Australia: Government rewrites GAAR to deal with tax benefit

Tom Seymour

The tax landscape in Australia has recently been shaped by significant debate concerning the effectiveness of the current general anti-avoidance rule (GAAR) and whether there is a need to significantly increase the scope and breadth of the operation of the rules.

To this end, on November 16 2012, the Australian government released draft provisions which propose to rewrite aspects of GAAR, in particular the provisions dealing with the existence of a tax benefit, which is a critical threshold issue before the GAAR rules take effect.

Australia's GAAR is enacted as Part IVA of the Income Tax Assessment Act 1936 (Cth) (Part IVA) and applies to cancel tax benefits arising from schemes where the dominant purpose for entering into the scheme is to obtain a tax benefit.

The GAAR requires an assessment of the tax benefit obtained by a taxpayer and an analysis of the reasonable alternative arrangements that could have been undertaken to achieve the taxpayer's commercial objectives (alternative postulate). The Australian Taxation Office (ATO) will consider the application of Part IVA where there is an indication of contrivance in an arrangement. The ATO will look for warning signs that the arrangement is tax driven including, where the arrangement contains a step or series of steps that appear to serve no real purpose other than to gain a tax advantage, where the tax result of the arrangement appears at odds with its commercial or economic result and instances, where the parties to the arrangement are operating on non-commercial terms or in a non arms-length manner.

In the past, the Commissioner of Taxation of Australia has successfully defended the application of Part IVA on a range of transactions resulting in additional assessable income and the denial of deductions, capital losses or foreign income tax offsets. However, a number of recent Court wins for taxpayers prompted the release of the draft provisions. In these cases, taxpayers were successful because they submitted key evidence demonstrating the commerciality of an arrangement or the unreasonableness of the Commissioner's alternative postulates.

The draft provisions are released at a time where tax administrations around the world have either considered introducing or strengthening GAARs (including the introduction of a GAAR in China and review into the need for a GAAR in the UK).

The draft provisions are accompanied with draft explanatory material and public comments were sought in relation to the proposals. Submissions were made on behalf of various professional bodies and industry groups with the generally held view that the proposed reforms were too wide ranging and, if enacted in the proposed form, may have unintended consequences. These submissions are being considered by the Australian Treasury.

Tom Seymour (tom.seymour@au.pwc.com)
PwC Australia
Tel: +61 2 8266 0000

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