of the Australian bank's assessable income. All that has been avoided
is an obligation to withhold monies. The non-resident's assessable income
also remains the same, all that has been avoided is a withholding of tax
on account of tax which may become due on his or her assessable income.
Accordingly the non-resident has not obtained a tax benefit.
As the person paying the withholding tax is not the person with the
ultimate liability, it would appear to be necessary for the provisions
extending the operation of Part IVA to the Australian withholding tax
regime to ensure that the person with the ultimate liability obtains a
credit for any withholding tax imposed as a result of Part IVA.
As the withholding tax payments is common area for tax avoidance, it
may be appropriate to extend the operation of Part IVA to Australia's
withholding tax regime. It is likely that a large part of the effect of
such an extension to the operation of Part IVA will fall on non residents
who may be particularly wary of taxes dependent on the Commissioner's
discretion(29).
The main area in which Part IVA may operate as a disincentive for foreign
investment arises from the wide discretion which is given to the Commissioner
and the resulting uncertainty as to when the Commissioner may seek to
cancel a tax benefit obtained by a taxpayer.
It is possible that overseas residents investing in Australia may have
more concerns in respect of this uncertainty as they may be less familiar
with the Australian system and have less confidence than an Australian
resident that the Commissioner will not seek to exercise his or her discretion
in circumstances other than artificial, blatant or contrived situations.
It is also likely that overseas residents may be particularly concerned
with the operation of Part IVA being extended to Australia's withholding
tax regime.
It seems unlikely that Part IVA would operate as a disincentive to Australian
residents investing overseas to any greater degree than it may operate
as a disincentive to Australian residents investing in Australia. The
main area in which Part IVA may operate as a disincentive to investment
generally also arises from the uncertainty given the wide discretion which
has been given to the Commissioner.
One qualification is that it is possible that the operation of Part
IVA may be more uncertain in relation to transactions in respect of foreign
investment in Australia and Australian investment overseas as it is likely
that the structure of such transaction may be more complicated.
In any event in order to draw any firm conclusions as to whether Part
IVA is a disincentive for foreign investment in Australia or for Australian
investment overseas, it would be necessary to consider the particular
tax regime of the other country.
It is necessary for any general anti-avoidance provisions such as Part
IVA to achieve a difficult balance. On the one hand, in order for the
anti-avoidance provisions to be effective, it is unavoidable that they
be drafted in very wide terms. The limitations of section 260, the predecessor
provisions to Part IVA, illustrate this. The grant of a discretion to
the Commissioner may be an essential element to any effective anti-avoidance
provision. On the other hand, any taxation system requiresthat a taxpayer
be able to determine with some degree of certainty his or her liability
to taxation. Arguably, Part IVA favours effectiveness over certainty,
although it may be possible to reduce any uncertainty by the Commissioner
giving some indication as to when Part IVA will be applied.
It is clear from the judgment of the High Court in the Spotless Services
Case that the mere fact that a transaction can be justified as a rational
commercial decision will not of itself be sufficient to avoid the operation
of Part IVA. It also follows from the High Court's judgment that where
a taxpayer has a number of purposes in entering into a transaction and
one of those purposes is to obtain a tax benefit, it is possible for that
purpose to be the dominant purpose, notwithstanding that it does not constitute
more than 50% of the overall purpose.
While concern has been expressed by taxpayers as to the possible scope
of Part IVA, whether any scheme was entered into or carried out with the
sole or dominant purpose of obtaining a tax benefit will always be a question
of fact to be determined in the particular circumstances of the case,
having regard to the matters listed in section 177D(b)(i) to (viii) of
the Act. An important aspect of the facts in the Spotless Services
Case was that the rate of interest obtained by the Spotless companies
on the investment of the funds in the Cook Islands was approximately 4%
lower than the interest rate which could have been obtained by investing
the funds in Australia. The only logical justification for this apparently
irrational behaviour was the tax advantage which was obtained by the Spotless
companies. In the words of the High Court, it was the collateral tax advantage
which provided the key to the whole transaction and without that benefit
the proposal would have made no sense.
The implications for small business of the Spotless decision
may well be significant. The Law Council has highlighted that legitimate
business arrangements, such as the loands arranged by small business so
as to reduce borrowing costs, might be caught. Certainly the majority
of commercial transactions do have taxation considerations as a main feature
and therefore, potentially, might now be caught by Part IVA. It is this
potentially wide application that arguably will most affect small business.
As this paper notes there are difficulties in providing express limitations
to the application of Part IVA so as to exclude all genuinely commercial
transactions from its operation. Likewise, it would be unconducive to
investment and other business activity to leave taxpayers uncertain as
to whether Part IVA will be applied to their transactions.
The difficulties of preventing the further erosion of the income tax
base in the context of the liberalisation of the trade and financial sectors
have played a significant role in fuelling the current debate on the need
for tax reform. Tax reform in the current phase of the debate is the search
for a broader base such as goods and services which would yield substantial
indirect taxes and minimise the potential for tax avoidance. Nevertheless,
as income tax will continue to be a major contributory to revenue, genuine
and total tax reform must take on board a review of the provisions of
Part IVA to meet the needs of the complexities of present day commercial
and financial activities.
- Since the Law Council of Australia's media release, the Australian
Taxation Office issued draft ruling TR97/D7 on 30 June 1997 in relation
to split loan arrangements. The draft ruling, which is not law but rather
a guideline, indicated that the ATO would only seek to apply Part IVA
to loan products which are deliberately structured to create larger
tax deductions for interest.
- (1996) 34 ATR: 183.
- Part IVA was introduced by the Income Tax Laws Amendment Act (No 2),
No. 110 of 1981 which came into operation on 24 June 1981.
- Federal Commissioner of Taxation v Jackson (1990) 90 ATC: 4990.
- See the judgment of the High Court in Commissioner of Taxation
v Peabody (1994) 181 CLR: 359 at 382-383.
- Section 53 of the Income Tax Assessment Act 1915 and section 93 of
the Income Tax Assessment Act 1922.
- See for example Federal Commissioner of Taxation v Gulland 85
ATC: 4765. The composition of the High Court also changed over this
time with Sir Garfield Barwick retiring as Chief Justice of the High
Court on 11 February 1981.
- The Treasurer also stated in the second reading speech that one possibility
considered by the Government in deciding the basis of new general anti-avoidance
provisions was to adopt the language of the Privy Council in Newton
v Federal Commissioner of Taxation [1958] AC 450 and make any provisions
inapplicable to schemes entered into in the course of ordinary business
or family dealings. In Newton's Case the Privy Council held that
if transactions are capable of explanation by reference to ordinary
business or family dealings, without necessarily being labelled as a
means to avoid tax, the arrangement was not within section 260. The
Treasurer said however that it had been decided that the better test
of what is blatant, contrived or artificial is the positive one that
was adopted.
- Sackville J in WD & HO Wills (Australia) v Commissioner of
Taxation, Federal Court, 1 March 1996 at page 79.
- At first instance before Lockhart J, the Spotless companies argued
that the Commissioner erred in the determination of the scheme in that
a small piece of the relevant events was considered, namely the acts
of their agents in leaving Australia for the Cook Islands with authority
to enter into the relevant transaction, travelling there and carrying
out the transaction, and determined that those events constituted the
scheme.
Lockhart J rejected the Commissioner's narrow definition
of the scheme. A critical part of the steps taken by the taxpayers
to achieve their investment was the sending of their agent to the
Cook Islands and the entry by him there into the transactions on their
behalf, which constituted acceptance of the offer. However, the offer
itself could not be ignored as part of the scheme and the intervening
acts leading up to the acceptance also constituted the relevant commercial
transaction and the scheme. Lockhart J held that the Commissioner
was not entitled to select only some of the relevant series of steps
and classify that isolated segment as the scheme for the purposes
of Part IVA.
After rejecting the Commissioner's definition of the scheme, Lockhart
J found that as the Commissioner approached the question of purpose
on an erroneous basis, it was unnecessary to go on to consider the
question of purpose.
The Commissioner also sought to include the interest received
on the deposit in the taxpayer's assessable income on the basis
that it was derived from a source within Australia. Lockhart J rejected
this contention and held that the source of the interest derived
by the Spotless companies was the Cook Islands.
Lockhart J's judgment was handed down before the judgment of the
High Court in Peabody's Case and his reasons for finding
against the Commissioner in relation to Part IVA have now been found
to be incorrect by the High Court in Peabody's Case.
- The Commissioner unsuccessfully appealed from the Lockhart J's judgment
to the Full Federal Court. At the time of the appeal the High Court's
judgment in Peabody's Case had been handed down.
- IRC v Duke of Westminster [1936] AC: 1.
- (1993) 181 CLR: 359.
- In Federal Commissioner of Taxation v Peabody the Commissioner
identified the scheme in wide terms as comprising ten steps. At first
instance O'Loughlin J considered that the Commissioner had particularised
the scheme too widely, however concluded that by adopting either of
the Commissioner's own narrower formulations of the relevant scheme,
the dominant purpose of the taxpayer was still to obtain a tax benefit.
On appeal, the Full Federal Court held that the only scheme
it could consider when reviewing the exercise of the Commissioner's
discretion was the actual scheme identified by the Commissioner. The
Commissioner was not permitted to isolate one step in the identified
scheme and treat it as a separate scheme. The Full Federal Court held
that in relation to the scheme propounded by the Commissioner and
relied on in the Commissioner's determination, there was no tax benefit
to the taxpayer and the conclusion as to purpose required by section
177D could not be reached.
On appeal, the High Court disapproved of the reasoning of the
Full Federal Court in relation to the identification of the scheme,
although reached the same conclusion as the Full Federal Court in
relation to the tax benefit issue. The High Court held that the
Commissioner was entitled to rely on the narrower scheme identified
by O'Loughlin J at first instance, thus disapproving the reasoning
of the Full Federal Court on this aspect.
- 181 CLR 359 at 383-384.
- 181 CLR 359 at 382.
- 181 CLR 359 at 382 .
- The High Court in Peabody's Case also held that the taxpayer
did not obtain a tax benefit. This aspect of the case is discussed under
the heading 'The limits to the operation of Part IVA'.
- 96 ATC: 4223.
- In general terms a captive insurer is a wholly owned subsidiary of
a parent company which provides insurance coverage only to other companies
within the same group.
- It was unnecessary for Sackville J to consider whether the taxpayer
obtained a tax benefit in connection with the scheme, however on the
evidence before him Sackville J would have found that the taxpayer did
obtain a tax benefit in connection with the scheme. Both the taxpayer
and the Commissioner had agreed that there was in existence a scheme
as defined by section 177A of the Act.
- For an example of where the status of the company was important see
Federal Commissioner of Taxation v Casuarina Pty Limited, High
Court (1971) 71 ATC 4068.
- 181 CLR 359 at 385.
- For examples of judgments where the scope of Part IVA was restricted
see Cridland v FC of T 77 ATC 4538, Mullens v FCT 76 ATC
4288 and Slutzkin v FCT 77 ATC 4076, although after the introduction
of Part IVA the scope of Part IVA was held to be wider FC of T v
Gulland 85 ATC 4765.
- See WP Keighery Pty Limited v. Federal Commissioner of Taxation
(1957) 100 CLR 66 at 92.
- Cecil Brothers Pty Limited v Federal Commissioner of Taxation
(1964) 9 ATR: 246.
- Article entitled 'Spotless Accounts' by in the Sydney Morning Herald
on 9 April 1997.
- Concern has already been expressed about the possible application
of Part IVA to infrastructure financing following the judgment of the
High Court in the Spotless Services Case, see for example the
article 'Another ride on infrastructure's $26bn highway' by Prudence
Moodie, page 2, Australian Financial Review, 30 December 1996.
- On 23 July 1997, the Taxation Commissioner said that the ATO is set
to crack down on withholding tax-avoiders who use complicated and contrived
cross-border leasing arrangements. The ATO planned a draft ruling and
the Taxation Commissioner said they would apply the provisions of Part
IVA in these circumstances.
|
