ATO Practice Statement: Tax benefits/avoidance & GAAR
The Australian Tax Office (ATO) has issued a very interesting Practice Statement Law Administration. It is an informal policy document for which interested parties should submit comments by 25 September. The Statement is a lengthy document, citing case law, that is very worthwhile reading, as Australia continues its proactive efforts driving change in the international tax arena.
Although informal, taxpayers can rely on such guidance for protection from interest and penalties. A copy of the Statement is provided for reference:
- A general anti-avoidance rule (GAAR) cannot be applied before a determination by the Tax Counsel Network (TCN).
- A GAAR decision is generally referred to a GAAR Panel (an independent advisory body) before a final decision is made.
- The taxpayer may be invited to attend a Panel meeting to assist the deliberative process.
- Concepts of a tax scheme and a tax benefit are discussed. A tax benefit inclusive in Part IVA, the GAAR provision relates to: an amount not included in income, an allowable deduction, a capital loss, a tax loss carry back, a foreign income tax offset or withholding tax.
- An alternative hypothesis” or “alternative postulate” identification is discussed; what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out.
- It is for the court to determine objectively what alternative would have occurred if the scheme had not been carried out.
- Arguably, there is no longer a test of reasonable exception, based on Parliament’s intention in enacting the Amendments.
- Warning signs that GAAR may apply (which ATO must consider) are established:
- Arrangement is out of step ordinarily used to achieve the commercial objective,
- Arrangement seems more complex than necessary,
- Tax result does not conform to the commercial or economic result,
- Arrangement is low risk where significant risks would normally apply,
- Parties are operating in a non-arm’s length manner, or
- Gap between substance and legal form.
- Penalties are applicable.
- Division 165 (a GST GAAR rule) is discussed, including permanent and timing differences.
- A “dominant purpose” test is applicable for the GAAR and the GST provisions, with different factors includable in each.
The above provisions attempt to conceptualize objective factors for an inherently subjective GAAR determination. As additional GAAR’s are introduced around the world, each applying a different level of subjectivity, the Statement is helpful in understanding the rationale and intent of the ATO.
Tax planning post-BEPS will require additional GAAR documentation for significant transactions, thereby requiring tax to be involved early in the discussions to understand the business intent and alternatives considered.