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This Law Administration Practice Statement is designed to assist ATO officers who are contemplating the possible application of Part IVA to an arrangement.

The Law Administration Practice Statement follows the broad outline of the Part, covering scheme, tax benefit, purpose, determinations and assessments, compensating adjustments, time limits and penalties.

The Law Administration Practice Statement provides administrative guidance on applying these elements of the Part, and also includes further explanations or interpretations drawn from cited case law.

The Law Administration Practice Statement is not divided into Statement and Explanation. Propositions contained in the Law Administration Practice Statement are, where necessary, explained, clarified by example, supported by case law authority, or discussed.

The Law Administration Practice Statement has five attachments: - Attachment 1 provides guidance on the proper execution of Part IVA determinations. - Attachment 2 contains a 'Framework for decision-making'. This table provides essential and structured guidance on the steps involved in making a Part IVA determination. - Attachment 3 replaces withdrawn Law Administration Practice Statement PS LA 1998/9. It describes the process for the proper escalation of Part IVA cases and the function of the Part IVA Panel. - Attachment 4 is written for officers preparing papers for presentation to the Part IVA Panel. It also contains guidance on the presentation of Part IVA Panel submissions at Panel meetings. - Attachment 5 contains the relevant provisions of Part IVA, excluding sections 177CA, 177E and 177EA.

Officers are directed to Case Decision Summaries on Part IVA as a reference on how Part IVA has been applied in particular cases.

This Law Administration Practice Statement replaces PS LA 1998/9.

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance provision. It replaced former section 260 of the Income Tax Assessment Act 1936 and should be construed and applied according to its terms, not under the influence of 'muffled echoes of old arguments' concerning other legislation, such as section 260: FC of T v. Spotless Services Ltd (1996) 186 CLR 404 at 414; 141 ALR 92 at 96; 96 ATC 5201 at 5205; 34 ATR 183 at 186.

Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1).

Before the Commissioner can exercise the discretion in subsection 177F(1), the requirements of Part IVA must be satisfied. These requirements are that: (i) a 'tax benefit', as identified in section 177C, was or would, but for subsection 177F(1), have been obtained; (ii) the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and (iii) having regard to section 177D, the scheme is one to which Part IVA applies.

Regard must be had to the individual circumstances of each case in making a determination under section 177F to cancel a tax benefit.

Where the Commissioner exercises the discretion in subsection 177F(1) to make a determination, he shall take such action as he considers necessary to give effect to that determination (subsection 177F(1)).

Officers should be aware that Part IVA is a general anti-avoidance provision and that there are specific provisions which may or may not apply in a particular case. Officers should be aware of subsections 177B(3) and (4) which reflect the last resort character of Part IVA.

Part IVA is not limited by the other provisions in the Income Tax Assessment Act 1936 or by the International Tax Agreements Act 1953 or the Petroleum (Australia-Indonesia Zone of Cooperation) Act 1990 : subsection 177B(1).

Part IVA was inserted into the Income Tax Assessment Act 1936 in 1981 and it applies to schemes entered into after 27 May 1981. It applies whether a scheme is carried out in Australia or abroad: section 177D.

On 11 November 1999 the Treasurer announced the second stage of the Government's response to the recommendations of the Ralph Review of Business Taxation - see Treasurer's Press Release No. 074. One of the key measures involves strengthening the general anti-avoidance provisions. This measure became effective immediately at 1pm, Australian Eastern Summer Time, 11 November 1999. This Law Administration Practice Statement does not apply to schemes entered into after that time. Officers need to be aware of the impact of these changes on schemes entered into or carried out after that time.

For Part IVA to apply, the identified scheme must fall within the broad definition of 'scheme' in subsection 177A(1). Relevant case law FC of T v. Spotless Services Limited (1995) 62 FCR 244 at 279; 133 ALR 165 at 196; 95 ATC 4775 at 4805; 32 ATR 309 at 338 per Cooper J: 'In my view, the definition in s. 177A requires that the parties to the scheme, insofar as they are known, must be identified and the terms or content of any agreement, arrangement, understanding, promise or undertaking and the steps or stages of any course of action or proposal, insofar as they are relevant, be identified. It is not sufficient to identify a scheme by reference to a hoped for fiscal outcome. Section 177A requires that the scheme has an existence based in fact and reality and is not something based on the Commissioner's view of the facts or their legal effect.'

The definition of scheme includes a unilateral scheme, plan etc.: subsection 177A(3). Example An example of a unilateral action constituting a scheme could be the action taken solely by a trustee of a discretionary trust.

The Commissioner may advance alternative schemes including a narrower scheme within a wider scheme in support of a Part IVA determination.

Where the Commissioner seeks to rely on an alternative scheme after nominating a scheme, the taxpayer should be informed as soon as practicable of the alternative scheme and the taxpayer should be given adequate time to respond. Relevant case law FC of T v. Peabody (1994) 181 CLR 359 at 382; 123 ALR 451 at 459; 94 ATC 4663 at 4670; 28 ATR 344 at 351. 'But the Commissioner is entitled to put his case in alternative ways. If, within a wider scheme which has been identified, the Commissioner seeks also to rely upon a narrower scheme as meeting the requirement of Pt IVA, then in our view there is no reason why the Commissioner should not be permitted to do so, provided it causes no undue embarrassment or surprise to the other side. If it does, the situation may be cured by amendment, provided the interests of justice allow such a course.'

Whatever steps or circumstances the Commissioner relies on in defining the scheme must be capable, by themselves, of constituting a scheme for the purposes of Part IVA. Relevant case law FC of T v. Peabody (1994) 181 CLR 359 at 383; 123 ALR 451 at 460; 94 ATC 4663 at 4670; 28 ATR 344 at 352. 'But Pt IVA does not provide that a scheme includes part of a scheme and it is possible, despite the very wide definition of a scheme, to conceive of a set of circumstances which constitutes only part of a scheme and not a scheme in itself. This will occur where the circumstances are incapable of standing on their own without being "robbed of all practical meaning".'

Officers should be aware that section 177D, which identifies schemes to which Part IVA applies, allows purpose or dominant purpose to be tested against a person who entered into or carried out the scheme or any part of the scheme. This is important where the scheme is complex and involves a number of parties and connected transactions. This does not, however, affect the identification of a 'scheme' under subsection 177A(1). Relevant case law FC of T v. Peabody (1994) 181 CLR 359 at 384; 123 ALR 451 at 460; 94 ATC 4663 at 4670; 28 ATR 344 at 352. 'The fact that the relevant purpose under s.177D may be the purpose or dominant purpose under s. 177A(5) of a person who carries out only part of the scheme is insufficient to enable part of a scheme to be regarded as a scheme on its own.'

If the Commissioner erroneously identifies a scheme, this will not always result in the wrongful exercise of the discretion conferred by subsection 177F(1). The discretion will only be wrongfully exercised if the identified tax benefit is not in fact a tax benefit within the meaning of Part IVA. Relevant case law FC of T v. Peabody (1994) 181 CLR 359 at 382; 123 ALR 451 at 458-459; 94 ATC 4663 at 4669; 28 ATR 344 at 351. 'The erroneous identification by the Commissioner of a scheme as being one to which Pt IVA applies or a misconception on his part as to the connexion of a tax benefit with such a scheme will result in the wrongful exercise of the discretion conferred by s. 177F(1) only if in the event the tax benefit which the Commissioner purports to cancel is not a tax benefit within the meaning of Pt IVA. That is unlikely to be the case if the error goes to the mere detail of a scheme relied upon by the Commissioner.' FC of T v. Consolidated Press Holdings (No 1) (1999) 99 ATC 4945 at 4967-4968; 42 ATR 575 at 597-598; 91 FCR 524 at 547-548 [currently on appeal to the High Court of Australia]: '[T]he actions identified by the Commissioner and accepted by His Honour as constituting a scheme did fall within the definition in s177A(1)(b). They can be described in the precise way his Honour described them "... the acquisition by ACP of redeemable preference shares in MLG and the acquisition by MLG of redeemable preference shares in CPIL(UK)". They can also be described compendiously as the interposition of MLG between ACP and CPIL(UK). They can be regarded as a module or component of the larger set of transactions. That does not prevent them from being treated as a scheme. They are in a sense self explanatory. The identification of their purpose which may have to be undertaken in the context of surrounding transactions is not a condition of their characterisation as a scheme. The identification of a scheme within the meaning of s177A is antecedent to its characterisation as a scheme to which Part IVA applies as defined in s177D. It would be an error to suppose that identification of purpose is necessary in determining whether there is in existence a scheme under s177A.'

Part IVA cannot apply unless a taxpayer has obtained, or would, but for section 177F obtain, a tax benefit in connection with a scheme. Subsection 177C(1) defines four types of tax benefit, relating broadly to: (i) an amount not being included in the assessable income of the taxpayer of a year of income; (ii) a deduction being allowable to the taxpayer in relation to a year of income; (iii) a capital loss being incurred by the taxpayer during a year of income; (iv) a foreign tax credit being allowable to the taxpayer.

Subsection 177C(1) allows two ways of determining whether a tax benefit has been obtained in connection with a scheme. The first is that the relevant tax benefit would not have been obtained if the scheme had not been entered into or carried out. The second is that the relevant tax benefit might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out. If it is possible to say that a tax benefit would have been obtained, it is not necessary to refer to the reasonable expectation test.

A reasonable expectation requires more than a possibility. Relevant case law FC of T v. Peabody (1994) 181 CLR 359 at 385; 123 ALR 451 at 461; 94 ATC 4663 at 4671; 28 ATR 344 at 353. 'A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable.'

The Full Federal Court in FC of T v. Consolidated Press Holdings (No 1) (1999) 99 ATC 4945; 42 ATR 575; 91 FCR 524, referring to FC of T v. Spotless Services Ltd (1996) 186 CLR 404; 141 ALR 92 ; 96 ATC 5201 at 5211; 34 ATR 183 stated: 'The language [in Spotless ] suggests less of a predictive and more of a reasonable hypothesis approach than the passage earlier quoted from Peabody .'

Given that the FC of T v. Consolidated Press Holdings (No 1) (1999) 99 ATC 4945, 42 ATR 575; 91 FCR 524 decision is on appeal to the High Court, further clarification of the meaning of 'reasonable expectation' may be provided. In the meantime, where in a particular case the meaning of 'reasonable expectation' is in issue, the issue should be referred to the Tax Counsel Network in accordance with the escalation process set out in Attachment 3.

It is possible for different results to be reached as to reasonable expectation. In that event, the Commissioner may rely on both or all the reasonable expectations to support a determination made under subsection 177F(1) in respect of that tax benefit.

In applying the reasonable expectation test, it may be useful to consider the following. This list includes examples only and is not intended to be exhaustive. • commercial norms, e.g., standard industry behaviour; • social norms, e.g., family obligations; • behaviour of relevant parties before/after the scheme, compared with the period of operation of the scheme.

It may be difficult for the ATO officer to obtain evidence to support the reconstructed version of events. In applying the reasonable expectation test in situations where there is a lack of information, reasonable inferences may be drawn, and reasonable assumptions may be made. However, care needs to be taken in applying the reasonable expectation test to a scheme involving a trust. It may not be reasonable to expect that a particular beneficiary of a trust would, but for the scheme, have received a trust distribution (see paragraph 63 below and also FC of T v. Peabody (1994) 181 CLR 359; 123 ALR 451; 94 ATC 4663; 28 ATR 344).

Officers should be aware that where the relevant taxpayer is a non-resident, the question of source must also be considered in determining if there is a tax benefit.

The test in paragraph 177D(b) is the core of Part IVA and is frequently referred to as the 'statutory predication test'.

The statutory predication test is applied by carefully weighing the matters contained in paragraph 177D(b) having regard to all the relevant evidence.

The section requires the Commissioner to have regard to each of the matters in paragraph 177D(b). However, not all of the matters will be equally relevant in every case.

Section 177D refers to 'the purpose' of the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme. The person need not be the taxpayer. Subsection 177A(5) clarifies that the particular purpose referred to in the Part includes the dominant purpose if the scheme was entered into or carried out for 2 or more purposes.

The dominant of two or more purposes is the ruling, prevailing or most influential purpose. Relevant case law FC of T v. Spotless Services Ltd (1996) 186 CLR 404 at 416; 141 ALR 92 at 98; 96 ATC 5201 at 5206; 34 ATR 183 at 188. 'Much turns upon the identification, among various purposes, of that which is "dominant". In its ordinary meaning, dominant indicates that purpose which was the ruling, prevailing, or most influential purpose.'

It is possible for Part IVA to apply, notwithstanding that the dominant purpose of obtaining the tax benefit was consistent with the pursuit of commercial gain. Relevant case law FC of T v. Spotless Services Ltd (1996) 186 CLR 404 at 415; 141 ALR 92 at 97; 96 ATC 5201 at 5206; 34 ATR 183 at 187. 'A person may enter into or carry out a scheme, within the meaning of Pt IVA, for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit where that dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business.'

The conclusion to be reached under section 177D is the conclusion of a reasonable person. Relevant case law FC of T v. Spotless Services Ltd (1996) 186 CLR 404 at 422; 141 ALR 92 at 102; 96 ATC 5201 at 5210; 34 ATR 183 at 192. '[T]he conclusion reached, having regard to the matters in par (b) as to the dominant purpose of a person or one of the persons who entered into or carried out the scheme or any part thereof, is the conclusion of a reasonable person.'

The consideration of purpose or dominant purpose under paragraph 177D(b) requires an objective conclusion to be drawn. Relevant case law FC of T v. Spotless Services Ltd (1996) 186 CLR 404 at 421; 141 ALR 102; 96 ATC 5201 at 5210; 34 ATR 183 at 192. 'The eight categories set out in par (b) of s 177D as matters to which regard is to be had "are posited as objective facts"', citing FC of T v. Peabody (1994) 181 CLR 359 at 382.

The requirement that the conclusion drawn under paragraph 177D(b) be objective does not mean that the intention of the person or their advisers can never be relevant, although it is not itself a matter to which paragraph 177D requires regard to be had. It is clear subjective purpose is not one of the eight matters in paragraph 177D(b) however evidence of subjective purpose in some cases may be relevant to one or more of the matters in paragraph 177D(b). The Full Federal Court is expected to deal with the role of evidence of subjective purpose in appeals in respect of Eastern Nitrogen Ltd v. FC of T (1999) 99 ATC 5163; 43 ATR 112 and Metal Manufacturers Ltd v. FC of T (1999) 99 ATC 5229; 43 ATR 375. In the meantime, where in a particular case the issue arises, it should be referred to the Tax Counsel Network in accordance with the escalation process set out in Attachment 3. Relevant case law Peabody v. FC of T (1993) 40 FCR 531 at 542; 112 ALR 247 at 257; 93 ATC 4104 at 4113; 25 ATR 32 at 41. The following relevant decisions are currently the subject of appeals: Eastern Nitrogen Ltd v. FC of T (1999) 99 ATC 5163; 43 ATR 112; FC of T v. Consolidated Press Holdings (No 1) (1999) 99 ATC 4945; 42 ATR 575; 91 FCR 524.

The Full Federal Court in FC of T v. Consolidated Press Holdings (No 1) (1999) 99 ATC 4945 at 4971; 42 ATR 575 at 601; 91 FCR 524 at 552 stated in relation to section 177D: 'The section requires the decision-maker, be it the Commissioner or the Court, to have regard to each of these matters. It does not require that they be unbundled from a global consideration of purpose and slavishly ticked off. The relevant dominant purpose may be so apparent on the evidence taken as a whole that consideration of the statutory factors can be collapsed into a global assessment of purpose.'

The Full Federal Court also stated at ATC 4973, ATR 603 and FCR 554 that: 'The Commissioner submitted that in these circumstances the purpose or purposes of Arthur Young in recommending the scheme are to be attributed to those who entered into and carried it out on the basis of their advice. His Honour's reference to those who advised the group at Arthur Young is to be read in that light. There would be few such arrangements which do not involve the obtaining of prior professional advice and the objective purposes associated with the implementation of that advice can properly be attributed to those who implement it. In the circumstances the relevant purpose has been found, albeit by reference to the purpose of the advisers to the Group.'

Given that the FC of T v. Consolidated Press Holdings (No 1) (1999) 99 ATC 4945; 42 ATR 575; 91 FCR 524 decision is on appeal to the High Court, further clarification of the concept of "global dominant purpose" and of the role of adviser's purpose may be provided. In the meantime, where in a particular case these issues arise, they should be referred to the Tax Counsel Network in accordance with the escalation process set out in Attachment 3.

The presence of any of the following features whether alone or in combination in an arrangement is relevant to the matters in paragraph 177D(b) and would be likely to lead a reasonable person to consider carefully the possible application of Part IVA. This list is not meant to be exhaustive or exclusive and is provided only by way of guidance. • transactions between related or unrelated parties which are not at arm's length; • transactions which do not occur at market rates/value; • transactions the purpose of which is to transfer to the taxpayer a tax benefit of which he or she is not, under the Act, the intended recipient; • transactions involving the interposition of an entity to access a tax benefit of which the taxpayer is not, under the Act, the intended recipient; • the artificial creation of deductions or losses; • arrangements involving a circularity of funds or no real money; • use of non-recourse or limited recourse loans which limit the parties' risk or actual detriment in relation to debts/investments; • arrangements where the taxpayer is not subject to significant risks when the tax benefit is taken into account because of the existence, for example, of a "put" option; • arrangements conducted contrary to normal commercial explicability; • financial arrangements made on unusual terms, e.g., interest rates above or below market rates, security for loans of little value in comparison to the principal amount, repayment of loan substantially deferred until the end of a lengthy repayment period; • arrangements where the transaction or series of transactions produce no economic gain or loss, for example, where the whole scheme is self cancelling; and • arrangements which lack economic substance and are not rationally related to any useful non-tax purpose, for example, inter-group or related party dealings that merely produce a tax result.

The eight categories of matter referred to in paragraph 177D(b) have been considered in some detail in the following cases - W.D. & H.O. Wills (Australia) Pty Ltd v. FC of T (1996) 65 FCR 298; 96 ATC 4223; 32 ATR 168; CC(NSW) Pty Ltd (In Liq.) v. FC of T (1997) 97 ATC 4123; 34 ATR 604; Re Clough Engineering Ltd and Deputy Commissioner of Taxation (1997) 97 ATC 2023; 35 ATR 1164 and FC of T v. Consolidated Press Holdings (No 1) (1999) 99 ATC 4945; 42 ATR 575; 91 FCR 524 . The analysis of the facts against the eight categories of matter in each of these cases is very instructive in understanding how these matters need to be properly considered against a set of facts.

Subsection 177F(1) gives the Commissioner a discretion to deal with a tax benefit that has been obtained, or would but for section 177F be obtained, in connection with a scheme to which Part IVA applies. The discretion can only be exercised where a tax benefit has been obtained, or would but for the section be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

Officers should be aware that regard must be had to the individual circumstances of each case in applying Part IVA.

The discretion must be exercised bona fide and in good faith.

In all cases a determination should be evidenced in writing and provided to the taxpayer concerned: subsections 177F(2B) and (2C). The format suggested in Attachment 1 should be used unless an alternative form is needed and approved in accordance with the escalation procedure in Attachment 3.

Where a determination is made, subsection 177F(1) directs the Commissioner to take such action as he considers necessary to give effect to that determination.

Determinations should be given effect to as directed by the Chief Tax Counsel in a Minute dated 22 August 1997. Where issues arise, the escalation process in Attachment 3 should be followed. The relevant part of the Minute is extracted below (paragraphs 53-58). Single scheme, alternative bases

If a taxpayer can be assessed on alternative bases in respect of a single scheme to which Part IVA would apply in a particular year, the correct approach would be to make a single determination under subsection 177F(1). The highest "tax benefit" should be used in the determination, unless there are special circumstances (eg. the highest tax benefit would result in juridical double taxation). If an amount is to be included in assessable income, then for purposes of subsection 177F(2), the determination should state the provisions of the Act, for all the alternative bases, under which the amount is deemed to be included in assessable income. Multiple schemes, multiple tax benefits and alternative bases

If a taxpayer can be assessed to two or more "tax benefits" under Part IVA from more than one scheme in a particular year, it will be necessary to issue determinations in respect of each scheme. However, only a consolidated assessment would be issued, based on the aggregate of the highest "tax benefit" for each of the schemes (subject to any special circumstances). Single Scheme, multiple tax benefits (but not alternative bases

If a taxpayer can be assessed to two or more separate "tax benefits" under Part IVA from the one scheme in a particular year (eg. omission of income and excessive deductions claimed), it will only be necessary to issue one determination for the scheme and a consolidated assessment based on the aggregate of the "tax benefits". Give effect to a determination

To give effect to a determination under section 177F, an assessment should be issued under section 166 of the Act if no assessment has been issued previously in respect of the relevant year to the taxpayer.

If an assessment has been issued prior to making the determination but the "tax benefit" was not included, it would be necessary to issue an amended assessment under section 170 of the Act to give effect to the determination.

If prior to making the determination under section 177F, the "tax benefit" was included in an assessment under sections of the Act other than Part IVA (eg. section 25(1) or Part IIIA), it would not be necessary to issue an amended assessment. As a matter of practice, we should issue and serve on the taxpayer a copy of the determination."

The normal and preferred method of giving effect to a determination is by an amended assessment. Officers should be cognisant of the Full Federal Court decisions in FC of T v. Jackson (1990) 27 FCR 1; 96 ALR 586; 90 ATC 4990; 21 ATR 1012 and FC of T v. Stokes (1996) 34 ATR 478; 141 ALR 653; 97 ATC 4001, which emphasise the limits on the Commissioner's ability to give effect to a Part IVA determination otherwise than by an assessment or amended assessment.

The normal and preferred method of giving effect to a determination made as part of determining an objection decision is also by an amended assessment. However, in this situation, subsection 169A(3) of the Income Tax Assessment Act 1936 will operate to deem the determination to have been made when the assessment was made. The effect of subsection 169A(3) is that the determination may be given effect to by a prior amended assessment (if one exists) imposing the same tax liability as results from the Part IVA determination. Relevant case law Kordan Pty Limited v Commissioner of Taxation [2000] FCA 1807 para 32.

The Commissioner has power to assess more than one taxpayer in respect of the same income. The Commissioner also has power to make subsection 177F(1) determinations, and to issue assessments to give effect to the determinations, to more than one taxpayer in respect of the same tax benefit. However, although it is possible for multiple concurrent assessments in respect of the same amounts to co-exist, the Act does not authorise double taxation, and tax must only ultimately be collected from the taxpayer truly liable. Relevant case law DC of T v. Richard Walter Pty Ltd (1995) 183 CLR 168; 127 ALR 21; 95 ATC 4067; 29 ATR 644.

Where a determination is proposed to be made in situations other than described herein, officers should follow the escalation process outlined in Attachment 3.

Where the scheme involves trust income under Division 6, care should be taken to ensure that the Part IVA determination issues in respect of the appropriate taxpayer (e.g., trustee or beneficiary). Officers in any doubt as to the proper taxpayer should escalate the issue in accordance with Attachment 3.

Care should be taken when making a Part IVA determination involving a partnership. A partnership is not a taxpayer for Part IVA purposes. Officers in any doubt as to the proper taxpayer should escalate the issue in accordance with Attachment 3.

Where the Commissioner has made a determination under subsection 177F(1) or (2A), he may, if it is fair and reasonable, make another determination under subsection 177F(3) adjusting the taxation situation of any taxpayer. A subsection 177F(3) determination is known as a 'compensating adjustment'.

A compensating adjustment must generally be made where the application of Part IVA causes double taxation. Example A scheme involves the diversion of personal services income to a family trust. The income has been distributed to the beneficiaries (family members) who were taxed accordingly. The Commissioner makes a determination under subsection 177F(1) with respect to the scheme. The determination includes the whole of the personal services income in the assessable income of the taxpayer (the personal services income earner). Compensating adjustments are made in favour of the taxpayer's family members (the beneficiaries), such that the individual beneficiaries' income from the trust is determined not to have been included in their assessable incomes.

Where the Commissioner determines that a deduction shall not be allowable to the taxpayer in relation to a year of income, it is fair and reasonable, in some circumstances, to allow an alternative amount as a deduction. Example The Commissioner determines that deductions relating to a sale and leaseback arrangement are not allowable to the taxpayer in relation to a year of income. If it would be reasonable to expect that, but for the scheme, the taxpayer would have entered into a loan, it may be fair and reasonable to determine that an amount reflecting the interest that would, but for the scheme, have been paid, be allowable as a deduction in that year of income.

Any action to make or give effect to compensating adjustments (e.g., amendment of assessments) should not be undertaken while the application of Part IVA is subject to objection or review.

Subsection 177G(1) allows the Commissioner to amend an assessment at any time before the expiration of 6 years after the date on which tax became due and payable under the assessment if the amendment is for the purposes of giving effect to a determination made under subsection 177F(1).

Where the Commissioner has not previously assessed a taxpayer in respect of a particular year of income, the Commissioner can make a determination under subsection 177F(1) at any time and give effect to it by issuing an original assessment to the taxpayer for that year of income.

Where there has been an avoidance of tax, paragraph 170(2)(a) allows the Commissioner to amend an assessment at any time if he is of the opinion that the avoidance of tax is due to fraud or evasion. Such an amended assessment may give effect to a determination under subsection 177F(1).

The Commissioner is entitled to amend an assessment at any time if the amendment is for the purpose of giving effect to a compensating adjustment made by the Commissioner under subsection 177F(3): see 177G(2).

Where Part IVA applies to eliminate a scheme benefit, the taxpayer is liable to pay an administrative penalty of 50% of the scheme shortfall amount, or 25% of the scheme shortfall amount if it is reasonably arguable that Part IVA does not apply: section 284-160 of Schedule 1 of the Taxation Administration Act 1953 . The scheme shortfall amount is the amount of the scheme benefit that you would have got from the scheme if Part IVA did not apply: section 284-150 of Schedule 1 of the Taxation Administration Act 1953.

For income years prior to 2000-2001, the following applies in relation to penalties. Where the Commissioner has taken a determination made under subsection 177F(1) into account in making an assessment or amended assessment, the taxpayer is liable under section 226 to pay, by way of penalty, additional tax equal to 50% of the difference between the tax properly payable and the tax that would have been payable had the determination not been made. However, in cases where it is reasonably arguable that Part IVA did not apply, this penalty is reduced to 25%: paragraph 226(2)(b).

For income years prior to 1992-93, the penalty is double the amount of tax avoided: see old section 226(2A).

The Commissioner has a discretion to remit all or part of the additional tax or administrative penalty. For years prior to the 1992-93 years, the Commissioner's power to remit is found in subsection 226(3). For years after 1992-93 and prior to 22 December 1999, the Commissioner's discretion to remit the whole or part of the additional tax is found in subsection 227(3). After 22 December 1999, the Commissioner's discretion to remit all or part of the penalty is found in section 298-20 of Schedule 1 of the Taxation Administration Act 1953.

The following articles may be of interest in relation to Part IVA: • Carmody, Michael, "Part IVA: Where to Draw the Line" (plus attachment), Journal of the Taxation Institute of Australia, March 1997, pp.176-186; • D'Ascenzo, Michael, "Part IVA: Post Spotless", Journal of Australian Taxation, Jul/Aug 1998, pp. 3-13; • D'Ascenzo, Michael, "Part IVA: Commentary on Key Issues", Taxation in Australia (Red Edition), Volume 4 No 3, February 1996, pp. 129-137; • D'Ascenzo, Michael, "Ownership: The Bellinz Saga", Tax Specialist, Vol 2 No 2, October 1998, pp. 65-72.

Officers should familiarise themselves with relevant Case Decision Summaries on Part IVA.