The ATO have released an exposure draft legislation on possible changes to the general anti-avoidance rules in Part IVA of the tax legislation. The general anti-avoidance rules allow the ATO to cancel the tax benefit associated with arrangements entered into for the sole or dominant purpose of avoiding taxation. If this new law is passed, the proposed rules will apply to arrangements entered into or commenced from 16 November 2012.
The ATO hopes the new rules will focus more attention on the dominant purpose of the participants. Some recent cases have allowed some taxpayers to defeat the application of the anti-avoidance rules by arguing that they would not have entered into a transaction had they known in advance that it would be subject to tax. In other words, if they did not enter in the scheme there would have been no tax liability and therefore entering into the scheme did not create a ‘tax benefit’ but instead a tax liability.
The main aim of the new law is to give the ATO the ability to defeat the “do nothing” alternative position. So this proposed change would allow the Commissioner to determine an alternative scenario to the scheme that would achieve the same non-tax outcomes. He can then compare this scenario to the scheme actually undertaken by the taxpayer for the purpose of determining whether a ‘tax benefit’ arose.
You are probably aware the risk of Part IVA applying to an arrangement you decide to take is what keeps most accountants up at night and it is unlikely that these new rules are going to improve this position. This new rule will further increase the level of uncertainty around the management and planning of a taxpayer’s affairs and make life even more difficult for everyone.