On Friday, 16 November 2012, the Government released exposure draft legislation (ED) proposed to give effect to changes to the income tax general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (Part IVA).
Taxpayers will need to assume for the time being that the proposed changes in the ED will be enacted unchanged and consider carefully what, if any, impact the changes will have on transactions and arrangements entered into after the 16 November 2012 start date to which the ATO might seek to apply Part IVA.
The release of the ED was foreshadowed in a 1 March 2012 press release by the then Assistant Treasurer (March 2012 Announcement), Mark Arbib, stating that the Government would “act to protect the integrity of Australia’s tax system by introducing amendments to Part IVA of the income tax law.”
The Government indicated that the amendments would:
The changes were prompted by a number of Federal Court decisions in which the Court’s interpretation of the manner in which Part IVA applies was at odds with the views of the Commissioner of Taxation (Commissioner). In particular, in several cases, the Court found that the scheme in question generated no “tax benefit” as defined, having regard to a proper formulation of what might reasonably have been expected to have occurred but for the scheme (the alternative postulate).
Senator Arbib also announced that the changes to Part IVA would have application to schemes entered into or carried out on and from 2 March 2012.
There are two main changes to Part IVA proposed in the ED.
The first change addresses specific concerns that the Government has about taxpayers successfully arguing that there is no tax benefit. The change constrains how the alternative postulate, that is, what might reasonably be expected to have happened but for the scheme, can be formulated. It does this by imposing a number of assumptions in relation to the alternative postulate.
Those constraints are that, when hypothesising alternative postulates to the scheme:
The second change addresses concerns that, on occasion, in determining the question of whether Part IVA applies to a particular arrangement, the dominant purpose test in s177D has been bypassed by the Courts because the taxpayer has demonstrated that it didn’t secure a tax benefit from the scheme in the first place. The change is apparently designed to restore the dominant purpose test to its central role in the application of Part IVA.
The explanatory memorandum to the ED (EM) suggests that what is sought to be achieved is to ensure that the question of whether there is a tax benefit (under s177C) is construed with the dominant purpose test (in s177D) in the interrelated way envisaged by Justices Gummow and Hayne in Commissioner of Taxation v Hart. In that passage, Gummow and Hayne JJ expressed the view that s177F (which authorises the Commissioner to make a Part IVA determination to cancel tax benefits obtained in connection with a scheme to which the Part applies) and s177D were the two provisions around which Part IVA “pivots”. The meaning of expressions used in those sections, such as “scheme” and “tax benefit”, were amplified or elucidated by other provisions of Part IVA. However, these various defined terms needed to be given operation in the interrelated way that s177F required to permit the making of a determination by the Commissioner. Further, each definition needed to be understood bearing in mind the objective inquiry required by Part IVA as evident from s177D.
According to the EM, the question of whether Part IVA applies to a scheme should no longer start with a consideration of whether a taxpayer has obtained a tax benefit under the scheme. Rather, it should involve a single, holistic inquiry into whether a person participated in the scheme with a sole or dominant purpose of securing a particular tax benefit for the taxpayer in connection with the scheme.
It appears that the ED seeks to make this change through subtle redrafting and reordering within existing provisions and the addition of other provisions which change slightly the emphasis of the provisions and the scheme of Part IVA. This subtle change in emphasis is effected as follows:
The forecast changes in the March 2012 Announcement focused mainly on denying taxpayers the ability to argue that there is no tax benefit because, but for the scheme, they would have entered into another scheme that also avoided tax, deferred their arrangements altogether or done nothing at all. This has been addressed in the changes contained in the new s177CB(1).
The March 2012 Announcement also commented that the amendments would confirm that Part IVA applies to commercial arrangements (including steps within broader commercial arrangements) implemented in a particular way to avoid tax. It is unclear what the concerns were here and how any apparent concerns are thought to be addressed in the ED. The only direct reference to the topic seems to be in the objects section in s177AA, where reference is made to schemes, including schemes that are steps within or towards other schemes.
The measures in the ED apparently aimed at restoring the primacy of the dominant purpose test (on the assumption that such primacy has somehow been lost), do not appear to have been referred to in the March 2012 Announcement.
There is one pleasant surprise in the ED.
The Government has decided to make the Part IVA changes prospective from the date of the release of the ED, 16 November 2012, rather than from the day after the March 2012 Announcement. In so doing, the Government has averted the criticism that would likely have been levelled at it concerning the introduction of retrospective tax laws and headed off any possible constitutional challenge to the Part IVA changes.
In the event that the proposed changes in the ED are enacted without amendment, some likely consequences are as follows:
 See Commissioner of Taxation v Axa Asia Pacific Holdings Ltd  FCAFC 134 (Axa), Commissioner of Taxation v Futuris Corporation  FCAFC 32 (Futuris) and RCI Pty Ltd v Commissioner of Taxation  FCAFC 104 (RCI).
See here on the possibility of a constitutional challenge to the recent retrospective transfer pricing measures.
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