The Australian government has announced that it will act to protect the integrity of Australia’s tax system by introducing amendments to the GAAR. The government’s action is in direct response to concerns about recent court losses suffered by the Australian Taxation Office (ATO) in seeking to apply the GAAR to transactions or arrangements entered into by some of Australia’s largest taxpayers.
Unfortunately, although the precise detail of the future changes to the GAAR are not known, once enacted, such changes are proposed to apply from 2 March 2012. As such, it is necessary for taxpayers that may enter into transactions and arrangements that give rise to income tax benefits, to have an approach to dealing with the uncertainty of the government announcement until such time as the detail of the changes is known.
In order for the GAAR, which is contained in Part IVA of the Income Tax Assessment Act 1936, to apply to a transaction or arrangement, there must be a “scheme”, the scheme must have given rise to a “tax benefit” and it must be possible to identify that a person (not necessarily the taxpayer) entered into the whole or a part of the scheme wholly or predominantly in order for the taxpayer to obtain the tax benefit.
A “scheme” is very widely defined, such that invariably it is possible to identify a scheme for the purposes of the application of the GAAR.
In order to determine whether the scheme has given rise to a “tax benefit” (e.g. a deduction not otherwise available, a non-assessable receipt, etc), it is necessary to hypothesise as to what might reasonably be expected to have happened but for the scheme. If the most reasonable alternative to the scheme would not have produced a tax deduction or would have produced a receipt which is assessable, etc, then there is a “tax benefit”.
The question of whether a person who entered into the whole or a part of the scheme did so wholly or mainly in order for the taxpayer to obtain a tax benefit must be determined having regard to eight factors set out in the GAAR. What is required is an objective assessment of the eight factors and, based on that assessment, an overall conclusion on whether the “dominant purpose” element is satisfied.
The ATO has long held the view that the threshold for satisfying the requirement of there being a “tax benefit” is low. According to the ATO, all that is required is identification of a possible alternative course of action to the scheme which would not have given rise to the tax benefit in question.
However, according to the courts, what is required is that the most reasonable alternative course of action to the scheme (not just any alternative) would not have given rise to the tax benefit in question.
In recent court cases involving internal reorganisations of large corporate groups, taxpayers have argued successfully that had they not entered into the “scheme”, the most reasonable alternative course of action would have been not to undertake the reorganisation at all, such that a “tax benefit” cannot arise.
It would appear that the ATO has successfully lobbied the Australian government to change the law on the basis that these court decisions undermine the integrity of Australia’s GAAR.
On 1 March 2012, the Australian government announced that a new concept of “tax benefit” for Australia’s GAAR will apply from 2 March 2012.
Under the new concept of “tax benefit”, it will not be possible for taxpayers to argue that, but for the scheme, they would not have entered into an arrangement that attracted tax by doing nothing, deferring the arrangements indefinitely or undertaking another scheme that also avoided tax.
The proposed amendments will apply to schemes entered into after 1 March 2012.
Consultation on the detail of the proposed changes will occur with the intention that the necessary legislative changes will be introduced into the Australian Parliament in September to October 2012.
Pending clarification of the final form of the new concept of “tax benefit” in the proposed legislative changes, it can be expected that the ATO will be reluctant to provide private binding rulings to taxpayers on the application of the GAAR.
Until such time as the legislative changes are enacted, or the detail of the measures becomes clearer, it would be prudent when assessing the tax risks of entering into a particular transaction or arrangement, for a taxpayer to proceed on the assumption that the ATO view on identification of a “tax benefit” will be reflected in the legislative changes. On that assumption, from 2 March 2012, the threshold for there being a “tax benefit” in relation to a transaction or arrangement will be low. That being the case, most questions about the GAAR will turn on whether it is possible, based on an objective assessment of the eight factors, to conclude that a person who entered into the whole or a part of the scheme did so with the sole or dominant purpose of the taxpayer obtaining the tax benefit. Until further clarification of the government’s announced changes, it would be prudent for taxpayers to assume that the GAAR will apply to any transaction or arrangement for which the “dominant purpose” element of the GAAR is satisfied.
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