Retrospective anti avoidance provisions

The Australian Government is currently considering changing the general anti-avoidance provision – Part IVA of Income Tax Assessment Act 1936 – with retrospective effect.

The changes proposed introduce uncertainty into major commercial transactions and legitimate tax planning.  Will something that is permissible under the current law still be permissible under the new law?

Part IVA applies when the dominant purpose of an arrangement is to obtain a tax benefit.  It was originally intended to tackle blatant and contrived tax avoidance arrangements, but its scope has broadened significantly since it was first introduced in 1981.

Due to a series of losses for the Australian Tax Office (ATO) in high profile court cases over recent years, the ATO and Treasury have been pushing the Government to amend Part IVA to address what they perceive to be a deficiency in the current legislation. 

The intention to change the Part IVA was signalled in March this year along with the assertion that any changes would apply from that date.  Six months later, there is still no clarity on what the changes will be.

The ‘deficiency’ in Part IVA

At the core of this issue is the concept known as; “do nothing counterfactual”. 

For Part IVA to apply, there needs to be a tax benefit.  The tax benefit is calculated as the difference between the tax that you paid on the transaction that took place, and the tax that would have been paid if the arrangement or scheme had not been entered into – this being the counterfactual.

Taxpayers have been successful in arguing that, if they didn’t enter into the arrangement or scheme that the ATO is alleging constitutes tax avoidance, they would have done nothing – hence the concept “do nothing counterfactual”.

This has the implication of meaning no tax benefit arises and Part IVA cannot apply.

Proposed changes to Part IVA

The proposed changes are expected to remove or limit the “do nothing counterfactual”.  Instead, the tax benefit would be determined relative to another method by which it would be reasonable to expect that the taxpayer could have achieved the same commercial outcomes.

At one level this appears appropriate – if the taxpayer was targeting a particular commercial outcome it would be reasonable to assume that they could have undertaken a different transaction to achieve the same commercial outcome.

However, what would happen in a situation where the tax cost of the alternative transaction is so significant that the transaction ceases to make commercial sense? 

Over the last three to four years, Australian Courts have been faced with numerous situations in which this has been the case. In the majority of cases, they’ve concluded that it was reasonable to expect that the taxpayer would have done nothing.  This is exactly the conclusion that the Government wants to stop.

Retrospective legislation is always a challenge for taxpayers, but when it relates to the general anti-avoidance provisions, it is all the more problematic.

Whilst the exact changes to the legislation are still not known, it has never been more important to seek comprehensive advice that addresses both the commercial and tax consequences of a transaction or strategy.

If you are concerned about how the retrospective provisions could affect you or your business please contact your local William Buck advisor.