The tax adviser’s guide to part IVA : a practical guide to the application of the general anti-avoidance rule

338 Pages·2014·2.27 MB·English

by  Travers

The Tax Adviser’s Guide to Part IVA
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A practical guide to the application of the general anti-avoidance rule e

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All tax advisers should have an understanding of Pt IVA. Additionally, the guide covers: the practicalities of the a
In this practical and readable guide, author Greg Travers, key elements of Pt IVA (scheme, tax benefit, alternative x
CTA, helps you navigate these rules to determine whether postulate and dominant purpose); the main cases decided
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Pt IVA may apply to an arrangement that your client has in respect of Pt IVA, with an explanation of the core
entered into, or is considering entering into. “takeaways” for each case; the practical impact of the d
The Tax Adviser’s Guide
recent legislative changes to Pt IVA; and tips for dealing v
This new title from The Tax Institute provides:
with the ATO on a Pt IVA situation. i
a practical way to approach the application of s to Part IVA
Pt IVA, including: e
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the “red flags” that you should be looking for Greg Travers, CTA, is the director in charge of the ’
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how to identify whether the ATO has an established Tax Services Division of William Buck Sydney. Greg’s

position on similar matters clients are predominantly private businesses, both G
Australian and foreign-owned, as well as higher
flowcharts and worksheets that steer you through a u A practical guide to the application of the general
wealth individuals and families. The work undertaken
structured approach to applying Pt IVA i anti-avoidance rule
by Greg includes advising on issues and transactions d
practical tips and guidance on how to deal with situations such as restructuring, exit strategies, business e
where a material Pt IVA risk exists acquisitions and international expansion, along

with referrals from accountants, lawyers and other t
examples of how Pt IVA can apply to common scenarios, o
advisers.
including:
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personal services income For more information about this book,
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please visit taxinstitute.com.au.
Greg Travers, CTA
small business concessions r
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year-end tax planning V
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general tax planning

business structuring and restructuring

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Publisher
Published in Australia in 2014 by
The Tax Institute ABN 45008392372
Level 10, 175 Pitt Street, Sydney, NSW 2000
taxinstitute.com.au
© The Tax Institute 2014
Travers, Greg.
The Tax Adviser’s Guide to Part IVA.
Includes index.
ISBN: 978-0-9873000-6-5
Acts other than fair dealing
Apart from any fair dealing for the purposes of private study, research, criticism or review as permitted
under the Copyright Act 1968 (Cth), no part of this publication may be stored or reproduced or copied
in any form or by any means without prior written permission. Enquiries should be made to the
publisher only.
Important disclaimer
This publication is intended as an information source only. The comments and extracts from legislation
and other sources in this publication do not constitute legal advice and should not be relied upon
as such. All readers — whether purchasers of the book or otherwise — should seek advice from a
professional adviser regarding the application of any of the comments in this publication to a particular
fact scenario. Information in this book does not take into account any person’s personal objectives,
needs or financial situations. Accordingly, you should consider the appropriateness of any information,
having regard to your own objectives, financial situation and needs and seek professional advice before
acting on it.
Greg Travers, William Buck and The Tax Institute exclude all liability (including liability for negligence)
in relation to your use of this publication.
All readers must rely on their own professional advice.
Contact the publisher for information at [email protected].
Currency
The author and the publisher intend that this book is, as far as possible, current as at February 2014.
Circulation
You must not circulate this book in any cover or binding other than its original and you must impose
this condition on any purchaser or acquirer of this book.
Printed in Australia by McPherson’s Printing Group.
Foreword
Part IVA of the Income Tax Assessment Act 1936 (Cth) is Australia’s general anti-avoidance rule (or
GAAR as it is known in its acronym form). For that reason alone, it assumes a level of importance
within the legislative framework of our tax system greater than most, if not all, other parts. Its
perceived success or failure in cancelling the efficacy of those tax avoidance schemes to which its
provisions are directed goes to the integrity of the tax system itself.
While Pt IVA has been amended from time-to-time to enlarge the scope of tax benefits to which
it applies by amendments to s 177C, and to enlarge the types of schemes to which it applies by the
insertion of ss 177EA and 177EB, it has, until last year, stood in the Assessment Act largely in the form
it was introduced over 30 years ago.
Last year, Pt IVA was amended with a view to remedying what were perceived by Treasury and the
Australian Taxation Office to be deficiencies in its application following decisions of the courts
concerning the construction of its provisions and the application of those provisions so construed to the
facts of those cases. Only time will tell whether these changes serve their intended purpose or whether,
as some think, merely create even greater uncertainty.
Because of Pt IVA’s role (as a general anti-avoidance provision) and the manner in which it has been
administered in the past, its history over the last 30 years has not been without controversy. Part IVA
in its original form has only been considered by the High Court on four occasions, and s 177EA on
one occasion. This is not truly reflective of the controversy it has created, which I have no doubt will
continue into the future.
With the advent of the changes made last year and the consultative process that was involved with these
changes, it is not surprising that the number of Pt IVA cases coming before the courts over the last two
years has dropped significantly. The tide has gone out so to speak but, as with the phases of the moon,
there is no reason to think that it will not come back in.
There can be no doubt that Pt IVA has been highly successful in ridding the community of blatant
artificial and contrived tax avoidance schemes, particularly those of the mass-marketed kind, and its
success at that level is to be applauded. The controversy that Pt IVA has created lies outside that field, in
the area where views will inevitably differ as to whether the scheme wears the badge of being blatant,
artificial or contrived. The inherent uncertainty thereby created will continue the controversy going
forward.
This work is not a book which is to be read from cover to cover. Rather, it is, as its opening pages strive
to emphasise, a practical work designed to provide assistance to tax professionals who are called upon
to advise their clients, day-in day-out and week-in week-out, on the application of Pt IVA to a myriad
of situations, many of which will not have been the subject of any factual similarity in any anterior
jurisprudence, to enable them to distil from that jurisprudence the principles that should determine the
tenor of their advice.
It is certainly not intended as a substitute for a client or his professional adviser obtaining expert advice
in a particular case, but it is designed to assist the professional adviser in guiding his client and setting
him in the right direction. To the extent that it achieves that result, it will certainly serve its purpose.
The labours and endeavours of the author in producing this fiscal aid are to be applauded and The Tax
Institute is to be congratulated for lending its support to that cause.
As a tool of trade in a difficult area of statutory construction and application, it will hopefully provide a
sounder path to overcome the traps that lie in wait for the unwary.
Justice Richard Edmonds
Federal Court of Australia
February 2014
v
Contents
Preface ...................................................................................................................vii
Abbreviations ..................................................................................................................viii
Section 1 A practical approach to Pt IVA
Chapter 1 Approaches to applying Pt IVA ...................................................................3
Chapter 2 Methodology for a practical approach......................................................11
Chapter 3 Established positions ................................................................................41
Section 2 Part IVA in practice
Chapter 4 Personal services income .........................................................................49
Chapter 5 CGT small business concessions .............................................................69
Chapter 6 Trusts ......................................................................................................103
Chapter 7 Tax planning ............................................................................................113
Chapter 8 Wash sale-type transactions...................................................................141
Section 3 The key legislative concepts
Chapter 9 Importance of the legislation ..................................................................159
Chapter 10 Scheme ...................................................................................................167
Chapter 11 Tax benefit ...............................................................................................179
Chapter 12 Purpose ...................................................................................................209
Section 4 The case law
Chapter 13 Foundation cases ...................................................................................243
Chapter 14 Other Federal Court cases ......................................................................259
Chapter 15 The “tax-effective investment scheme” cases .......................................289
Section 5 Other important elements
Chapter 16 Rulings ....................................................................................................301
Chapter 17 The GAAR Panel .....................................................................................305
Chapter 18 Part IVA determinations ..........................................................................309
Index ................................................................................................................317
vi
About the author
Greg is the director in charge of the Tax Services Division of William Buck Sydney. Greg’s clients
are predominantly private businesses, both Australian and foreign-owned, as well as higher wealth
individuals and families. The work undertaken by Greg includes advising on issues and transactions
such as restructuring, exit strategies, business acquisitions and international expansion, along with
referrals from accountants, lawyers and other advisers.
About the publisher
The Tax Institute is Australia’s premier tax body. Since 1943, The Tax Institute has provided the tax
profession with leading-edge education, information, support and an active forum. The Tax Institute
provides services to more than 35,000 professionals. Membership currently stands in excess of
15,000, which includes a comprehensive cross-section of leading tax accountants, lawyers, tax agents,
managers, academics and students.
As part of an ongoing commitment to members, The Tax Institute provides the best tax education
available in Australia, delivered by the profession’s leaders. Institute members have access to extensive
continuing professional development, the highly valued Taxation in Australia journal, TaxVine
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In order to better serve the tax profession, The Tax Institute offers an innovative Tax Education
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The Tax Institute believes this program will be a prerequisite for all tax professionals.
Please direct any enquiries relating to membership or purchasing options for this or any other
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Acknowledgments
This book would not have been possible without the assistance and guidance of the people who have
reviewed drafts, made suggestions for case studies, critiqued the analysis and otherwise made valuable
contributions, including, in particular, David Marschke, Partner at McCullough Robertson and Ken
Schurgott, Partner at Schurgott and Noolan. The contributions of the various members of the Tax Team
at William Buck are also gratefully acknowledged.
The author acknowledges the exceptionally talented publishing group and consultants of The Tax
Institute who have worked on all aspects of this publication and are helping to make The Tax Institute
the publisher of choice for the tax profession including: Alex Munroe (General Manager, Information
Products), Renée McDonald (Publisher), Deborah Powell (Managing Editor), Robert Allerdice (Tax
Consultant), Louella Brown (Production Manager), Mei Lam (Designer), Kristina Proft (Indexer) and
Stuart Murphy (Online Publishing).
Australian Taxation Office
Unless specifically referenced to an Australian Taxation Office publication, the views expressed in this
book are not endorsed by the Australian Taxation Office.
vii
Preface
A key aim of mine in writing this guide is to de-mystify Pt IVA for general practitioners.
Part IVA is a fundamental part of our tax system, although one that many practitioners don’t really
understand in any detail. It is a provision that impacts every tax decision, every bit of planning, every
piece of structuring, yet so often, practitioners don’t know where to start when assessing the potential
impact that Pt IVA could have. My objective, through this guide, is to provide practitioners with a
robust, practical framework within which to approach Pt IVA issues.
This guide is different to the existing material that has been published on Pt IVA in that I have
specifically set out to explain Pt IVA in a straightforward and understandable manner. The guide is
intended to be practical, not technical, in its focus. It is also very much focused on the private business/
SME taxpayer.
The recent amendments to Pt IVA have created a high level of uncertainty as to how Pt IVA will be
applied in the future. It will be many years before we receive guidance from the courts on how to
interpret the new provisions. In the meantime, practitioners need to gain an understanding of the new
provisions and how to apply them on a day-to-day basis. The likely approach of the ATO also needs to
be understood and factored into how a Pt IVA issue is dealt with.
Over time, as our understanding of Pt IVA develops and evolves, I expect that this guide will also
develop and evolve with the aim of continuing to provide practical and relevant guidance to tax
practitioners dealing with tax issues for private business/SME taxpayers.
Greg Travers
William Buck
February 2014
viii
Abbreviations
ATO Australian Taxation Office
CGT Capital gains tax
FBT Fringe benefits tax
GST Goods and services tax
ID ATO interpretive decision
ITAA36 Income Tax Assessment Act 1936 (Cth)
ITAA97 Income Tax Assessment Act 1997 (Cth)
PAYG Pay as you go instalment
PSB Personal services business
PSI Personal services income
PS LA ATO law administration practice statement
SME Small-to-medium enterprise
TD ATO taxation determination
TR ATO taxation ruling
UPE Unpaid present entitlement
1
Section 1
A practical approach to Pt IVA
Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA36) is a difficult provision, but it is also a
provision that affects every taxpayer and applies in a broad range of circumstances. So, while it may be
difficult, it is a provision that every tax adviser needs to understand.
There is no substitute for a full and detailed understanding and consideration of the terms of Pt IVA.
However, since practitioners need to consider Pt IVA many times over the course of any day spent
working on tax-related matters, a more general understanding and a practical way to approach Pt IVA
are needed.
Beyond the smell test
The general anti-avoidance rule, both in its current form (Pt IVA) and its predecessors (eg s 260
ITAA36), has been colloquially referred to as “the smell test”. The basic premise, if it is even necessary
to explain, is that, if an arrangement “smells”, then it would be struck down by the general
anti-avoidance rule.
By “smell”, it is meant smell of tax avoidance, ie there are features or aspects of the arrangement that
give it the look and feel (and smell) of something that should be caught by the tax avoidance provisions.
In other instances, the question may be posed as to whether a taxpayer would enter into the scheme
“but for” the tax benefit.
These shorthand methods are crude, but probably reasonably effective, approaches when dealing with
the “blatant, artificial and contrived” set of arrangements that Pt IVA seeks to attack. If Pt IVA was
limited to applying to blatant, artificial and contrived arrangements, then the smell test in its various
incarnations may be sufficient, but Pt IVA is not limited in this way.
As transactions move into the grey area between legitimate tax planning and illegitimate tax avoidance,
having a more detailed mechanism for assessing the application of Pt IVA is required.
A practical approach
This section of the guide provides a practical approach to the understanding and application of Pt IVA.
The focus is on the key elements — scheme, tax benefit and purpose — with each being considered in a
structured way:
„ a worksheet and accompanying instructions are provided to assist in identifying the
Pt IVA scheme;
2
„ a series of flowcharts can be used to navigate through the process of determining the tax benefit; and
„ a checklist of questions drawn from the case law is provided to enable an analysis of purpose to be
undertaken and documented.
Also included in this section are two additional checklists:
„ “red flags” drawn from the case law that may indicate a higher risk of Pt IVA applying; and
„ “established positions” drawn from the case law and ATO rulings that can provide clearer direction
on how Pt IVA may be applied.
Finally, commentary is provided on steps that can be taken to assist in mitigating the risk of Pt IVA
being applied to deny a tax benefit.
Limitations of the practical approach
It is important to keep the practical approach in context.
A practical approach is appropriate at the advisory stage of most SME taxpayer matters. The aim is
to accurately identify if there is a genuine Pt IVA risk so that an informed decision can be made on
whether to proceed as planned, obtain further advice, or modify the transaction.
Once a situation enters the “dispute” phase, ie audit, objection or appeal, at some point the focus will
need to shift from a practical approach to Pt IVA to a technical approach.
This will clearly be the case at the appeal stage, but it could also be earlier, particularly if the taxpayer
is of a mind to appeal an adverse decision made by the ATO.
A practitioner who does not have experience in dealing with Pt IVA should look to involve a
specialist tax adviser with relevant Pt IVA experience in matters that are in (or are likely to enter)
a dispute phase.