The Australian government on a press release in march this year suggested that it was considering to ammend Part – IVA of the Income Tax Assessment Act 1936 (GAAR) to counter technical deficiencies. Earlier, on 16th of this month, the explanatory memorandum and the exposure draft issued by the Assistant Treasurer proposed changes to the general anti-avoidance rule or GAAR. This was because the Australian Taxation Office had lost several high profile cases in the courtrooms. As a result, the changes suggested from November 16th are intended to come into force.

Concerns addressed by the reform

The GAAR contains a number of provisions which are aimed at testing two ideas:

Tax benefits arising from any scheme – the relevant sections are 177D (a) and 177C of ITAA36.
A participant of the scheme with the sole purpose of facilitating a tax benefit allows a tax payer to obtain the benefits concerning the scheme. The concerned section is 177D (b) that addresses the factors that need to be considered when determining the purpose.

If any of the above mentioned conditions are satisfied, then as per section 177F, the commissioner can restructure the scheme under question so as to counter any tax benefits.

The memorandum and the press release suggest that the recent cases reveal a technical deficiency within the section 177C. 177C is applicable when determining if a tax benefit has arisen. The provision under Section 177C is used to gauge the consequences if at all the scheme under question had not taken place. This particular aspect is the counterfactual. The memorandum also states that the counterfactual aspect of GAAR undermines the efficient implementation of Part – IVA.

Proposals made in the memorandum

The memorandum suggests that the main aim of the proposal is to restore ‘purpose test’ as the main test under GAAR and not the counterfactual. The exposure draft facilitates this by restructuring section 177D. In addition to this the section 177C is also being subjected to reform by the inclusion of a new section 177CB. A number of assumptions will be applicable under the new section to determine the counterfactual. The assumptions are:

The consideration of counterfactual must be regardless of the tax expense of any other alternative that could be pursued in the absence of the scheme in question.
The counterfactual must include equal non-tax consequences. For example, if the scheme under question involves an investment via loan, then the counterfactual must also include a loan.
If the scheme does not involve any non-tax consequences, the counterfactual will be weakened. In such a case, the counterfactual cannot consider alternatives that were not involved in the scheme to achieve the exact tax consequences.
In a case where the scheme contains of a set of steps in a wider transaction, the counterfactual can only perform the same role as the scheme. This particular assumption is aimed to counter Futuris case according to which, the scheme merely performs a function related to tax.

Penny is an expert associated with i3Group a leading payroll service provider. Its custom corporate payroll solutions have helped blue-chip brands across industries manage payroll obligations efficiently and cost-effectively.