The general anti-avoidance rules contained in Part IVA of the Income Tax Assessment Act 1936 (Cth) (‘Part IVA’) may be applied by the Australian Taxation Office (ATO) to deny a taxpayer the tax benefit of a scheme they have entered into.
The key features of Part IVA include the following:
- Is there a scheme?
- Has a tax benefit been obtained?
- What was the taxpayer’s sole or dominant purpose.
- What happens when Part IVA is applied.
Is there a scheme?
It is important to identify the scheme as it sets the framework for determining if a taxpayer has obtained a tax benefit in connection with the scheme and whether the dominant purpose of the taxpayer for entering into the scheme was to obtain the tax benefit. Part IVA provides a broad definition of ‘scheme’, which includes any agreement, arrangement, promise or undertaking, whether express or implied and whether or not enforceable.
What is the tax benefit?
A ‘tax benefit’ is defined in section 177C as an amount not included in assessable income, a deduction being claimed or a capital loss being incurred. Furthermore, section 177C specifies that a taxpayer will have obtained a tax benefit in connection with a scheme if the tax benefit would not have arisen if the scheme did not occur.
What was the taxpayer’s sole or dominant purpose?
It is necessary to determine whether a person entered into or carried out a scheme for the sole or dominant ‘purpose’ of obtaining a tax benefit. If obtaining a tax benefit is only an incidental purpose of entering into a scheme, then this is not sufficient for Part IVA to apply. A decision to enter into a transaction can be both commercially and tax driven, but the relevant purpose will be the one that is the most influential, ruling or prevailing purpose.
What happens when Part IVA is applied?
Where it is determined that the taxpayer entered into a scheme to obtain a tax benefit the Commissioner of Taxation has a discretion under section 177F(1) to cancel the relevant tax benefit. When considering any proposed transactions, you must carefully consider the transaction’s commercial and economic substance. Apart from the impact of Part IVA applying to ‘reverse’ the impact of any scheme, if it is applied, the ATO can also impose penalties of up to 50% of the tax payable.