Application of General Anti-Avoidance Rules

This practice statement is designed to assist Tax officers who are contemplating the application of Part IVA or other GAARs to an arrangement, including in a private ruling, Public Ruling (including a Product Ruling or a Class Ruling) or other document setting out the ATO view.

All references to legislation within this practice statement and attachments are to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise specified.

The first part of this practice statement discusses private ruling applications and Part IVA and also contains the rules about referring GAAR matters to the Tax Counsel Network (TCN) and the GAAR Panel. The role and procedures of the Panel are contained in paragraphs 18 to 41.

The second part of this practice statement on the GAAR provisions (commencing at paragraph 42) discusses the operation of key aspects of Part IVA and other GAARs, covering scheme, tax benefit or GST benefit, purpose, determinations or declarations, assessments, compensating adjustments, time limits and penalties.

The guidance on the operation of • Part IVA is contained in paragraphs 42 to 184. • section 67 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) is contained in paragraphs 185 to 191. • Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is contained in paragraphs 192 to 241. • the general anti-avoidance rule for the Luxury Car Tax is contained in paragraph 242. • the general anti-avoidance rule for the Wine Equalisation Tax is contained in paragraph 243. • section 5(1)(g) of the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 and section 19 of the Coronavirus Economic Response Package (Payments and Benefits) Act 2020 is contained in paragraphs 244 and 245.

Further resources for Tax officers on the application of Part IVA can be found in the links at the end of this document.

This practice statement replaces PS LA 2000/10 which is withdrawn.

The application of a GAAR is a serious matter. Its potential application should not be raised lightly. It should be made clear to a taxpayer or advisor that a careful analysis of the facts will be undertaken before a decision is taken to apply a GAAR. The process leading to a decision, including consideration by the GAAR Panel, should also be explained. As explained in this practice statement, the application of a GAAR is based on an objective analysis of an arrangement against a set of factors specified in the relevant provisions of the law. It is not a test of a taxpayer's motives and care should be taken to avoid any implication that a decision to apply a GAAR is a judgment on a taxpayer's ethics.

If a taxpayer applies for a private ruling in respect of an arrangement but has not requested a ruling on whether Part IVA applies to the arrangement, Tax officers must consider whether Part IVA may apply to the arrangement based on the information provided in connection with the ruling application. This must be done whether or not the taxpayer has advised in their ruling application that Part IVA need not be considered by the Commissioner.

If the Tax officer considers that on the basis of the information provided in connection with the ruling application it is either not clear whether Part IVA applies, or it seems that Part IVA may apply to: • the particular arrangement for which the private ruling is requested; or • an associated arrangement(s) or a wider arrangement of which the particular arrangement for which the ruling is requested is part, then the Tax officer should consider whether the private ruling should include an appropriate message or warning about the potential application of Part IVA.

If the Tax officer proposes to request additional information from the taxpayer to determine whether Part IVA may apply to the arrangement or an associated arrangement, then the Tax officer should disclose to the taxpayer that Part IVA may be in contemplation. Where Part IVA is in contemplation, the Tax officer should consider referring the matter to TCN, as per paragraphs 14 to 17.

If there is no reason to think on the basis of the information provided in connection with the ruling application that Part IVA may apply, then any ruling that is given does not need to refer to Part IVA.

Further guidance for Tax officers can be found in the link at the end of this document.

Where officers seek to apply a GAAR, including sections 177DA, 177E, 177EA and 177EB, they must, before making a determination or declaration cancelling a tax benefit or a GST benefit, refer the matter to the TCN. In the usual case, the matter will be referred to the TCN prior to the issue of a Tax Office position paper indicating that Part IVA may apply. Also, where officers propose to give a private ruling, Product Ruling or Class Ruling that a GAAR applies to an arrangement, they must refer the matter to the TCN using the same escalation processes, before issuing the ruling.

Where a request for a Class Ruling includes the application of a GAAR the matter must be referred to the TCN, including where it is proposed that the GAAR would not apply. However, a decision that a GAAR would not apply in response to an application for a private ruling or a Product Ruling does not always require referral to the TCN. Similarly, a decision not to apply a GAAR in the context of an audit does not always require referral to the TCN. The business line will make a judgment about whether such matters need to be referred to the TCN depending on whether the application of the GAAR could be seriously contemplated. Further guidance for Tax officers on escalating matters to TCN can be found in the link at the end of this document.

When a matter is referred to the TCN before a decision not to apply a GAAR is made and a member of the TCN confirms the Commissioner should not seek to apply the GAAR, the matter is returned to the decision-maker in the business line as a preliminary step to the making of the decision. If, however, the TCN officer is of the view that the GAAR may apply to the matter, the TCN officer will provide interim advice to the decision-maker and arrange for that advice and relevant papers to be provided to a Deputy Chief Tax Counsel (DCTC) for further consideration before the decision is made.

A decision on review or objection or in the course of litigation to reverse a decision to apply a GAAR must not be made without first referring the question to a DCTC or the Chief Tax Counsel (CTC).

In acknowledgment of the serious nature of the GAARs, as outlined in paragraph 8, the Commissioner has established the GAAR Panel (the Panel) to advise on the application of GAARs to particular arrangements.

Unless indicated otherwise below, matters for which a decision-maker is proposing to apply a GAAR must be referred to the Panel before a final decision is made. In the usual case a matter will be referred to the Panel after the TCN officer, to whom it has been referred under the rules in paragraphs 14 to 17 above, has fully considered the matter.

Applications for private rulings, Class Rulings and Product Rulings in respect of the application of a GAAR are not generally referred to the Panel for advice. Referral to the Panel would delay the issue of a ruling. However, a private ruling or Class Ruling application must be referred to the Panel for advice where the applicant requests the referral and by doing so agrees to a delay in the issue of the ruling. Any ruling that a GAAR applies to a particular transaction must be approved by a TCN officer.

A taxpayer who receives a private ruling that a GAAR applies may request that the matter be referred to the Panel for advice as part of seeking a review of the ruling. This may be done before the lodgment of an objection against the private ruling or at the same time as, or after, the lodgment of the objection.

Matters considered to raise substantially identical issues on facts essentially comparable with a matter previously referred to the Panel are not referred to the Panel again. However any decision to apply a GAAR without referring the matter to the Panel must receive clearance from the Chair of the Panel or a DCTC. It is not expected that there will be many matters in this category and, where there is any doubt, the matter will be referred to the Panel.

Upon a matter being referred to the Panel, the Chair of the Panel has a discretion whether or not to put that matter to the Panel for its consideration. The Commissioner or the CTC may also direct that a matter shall be decided without reference to the Panel. However, a decision to apply a GAAR will not generally be made without first obtaining advice from the Panel.

The primary purpose of the Panel is to assist the Tax Office in its administration of the GAARs in the sense that decisions made on the application of GAARs are objectively based and there is a consistency in approach to various issues that arise from time to time in the application of the GAARs. The Panel does this by providing independent advice to a GAAR decision-maker in those matters which are referred to it. This includes advice regarding the appropriate imposition of penalties. The Panel is made up of business and professional people chosen for their ability to provide expert and informed advice, with the other members of the Panel being senior Tax officers. The Chair of the Panel is a senior Tax officer.

The Panel has no statutory basis; its role is purely consultative. The relevant decision under a GAAR is that of the decision-maker; the Panel does not make a decision but its advice is taken into account by the Tax Office decision maker. The Panel does not investigate or find facts, or arbitrate disputed contentions. Rather, the Panel provides its advice on the basis of the contentions of fact which have been put forward by the officers of the Tax Office and by the taxpayer. In providing advice the Panel is able to advise on any differences between the Tax Office and taxpayer on conclusions or inferences to be drawn from the facts. If there is a dispute as to the facts, the Panel may suggest that the Tax officers make additional enquiries or may indicate whether the difference would, in its opinion, change its advice. Where a matter referred to the Panel arises from an application for a private ruling, the Panel has regard to the arrangement in relation to which the Commissioner is asked to rule.

Upon a matter being referred to the Panel, a decision-maker will not (other than in exceptional circumstances) make a decision before receiving advice from the Panel. Where exceptional circumstances are considered to exist, any decision is not to be made without first discussing the matter with the Chair of the Panel. A decision-maker is not obliged to follow the advice of the Panel one way or the other; the decision to apply or not to apply the GAAR is that of the decision-maker. However, a decision to apply a GAAR contrary to the advice of the Panel is not to be made without first escalating the matter to the Chair of the Panel or the CTC.

A member of the TCN must provide interim advice in respect of a matter that is to be referred to the Panel. A TCN member will be present at the Panel meeting when the case is discussed.

A matter is generally referred to the Panel following the issue of the Tax Office's position paper and a consideration by the decision-maker of all available information, including any responses by the taxpayer to the position paper. However, important, sensitive, novel or complex cases may be referred to the Panel at an earlier time for preliminary advice. While there is no requirement to do so, a Tax officer may inform a taxpayer that he or she is seeking preliminary advice from the Panel in relation to a matter. It is important for officers to ensure that sufficient time is allowed in the conduct of an audit for referral to, and consideration of advice from, the Panel before the date allowed for amendment of an assessment to give effect to a decision to apply a GAAR.

Apart from private rulings and Class Rulings and cases where preliminary advice is sought, a case will not generally be referred to the Panel until after the issue of a Tax Office position paper and the receipt of the taxpayer's response (if any) to the paper. The position paper represents the Tax Office's preliminary view of the facts and the law applying to those facts.

Matters initially referred to the Panel for preliminary advice should be referred again to the Panel following the consideration of a taxpayer's response to the Tax Office's position paper and any other information before a decision is made to apply a GAAR.

To assist the deliberative process of the Panel in providing advice to the decision-maker, a taxpayer (and/or a representative of the taxpayer at the taxpayer's election) will usually be invited to attend a Panel meeting and address the Panel. (No such invitation will be extended to a taxpayer in relation to matters which are referred to the Panel at an early stage for preliminary advice.)

The Panel generally meets on a monthly basis. The dates for Panel meetings are decided in advance in order to facilitate the orderly working of the Panel. Panel meetings are not rescheduled other than in exceptional circumstances. The unavailability of a taxpayer's preferred representative on a particular date will not usually constitute exceptional circumstances that would justify the rescheduling of a Panel meeting.

An invitation given to a taxpayer to attend a Panel meeting and address the Panel is not extended on the basis that it will provide a platform for a hearing as part of a quasi-judicial process of review. This is not the function of the Panel, nor in any event does it have power to undertake a review process; it is there merely to provide advice to decision-makers so as to assist in the making of objective decisions by decision-makers and to ensure consistency in the approach to various issues that arise in the application of the GAARs. Of course, the decision-maker is always available to receive and address any submissions that a taxpayer may wish to put to the decision-maker at any time.

Where an arrangement involves numerous taxpayers in essentially similar circumstances only one representative taxpayer will ordinarily be invited to address the Panel. On occasions, promoters or facilitators of the arrangement may also be invited in such cases to address the Panel.

Generally, the decision-maker will (if possible) attend the Panel meeting to which the taxpayer is invited to attend. A taxpayer may accept or decline the invitation as the taxpayer sees fit. No adverse inference will be drawn against the taxpayer should the taxpayer decline to attend the Panel meeting. A taxpayer who accepts an invitation to attend must do so on the basis that the Chair has the control of the Panel meeting. If a taxpayer who has been invited to attend the Panel meeting fails to provide a written submission (referred to in paragraph 37), the invitation may be withdrawn.

A taxpayer invited to attend the Panel meeting will, by a reasonable time prior to the meeting, be informed of the contentions of fact giving rise to the issue referred to the Panel, and of the substance of the Tax Office's proposed approach to the application of the GAAR. Generally, this advice will be by way of reference to a position paper already provided to the taxpayer or by an updated paper prepared following consideration of a response by the taxpayer to the position paper.

In extending an invitation to a taxpayer, the Chair will request the taxpayer to provide a written submission (unless the taxpayer chooses to rely upon a written submission already made to the Tax Office). If in relying upon an earlier submission the taxpayer wishes to add to or correct some part of an earlier submission, the taxpayer may do so. Written submissions should be concise. The appropriate timeframe for a written submission to the Panel will depend on the circumstances of each case. As a general guide, a taxpayer can expect to be given around 28 days notice of a Panel meeting and will be asked to make any written submission no later than 14 days before that meeting.

Ordinarily, the Panel will have had an opportunity to review the papers before the meeting and may wish to question or hear an oral submission by Tax officers, or discuss the matter, before hearing from the taxpayer. This will occur in the absence of the taxpayer. The taxpayer will then be given an opportunity to address the Panel. The Chair will set the time for this address as appropriate in each case, but it is expected that in most cases it would be no more than one hour. This oral submission should seek to emphasise or elaborate upon the key points of the taxpayer's written submission. While the Panel is not open for questioning or debate about the application of the GAAR, Panel members may ask questions and discuss issues with the taxpayer to ensure the Panel has a clear understanding of the taxpayer's submission. Other Tax officers (that is, in addition to Panel members and the decision-maker) will usually be present during the meeting but they will not (nor will the decision-maker) be available for questioning. However, the taxpayer will be offered the option of making its submissions in the absence of such other Tax officers, if the taxpayer prefers.

Taxpayers attending a Panel meeting should address or be prepared to respond to questions relating particularly to the tax benefit and the objective factors in subsection 177D(2) of Part IVA or equivalent provisions in other GAARs.

If a determination cancelling a tax benefit or declaration negating a GST benefit is made, the reasons for making the determination or declaration should be documented separately. Refer to Appendix 1 for further guidance on executing GAAR determinations.

A taxation ruling or determination or an ATO Interpretative Decision (ATOID) could be prepared after a decision is made about the application of a GAAR in a matter. In accordance with PS LA 2001/8, the decision whether an ATOID should be prepared for an interpretative decision involving Part IVA or other GAAR must be made by a TCN officer.

Part IVA contains a number of anti-avoidance provisions. The discussion in relation to Part IVA below focuses on the application of sections 177A, 177C, 177CB, 177D and 177G. A reference to Part IVA in the following paragraphs should therefore be read as a reference to these sections. However, while this practice statement does not contain specific guidance on the operation of sections 177DA (schemes that limit a taxable presence in Australia), 177E (stripping of company profits), 177EA (creation of franking debit or cancellation of franking credits), 177EB (cancellation of franking credits for head company of consolidated group) or 177H, the following guidance is useful as a background reference for officers exercising powers in respect of those provisions.

Part IVA of the ITAA 1936 is a general anti-avoidance provision. It replaced former section 260 of the ITAA 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: Federal Commissioner of Taxation 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; Federal Commissioner of Taxation v. Hart [2004] HCA 26; 217 CLR 216; 206 ALR 207; 2004 ATC 4599; 55 ATR 712 at [51].

Part IVA gives the Commissioner the power 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 power is found in subsection 177F(1).

Before the Commissioner can exercise the power 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.

The word 'may' in subsection 177F(1) refers to the exercise of a power which arises when it is found that there is a tax benefit obtained in connection with a scheme to which section 177D applies. There is no over-arching or final discretion independent of the exercise of this power: Cumins v. Federal Commissioner of Taxation (2007) 66 ATR 57; 2007 ATC 4303; [2007] FCAFC 21 at [41]. That case demonstrates that, if the objective criteria for the application of Part IVA are present, the Commissioner's decision to go ahead and cancel the tax benefit under section 177F is not open to challenge on the basis that the Commissioner ought not to have exercised that power because, for example, he has in doing so failed to take into account some further matter that is said to be relevant. See also the remarks of Hill J (Carr and Hely JJ agreeing) in Federal Commissioner of Taxation v. Sleight (2004) 136 FCR 211; 2004 ATC 4477; (2004) 55 ATR 555; [2004] FCAFC 94 at [103] to [110] and [114].

The same view is taken of the power to negate a GST benefit under Division 165 of the A New Tax System (Goods and Services Tax) Act 1999.

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).

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

Part IVA is not limited by provisions in the ITAA 1936 or Income Tax Assessment Act 1997 (ITAA 1997) or by the International Tax Agreements Act 1953 or the Petroleum (Timor Sea Treaty) Act 2003 : subsection 177B(1).

Part IVA was inserted into the ITAA 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.

Part IVA was significantly amended in 2013. [1] The amendments apply to schemes entered into, or commenced to be carried out, on or after 16 November 2012. For discussion on the 'alternative postulate' under these amendments, please refer to paragraphs 78 to 95. Unless specified otherwise, the concepts in this document apply equally to the legislation as it stood before and after these amendments.

Focussing on the various elements of Part IVA should not obscure the way in which the Part as a whole is intended to operate. What constitutes a scheme is ultimately meaningful only in relation to the tax benefit that has been obtained since the tax benefit must be obtained in connection with the scheme. Likewise, the dominant purpose of a person in entering into or carrying out the scheme, and the existence of the tax benefit, must both be considered against a comparison with an alternative.

For Part IVA to apply, the identified scheme must fall within the wide definition of 'scheme' in subsection 177A(1).

The definition of scheme includes a unilateral scheme, plan etcetera: subsection 177A(3).

The definition of scheme can include the failure to do something.

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

The need for the Commissioner to identify the scheme is simply an aspect of the requirement for a party to legal proceedings to particularise the case the other party or parties will have to meet. A reformulation of the scheme in connection with which the tax benefit is obtained after the close of evidence will be impermissible only if it affects the evidence that the other party might have led.

Section 177D, which identifies schemes to which Part IVA applies, allows the objectively determined purpose or dominant purpose to be tested against a person who entered into or carried out the scheme or any part of the scheme. Hence, Part IVA will apply to a scheme if a person enters into or carries out only a part of the scheme for the dominant purpose of enabling the taxpayer to obtain a tax benefit in connection with 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). Whether a scheme is wider or narrower should not be relevant in determining if the test in section 177D is met with respect to the scheme, as long as the tax benefit in question is sufficiently connected with the scheme.

If the Commissioner erroneously identifies a scheme, this will not usually 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.

The breadth of what may constitute a scheme reflects the objective nature of the inquiry to be made under Part IVA. The scheme ultimately matters only in the context of whether there is a tax benefit obtained by the taxpayer in connection with the scheme for which the conclusion in subsection 177D(2) can be reached.

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 six kinds 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 loss carry back offset being allowable to the taxpayer in relation to a year of income; (v) a foreign income tax offset being allowable to the taxpayer; (vi) an amount of withholding tax not being incurred by the taxpayer in a year of income.

For schemes entered into on or after 16 November 2012, tax benefit must be determined with reference to section 177CB: refer paragraphs 83 to 88.

The reference in paragraph 177C(1)(a) to 'an amount not being included in the assessable income of the taxpayer' is a reference to an amount not being included that would be or might reasonably be expected to be included in the taxpayer's assessable income by reference to the relevant alternative postulate: refer to paragraphs 77, 89, 97 to 101, and 155. The fact that an amount was included in the assessable income of the taxpayer under the scheme by virtue of a different provision or circumstance does not affect the amount of a tax benefit, nor the provision by virtue of which it is to be included. Paragraph 177C(1)(a) focuses on what has been left out of assessable income by the scheme - not on what has been included: refer to Taxation Ruling IT 2456 .

There is some uncertainty regarding the phrase 'a deduction being allowable to the taxpayer' in paragraph 177C(1)(b). In FCT v Lenzo [2008] FCAFC 50; (2008) 167 FCR 255, the Full Federal Court held that a taxpayer can demonstrate that it has not obtained a tax benefit if the alternative postulate would have resulted in a deduction of the same kind as that under the scheme.

A differently constituted Full Federal Court did not follow Lenzo in Federal Commissioner of Taxation v. Trail Bros Steel & Plastics Pty Ltd (2009) 75 ATR 916; 2009 ATC 20-141. In this case, the court held that the relevant enquiry is simply as to the difference in amount between the effect of the scheme and the alternative postulate, regardless of whether any deduction that would have been allowable without the scheme would have been of the same kind as the deduction under the scheme.

The enactment of subsection 177CB(2) means that this issue will now be academic in many deduction cases: refer paragraphs 83 to 95. See also, the discussion on compensating adjustments at paragraphs 174 to 176.

Subsection 177C(2) excludes a tax benefit from Part IVA where: (i) the tax benefit is attributable to the making of a declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option by any person expressly provided for under the ITAA 1936 or the ITAA 1997 (other than an agreement or election specifically dealt with by subsection 177C(2A): refer to paragraph 72); and (ii) the relevant scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the election or choice etcetera to be made.

It follows that the relevant tax benefit will not be excluded under subsection 177C(2) if it was obtained in connection with a scheme that was entered into or carried out by any person for the sole or dominant purpose of enabling that person or any other person to make the election or choice etcetera.

The first condition in subsection 177C(2), for the exclusion to apply, uses the phrase 'attributable to'. This phrase means that there must be a direct relationship between the obtaining of the tax benefit and the making of the relevant 'declaration ... election ... or choice'. Where the obtaining of the tax benefit is attributable to 'a sequence of integrated and inter-dependent steps making up the scheme', only one of which involves the making of the declaration, etcetera, in question, it cannot be said that the first condition is satisfied.

Subsection 177C(2A) excludes from Part IVA a tax benefit that is the non-inclusion of assessable income or is the incurring of a capital loss where: (i) these tax benefits are attributable to making a CGT rollover election or agreement under Subdivision 126-B of the ITAA 1997 or making a net capital loss transfer agreement under Subdivision 170-B of the ITAA 1997; and (ii) the relevant scheme consisted solely of the making of the agreement or election.

The limitation to the subsection 177C(2A) exclusion in subparagraph (a)(ii) requires the relevant scheme to consist solely of the making of the agreement or election, and will not be satisfied where this scheme is found to consist of other steps.

Subsection 177C(3) provides that a particular tax benefit will be 'attributable' to an election or choice etcetera for the purpose of subparagraph (i) of paragraphs 177C(2)(a), (b), (c) and (d) and subparagraph (i) of paragraphs 177C(2A)(a) and (b) if, but for the election or choice etcetera, the tax benefit would not have been obtained. This will be the case if, for example, the non-inclusion of assessable income for a tax benefit under paragraph 177C(1)(a) necessarily results from the making of the election or choice etcetera.

The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis' or an 'alternative postulate'. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. This alternative hypothesis or postulate also forms the background against which the objective ascertainment of the dominant purpose of a person occurs in accordance with section 177D. The alternative hypothesis(es) or postulate(s) is referred to in this practice statement as the 'counterfactual(s)'.

This is not to suggest that the enquiry concerning dominant purpose is necessarily always the same as that to do with whether a tax benefit under section 177C has been obtained. The former may involve a consideration of the 'particular way' the transaction in question was structured or of the 'particular features' of the transaction giving rise to the tax benefit, and a comparison of how the scheme achieves particular commercial objectives with alternative ways of achieving those same objectives.

The eight factors that must be considered in applying the purpose test in former paragraph 177D(b) (now subsection 177D(2)) are considered against the background of the counterfactual(s): refer to paragraph 130.

Part IVA was significantly amended in 2013. [1] The amendments apply to schemes entered into, or commenced to be carried out, on or after 16 November 2012. The focus of the amendments is mostly on the concept of tax benefit. A summary of the effect of these amendments is found in the Explanatory Memorandum to the amending Bill. In particular, the Explanatory Memorandum states that the amendments are intended [2] : • to put it beyond doubt that the 'would have' and 'might reasonably be expected to have' limbs of each of the subsection 177C(1) paragraphs represent alternative bases upon which the existence of a tax benefit can be demonstrated; • to ensure that, when obtaining a tax benefit depends on the 'would have' limb of one of the paragraphs in subsection 177C(1), that conclusion must be based solely on a postulate that comprises all of the events or circumstances that actually happened or existed other than those forming part of the scheme; • to ensure that, when obtaining a tax benefit depends on the 'might reasonably be expected to have' limb of one of the paragraphs in subsection 177C(1), that conclusion must be based on a postulate that is a reasonable alternative to the scheme, having particular regard to the substance of the scheme and its effect for the taxpayer, but disregarding any potential tax costs; and • to require the application of Part IVA to start with a consideration of whether a person participated in the scheme for the sole or dominant purpose of securing for the taxpayer a particular tax benefit in connection with the scheme; and so emphasising the dominant purpose test in section 177D as the 'fulcrum' or 'pivot' around which Part IVA operates.

It is not possible at present to make many authoritative statements about the correct interpretation of the Part as amended. The other statements about interpretation in this practice statement are mostly grounded in the case law on Part IVA as it was prior to amendment in 2013. There is no case law on the amendments at the time of publication of this revised Statement. The ATO has very little practical experience so far in applying the amendments in real cases. We have received very few enquiries from practitioners about actual transactions (whether carried out or merely proposed).

In 2013 a 'workshop' was held between the ATO and some interested practitioners under the auspices of the National Tax Liaison Group. Practitioners provided some practical examples which raised questions under Part IVA, and the ATO sought to offer indicative views about the examples, having first had the benefit of discussing them with the group. Despite the intended purpose of the workshop, few if any of the examples supplied raised questions about the effect of the amendments. Their resolution depended chiefly on an analysis of dominant purpose under section 177D in much the same way as they would have under the previous version of Part IVA. The outcomes of the workshop have, nonetheless, been published. [3]

In these circumstances, the only sure source of 'guidance' is the text of the provisions themselves and the extrinsic materials that accompanied the introduction of the amendments, in so far as the latter are a legitimate aid to the task of interpretation. It would not be helpful simply to repeat the text of those documents here. The following discussion assumes knowledge of what is said about the amendments in the Explanatory Memorandum for the Bill that became the amending Act.

Some external commentary on the amendments has been published since their enactment. [4] This commentary has raised some questions that are perhaps not clearly answered by the legislation or the extrinsic materials. The following sets out some of the questions that emerge from that material together with an indication of how the ATO would likely apply the law and what submissions we would likely make if any of these issues ever arise in litigation.

No. New section 177CB so significantly alters the conceptual framework of the tax benefit test that cases such as Federal Commissioner of Taxation v. RCI Pty Ltd (2011) 2011 ATC 20-075; (2011) 84 ATR 785; [2011] FCAFC 105 and Federal Commissioner of Taxation v. Futuris Corporation Ltd (2012) 205 FCR 274; 2012 ATC 20-306; [2012] FCAFC 32, can no longer be wholly regarded as representing the law, so far as the tax benefit concept is concerned, and should be treated with extreme caution. [5] That this was Parliament's intention in enacting the amendments is clear from the legislative history and the extrinsic materials. [6] In particular, the explanatory memorandum highlights that section 177C is not intended to be a test of prediction, but rather to require the identification of reasonable alternatives to schemes that are 'informed by the commercial results to which the schemes were directed'. [7] That is, 'whether or not there were other ways (for example, more convenient, or commercial, or frugal ways) in which the taxpayer might reasonably have achieved the substance and effect (tax implications aside) that it achieved from, or in connection with, the scheme'. [8]

No. The amending Act left the text of section 177C largely intact but inserted a new section 177CB that substantially affects its operation. It could therefore be suggested that the previous law on section 177C still holds and the sole effect of new section 177CB is to provide a further restriction, or condition, on what can be a tax benefit.

This reading of the provisions might just be literally open. But it is also open to read subsections 177CB(2) and (3) as replacing (rather than adding to) the 'prediction' approach which the previous case law established as the correct approach to the interpretation of section 177C. In so far as the text is ambiguous on this point, recourse to the extrinsic materials is permitted. These make it clear that the 'replacement' approach is correct. Having regard to the evident purpose and history of the amendments, it would be odd to suggest that Parliament only intended to restrict the previous operation of Part IVA by these amendments.

No. The concepts in section 177CB elucidate, and to the extent of any inconsistency replace, the test that the ordinary meaning of the expression 'would or might reasonably be expected' in subsection 177C(1) would otherwise require. For the 'would' limb, this much is plain on the face of the legislation. The 'reasonably expected' limb should be interpreted correspondingly. Having identified a postulate that meets the requirements of subsections 177CB(3) and (4), a tax benefit can be immediately calculated. There is no requirement to conduct a further enquiry by attempting somehow to shoehorn this postulate back into a separate test of reasonable expectation, as that expression had been interpreted in the previous cases. The concept of reasonable expectation is now to be understood in light of subsections 177CB(3) and (4), rather than in addition to those provisions.

This approach is consistent with paragraph 1.88 of the Explanatory Memorandum.

It is not clear how the opposite approach could be made to work without defeating the evident purpose of section 177CB.

Yes. This stems from the ordinary meaning of the word 'or' in subsection 177C(1). In this respect, the law has not changed, although the content of the two limbs has of course been significantly affected by the insertion of section 177CB. It is open to the Commissioner to formulate his case under either or both approaches.

The text of the legislation appears to leave this possibility open: note the use of the indefinite article in subsection 177CB(3). Whether or not the answer to this question will matter in many practical situations is not known at this stage.

No. Section 177CB says nothing to this effect.

In theory, the following scenario might arise. A scheme results in a certain commercial objective being met without incurring any tax liability. Absent the scheme, the same non-tax objective might have been met in two different ways: one resulting in a $100 tax liability and the other in a $200 tax liability. Assume that neither alternative would itself have attracted Part IVA, had it been carried out. Under the pre-amendment law, the question would be, as a matter of reasonable prediction, which of those two alternatives (if either of them) is it most reasonable to predict would have happened absent the scheme? The taxpayer would be entitled to suggest that the lower tax liability for the first alternative is a reason to expect that course would have been taken rather than the second. Other things being equal, a court may well have agreed with this.

Under the new law, the identification of a reasonable alternative to the scheme must be done disregarding these hypothetical tax effects. As between the two possible alternatives, it is not permissible to give weight to their relative tax costs.

In this somewhat theoretical scenario, section 177CB does not require the higher or the lower of the two hypothetical tax liabilities necessarily to be chosen. If the two truly were equally 'reasonable' by the lights of section 177CB, the law does not say which to choose. On the other hand, it behoves the Commissioner to administer Part IVA (and indeed the whole of the tax law) with common sense and reasonableness. Besides, the Commissioner's case under section 177D might well be more attractive to a court in practice if the lower of the two is the correct reference point. For the enquiry as to purpose under section 177D requires consideration of what other possibilities existed, and the tax effects of the scheme are still relevant to that enquiry: paragraph 177D(2)(d).

In any event, the Commissioner may choose to cancel only part of a tax benefit in appropriate cases. And, in the final analysis, the compensating adjustment mechanism in subsection 177F(3) remains available to ameliorate any unfair or unreasonable result: refer paragraphs 174 to 176.

Paragraphs 97 to 107 apply only to Part IVA in the form in which it stood before the amendments made in 2013. (See above at paragraph 53). It consists of the relevant passages from the original version of this Practice Statement, as now updated to reflect developments in the case law on the original version of Part IVA, that occurred between 2005 and the time of the amendments.

A reasonable expectation requires more than a possibility.

The full Federal Court in Federal Commissioner of Taxation v. Consolidated Press Holdings (No. 1) (1999) 91 FCR 524 at 549; 99 ATC 4945 at 4964; 42 ATR 575 at 599, referring to Federal Commissioner of Taxation 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.

The following propositions concerning section 177C (in its pre-2013 form) have been stated by the Full Federal Court per Edmonds J (Bennett and Middleton JJ agreeing):

Propositions 14 and 16 require a comment. While the weight of authority provided by the judgments in Trail Bros, AXA and Ashwick is noted, it is not yet clear that the view in Lenzo is certainly to be rejected (see paragraphs 66 to 68).

It is possible for different conclusions to be reached as to what might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. In that event, the Commissioner may rely on both or all the reasonable expectations in the alternative, and therefore on more than one counterfactual, to support a determination made under subsection 177F(1). See paragraph 159 in relation to making determinations where there are alternative counterfactuals.

The identification of what, as a hypothetical alternative, might reasonably be expected to have happened if the scheme did not occur can be affected by the cost of implementing that alternative. For example, the size of the 'tax cost' of carrying out a possible alternative scheme may show the relevant persons would not, or could not reasonably be expected to, have carried out that scheme. [13] This may be especially so where there is evidence pointing to a range of other alternatives that might have been adopted, in which this cost would not have arisen.

It is not correct that the taxpayer can only succeed by establishing that the Commissioner's counterfactual is unreasonable. It is for the court to determine objectively, on all of the relevant evidence, 'including inferences open on the evidence, as well as the apparent logic of events', what alternative would, or might reasonably be expected to, have occurred if the scheme had not been entered into or carried out.

The taxpayer might discharge its onus by leading evidence that it would have carried out a particular activity, or adopted a particular course, or not carried out a particular activity, or adopted a particular course, as the case may be. Such evidence is to be tested against the objective facts surrounding the relevant transaction.

The fact that the taxpayer leads no direct evidence on what would, or might reasonably be expected, to have happened, if the scheme did not, will not automatically lead to the taxpayer failing to discharge the onus.

Although there is no authority on the point yet, we expect that how the taxpayer discharges the onus for a post-2013 scheme would be regarded as a matter for the taxpayer in a similar way as under the pre-amendment law. So, the taxpayer's argument may include inferences that are open on the evidence, as well as commercial logic. However, under the amended test in section 177CB it is no longer a matter of the taxpayer simply establishing the most likely prediction of what would have occurred absent the scheme, especially if that prediction poorly reflects the substance of the scheme and the relevant non-tax consequences for the taxpayer and other entities. Rather, the enquiry under the amended legislation is as to what reasonable alternatives to the scheme can be put forward, and subsection 177CB(4) directs one to have particular regard to certain matters, and to disregard others, in reaching this conclusion.

Also, if the taxpayer can show that there is no reasonable alternative to the scheme that would result in a less favourable tax outcome, this would tend to be consistent with an absence of the tax purpose required by s177D in any event.

The following paragraphs are relevant to both the pre-2013 and post-2013 versions of Part IVA.

In applying the reasonable expectation test to identify the counterfactual(s), it may be useful to consider the following [14] : • the most straightforward and usual way of achieving the commercial and practical outcome of the scheme (disregarding the tax benefit); • commercial norms, for example, standard industry behaviour; • social norms, for example, family obligations; • behaviour of relevant parties before/after the scheme compared with the period of operation of the scheme; and • the actual cash flow.

If the scheme had no effect or outcome other than the obtaining of the relevant tax benefit(s), it will be reasonable to assume that nothing would have happened if the scheme had not been entered into or carried out.

Conversely, if a tax benefit is obtained in connection with a scheme that also achieves a wider commercial objective (disregarding the tax benefit), then it is reasonable to expect that in the absence of the scheme the wider commercial objective would still have been pursued by the means of a transaction or dealing with a different form or shape.

It may be difficult for a Tax officer to obtain evidence to support the counterfactual, that is, 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. For example, care needs to be taken in applying the reasonable expectation test to a scheme involving a trust. Officers may need to consider whether it was reasonable to expect that a particular beneficiary of a trust would, but for the scheme, have received a trust distribution (see paragraphs 162 and 163 and also Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359; 123 ALR 451; 94 ATC 4663; 28 ATR 344).

Where the relevant taxpayer is a non-resident, the question of source must also be considered in determining whether there is a tax benefit.

If a scheme involves a company joining a consolidated group, the fact that the scheme has resulted in the company becoming a subsidiary member of that group is no bar to finding that the company has obtained a tax benefit consisting of the non-inclusion of an amount in the company's assessable income, despite the single entity rule in section 701-1 of the ITAA 1997. The Commissioner may issue a section 177F determination to that company and may give effect to the determination by issuing an assessment (or an amended assessment) to that company, even though it is in fact a subsidiary member of a consolidated group. The Commissioner may not however assess the head company in these circumstances.

On the other hand, if a scheme involves a company joining a consolidated group, and without the scheme the head company of the group would not have been entitled to a certain deduction from its assessable income, then it is the head company that has obtained the tax benefit. The Commissioner may issue a section 177F determination to the head company and assess it accordingly. (This situation has not yet been considered by a court but, by contrast with the omission of income situation, there seems to be no reason to doubt that the law would apply in this way.)

The counterfactual must not itself be a scheme entered into or carried out with the sole or dominant purpose of obtaining a tax benefit. Although the cases supporting this proposition were decided by reference to the pre-amendment version of Part IVA, there is no reason to think the proposition would not apply equally under the amended version.

Section 177D provides that Part IVA applies to a scheme in connection with which the taxpayer has obtained a tax benefit if, after having regard to eight specified factors, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling the taxpayer to obtain the tax benefit.

The objective test in subsection 177D(2) is the core of Part IVA and has been described by the High Court as the 'pivot' or 'fulcrum' on which Part IVA turns. It is frequently referred to as the 'statutory predication test'.

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 'purpose' includes the dominant purpose where there are two or more purposes.

The dominant of two or more purposes is 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. The key issue under Part IVA is whether the particular scheme, or any part of it, was entered into or carried out by any person for the relevant purpose having regard to the objective factors in subsection 177D(2).

The conclusion to be reached under section 177D is the conclusion of a reasonable person.

The consideration of purpose or dominant purpose under subsection 177D(2) requires an objective conclusion to be drawn. The conclusion required by section 177D is not about a person's actual, that is, subjective, dominant purpose or motive. Section 177D requires an objective conclusion as to purpose to be reached having regard to objective facts. The actual subjective purpose of any relevant person is not a matter to which regard may be had in drawing the conclusion under section 177D. In other words, a conclusion about a relevant person's purpose for section 177D is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the eight factors for the scheme (see paragraphs 117 and 125 to 150). Tax officers must therefore focus on these facts and not on what a relevant person actually intended or what the taxpayer's motivations were for entering into the scheme.

It may be relevant in determining what objectively was the purpose of any person entering into or carrying out the scheme, or any part of the scheme, to have regard to the purposes of the advisers or other agents of any of those persons. This, of course, will be appropriate only where a person acts on professional advice and what was done on professional advice is relevant to considering the eight matters required to be considered in applying the purpose test in subsection 177D(2) - refer to paragraphs 125 to 150.

The section requires the Commissioner to have regard to each of the eight matters in subsection 177D(2) in reaching an objective conclusion about purpose. However, not all of the matters will be equally relevant in every case.

The eight matters in subsection 177D(2) are to be each individually taken into account for the scheme having regard to all the relevant evidence, and then weighed together, in arriving at the conclusion as to dominant purpose.

The eight matters listed in subsection 177D(2) enable consideration of the context in which the particular scheme occurs.

Provided the eight matters identified in subsection 177D(2) are each taken into account, it is possible to arrive at the conclusion as to purpose by making a global assessment of purpose.

The eight factors in subsection 177D(2) consist of three overlapping sets. The first set is about how the scheme was implemented: how its results were obtained. It comprises the first three factors in paragraphs (a), (b) and (c) of subsection 177D(2) and deals with manner, form and substance, and timing. The second set comprises the next four factors in paragraphs (d), (e), (f) and (g) of subsection 177D(2) and deals with the effects of the scheme: the tax results, financial changes, and other consequences of the scheme. The third set is the eighth factor in paragraph (h) of subsection 177D(2) which deals with the nature of any connection between the taxpayer and other parties.

There is authority to suggest that consideration of the eight factors involves comparison of the scheme with the 'alternative hypothesis', that is, the counterfactual: refer to paragraphs 75 to 116. [15]

However, the most recent judicial statement touching on the role of alternative postulates in considering the purpose test is that of Pagone J in Orica Limited v Commissioner of Taxation [2015] FCA 1399; 2015 ATC 20-547 at [20]: The conclusion contemplated by s 177D calls for an evaluative judgment. It is to that extent similar to the evaluative judgment contemplated by the predication test in Newton v Federal Commissioner of Taxation (1958) 98 CLR 1, 8-9. The evaluative judgment to be made under s 177D about dominant purpose is one to be made by application of the words of s 177D and, specifically, by having regard to the matters to which the section compels, and confines, attention. It is by a consideration of those matters that the conclusion is to be made about whether obtaining the tax benefit was the 'ruling, prevailing, or most influential purpose': Spotless Services at 416; see also at 423. The dominant purpose of obtaining a tax benefit may be revealed, as was decided in Spotless Services, by 'the particular means adopted by the taxpayers to obtain the maximum return on the money invested after payment of all applicable costs, including tax': Spotless Services at 423. It may also be revealed by consideration 'of what other possibilities existed' by reference to the eight matters in s 177D(b): Hart at 243 [66]; see also British American Tobacco Australia Services Ltd v Federal Commissioner of Taxation (2010) 189 FCR 151, 163, [53]. In Hart the dominant purpose of obtaining a tax benefit could be seen by comparing what was done to borrow funds with how else funds could be borrowed, and, therefore, as in Spotless Services, the dominant purpose was revealed by consideration of the eight factors in s 177D(b) in the particular means adopted by the taxpayer. It is not relevant to consider, therefore, whether Orica might have done something else, such as to borrow funds from an external source. In any event, if it be relevant, the evidence is that Orica rejected such an option and there is insufficient evidence to conclude that Orica's directors would have funded OUSSI from external sources. The inquiry called for by s 177D is, rather, what was the dominant purpose of entering into the transactions that Orica did choose. It is an inquiry that must be undertaken by having regard to the eight matters in s 177D(b) and, as a conclusion about purpose to be drawn from those matters, will require an evaluation of inference and degree.

These first three factors are very important because they examine exactly how a scheme achieves its effects. The first factor which examines 'the manner in which the scheme was entered into or carried out' enables contrivance and artificiality to be identified by comparing the manner in which the scheme was entered into or carried out with the manner in which the counterfactual would have been implemented, for example, by the presence of a step or steps in a relevant transaction or arrangement that would not be expected to be present in a more straightforward or ordinary method of achieving the outcome of the transaction or arrangement. Conversely, if a scheme is entered into and carried out in the manner in which ordinary business or family dealings are conducted, the manner of the scheme will not indicate the purpose of obtaining the tax benefit.

The identification of any step or aspect of the scheme that is apparently explicable for no purpose but a tax purpose will go to the manner in which the scheme was entered into or carried out. To illustrate from the decided cases, in Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359; 28 ATR 344; 94 ATC 4663; 123 ALR 451 there was a share devaluation with no non-tax rationale; in Federal Commissioner of Taxation v. Consolidated Press Holdings Ltd [2001] HCA 32; 207 CLR 235; 179 ALR 625; 2001 ATC 4343; 47 ATR 229 there was a company which lacked any non-tax reason for being in the corporate structure; in Federal Commissioner of Taxation v. Hart [2004] HCA 26; 217 CLR 216; 206 ALR 207; 2004 ATC 4599; 55 ATR 712 there was an election to split the loan to permit all repayments to be allocated to the private residence and the capitalisation and compounding of interest on the part of the loan allocated to the investment property; and, in the area of mass marketed schemes, in Federal Commissioner of Taxation v. Sleight [2004] FCAFC 94; 136 FCR 211; 206 ALR 511; 2004 ATC 4477; 55 ATR 555 there was a round-robin exchange of cheques.

The second factor, which examines 'the form and substance of the scheme', requires that substance, rather than form, be the subject of inquiry. Put simply the factor directs attention to whether there is a discrepancy between the form of the scheme and its substance, meaning its commercial and economic substance. A discrepancy between the business and practical effect of a scheme on the one hand, and its legal form on the other, may well indicate the scheme has been implemented in a particular form as the means to obtain a tax benefit if the substance of the scheme may be achieved or available by some other more straightforward or commercial transaction or dealing.

In practice these first two factors are likely to be related. For example, a divergence between form and substance could involve a roundabout way of implementing the scheme by steps that have no effect on the substance of what is achieved but lead directly to the obtaining of the tax benefit.

In considering the second factor for the split loan scheme in Federal Commissioner of Taxation v. Hart [2004] HCA 26; 217 CLR 216; 206 ALR 207; 2004 ATC 4599; 55 ATR 712, Gummow and Hayne JJ said at [71]: As Hill J rightly pointed out, the form and substance of the scheme (s 177D(b)(ii)) also point to the purpose of a relevant person obtaining a tax advantage. What was one advance, to be repaid by 300 instalments, was treated as if it were 2 separate loans. The only persons obtaining any advantage from the treatment were the ... [taxpayers]. And the only advantages which they obtained depended upon the taxation treatment resulting from the application of payments and accumulation of interest for which the scheme (however identified) provided.

In considering the second factor in relation to the tea tree oil scheme in Federal Commissioner of Taxation v. Sleight [2004] FCAFC 94; 136 FCR 211; 206 ALR 511; 2004 ATC 4477; 55 ATR 555, Hill J said at [81] and [82]: There is a difference between the form and the substance of the present scheme. In form there is an option whether to farm alone or to employ the management company. There is a management agreement and financing and interest payments. The form, involving pre-payment of management fee and interest is, it may be concluded readily, designed to increase the taxation deductions available to an investor. The substance is, however, quite different. As senior counsel for the Commissioner put it, in substance the investor is a mere passive investor in what, once the tax features are removed, is a managed fund where no deduction would be available, or perhaps an alternative characterisation of the substance of the scheme is an investment in shares in the land company which at the expiration of 15 years is to own the tea tree plantation. With respect to the learned primary judge it is not correct to say that form and substance are the same. Rather the particular shape the investment took was clearly fashioned in a way that would maximise the tax deductions. They were geared up by the loan agreement with up front interest payments. But for the tax deductions the form the investment might be expected to take would clearly relate more to the substance of what happened.

The first two factors in relation to a scheme enable the particular 'shape' of the transaction or arrangement to be identified for the purpose of determining whether that particular shape is the means by which the tax benefit is obtained. The first two factors require consideration of any elements or aspects of how the particular scheme is implemented that make the scheme more complicated than a straightforward or ordinary commercial or family arrangement that achieves the same overall effect, disregarding the tax effects.

The presence of material steps in a scheme consistent with no other explanation than the purpose of obtaining a tax benefit will be critical in characterizing the purposes of the persons who entered into or carried out the scheme. It will be they which lend an air of artifice and contrivance to the manner in which the scheme is carried out, and usually it will be they which separate form from substance.

The third factor draws attention to particular 'timing' aspects of the manner in which a scheme is entered into or carried out. It will include consideration of the time the scheme, or any part of it, was entered into or carried out, and the length of the period during which it was carried out. This factor will enable consideration of the extent to which the timing and duration of the scheme go towards delivering the relevant tax benefit or are related to commercial opportunities or requirements. For example, this factor will identify whether the scheme is entered into shortly before the end of a financial year (or other tax sensitive date such as the date of a change in the rate of tax), or carried out for only a brief period. It is noted that a taxpayer is able to benefit from a scheme entered into well before the end of a year by having Pay-As-You-Go tax instalments varied. It follows that a scheme entered into well before the end of a year does not necessarily mean that timing would point to a neutral or non-tax purpose. It may also be relevant to note that the time at which a scheme is entered into is not proximate to any commercial occasion; that is, the timing of the scheme does not seem to be associated with an opportunity or need that might point to a non-tax purpose. In other circumstances timing and duration is more likely to be neutral or point to a non-tax purpose.

In considering the third factor for the tea tree oil scheme in Federal Commissioner of Taxation v. Sleight [2004] FCAFC 94; 136 FCR 211; 206 ALR 511; 2004 ATC 4477; 55 ATR 555, Hill J said at [83]: This factor clearly points to taxation as a predominating purpose. The scheme was entered into on the last day of the year of income. This was not accidental as it was necessary for a large portion of the deductions to be incurred in the 1995 year of income. If what may be called the tea tree or investment purpose predominated, then there would be no need for a 'flurry of activity' to occur, as it did, at the end of the year of income. The investment could be entered into at any time.

In considering the third factor for the employee bonus scheme in Pridecraft Pty Ltd v. Commissioner of Taxation [2004] FCAFC 339; 213 ALR 450; 2005 ATC 4001; 58 ATR 210, Sackville J (with whom Sundberg J and Ryan J agreed) said at [90]: His Honour [Merkel J at first instance] correctly found that there was no commercial need or advantage for any contribution to be made in the 1996/1997 year of income, let alone on the last day of the financial year. The post-1997 scheme could have achieved its (non-tax related) commercial objectives without any contribution having been made to the Incentive Trust in the 1996/1997 year of income. When the timing of the contribution of $15,000,000 is taken into account, the contribution is inexplicable except as a means of Spotlight obtaining a tax deduction for the whole of that amount in the 1996/1997 year. It is true that had the Pt IVA scheme not been entered into, Spotlight would have made a small contribution to the trust fund in the next year of income and would have paid out, or set aside, about $15,000,000 in bonuses over a 5 year period. But an integral element of the Pt IVA scheme, in effect, constituted a means of deferring a very large amount of tax that otherwise would have been payable by Spotlight in the 1996/1997 year of income. [Original emphasis]

The second set of factors focuses on the tax, financial and any other consequences or effect of carrying out the scheme. These factors require consideration of the tax result, financial change and any other consequences of the scheme for the taxpayer and for related parties.

The fourth factor expressly focuses on the tax benefit and any other tax consequence resulting from the scheme.

The fifth, sixth and seventh factors focus on the non-tax effects of the scheme, not only for the relevant taxpayer, but also for all connected parties. These factors look to the practical financial, legal, economic and any other outcomes achieved by the scheme for the taxpayer and connected parties. For example, the change in the position of a taxpayer may mean little if there is an inverse change in the position of another person as a result of the scheme, and that other person is an associate or alter ego of the taxpayer such as a spouse or a wholly-owned company. It may also be relevant to observe that an allowable deduction is, or is not, matched by a corresponding amount of assessable income among the other parties who are affected by the scheme. These factors will often require consideration in conjunction with the second factor.

The fifth, sixth and seventh factors involve identifying changes in financial position or any other consequences that may be reasonably expected to result from the scheme, not just changes that have resulted or will result. In Federal Commissioner of Taxation v. Hart & Anor [2004] HCA 26; 217 CLR 216; 206 ALR 207; 2004 ATC 4599; 55 ATR 712, the fact that there was a 'very real chance' over the life of the split loan entered into by the taxpayers that the amount owing on their investment property would exceed its value (due to the compounding of interest on the investment portion) and that their private residence would remain as security for the debt was considered by Callinan J at [94] in the context of the second set of factors.

The absence of any practical change in the overall financial, legal or economic position of a taxpayer and connected parties that are affected by the scheme is likely to add weight to the dominance of the tax purpose when all the subsection 177D(2) factors are weighed together. For example, in Pridecraft Pty Ltd v. Commissioner of Taxation [2004] FCAFC 339; 213 ALR 450; 2005 ATC 4001; 58 ATR 210, the 'round robin' of funds was relevant in considering the fifth factor for the employee bonus scheme. Sackville J (with whom Sundberg J and Ryan J agreed) said at [91]: These conclusions are reinforced by the 'round robin' arrangement (s 177D(b)(i), (ii) and (v)). As [counsel for the taxpayer] ... pointed out, the secured advance to Spotlight had a commercial benefit for the Incentive Trust, in that interest was payable on the loan. But the fact remains that Spotlight was able to obtain a very large and immediate tax benefit - amounting to several million dollars - without having to part with any more than $200,000 in the 1996/1997 year of income and relatively modest amounts in the succeeding years. (By 30 June 2003, only $9.7 million of the $15,000,000 contribution had actually been paid out as bonuses to or for the benefit of employees.) The obtaining of a large tax benefit without any substantial change in Spotlight's cash position suggests that its 'most influential and prevailing or ruling' purpose in entering into or carrying out the Pt IVA scheme, or part of that scheme, was to obtain a tax benefit.

In considering the second set of factors it should be kept in mind that the application of Part IVA turns on an objective determination of the purpose of a person entering into a scheme, not the effect or purpose of the scheme. The fourth to seventh factors cannot simply be compared and weighed to determine purpose for to do so is to ignore the other factors. The bare fact that a taxpayer pays less tax if one form of the transaction rather than another is adopted, does not by itself demonstrate that Part IVA applies. Nevertheless, the effect of the scheme can contribute to a conclusion about the objective purpose of a person in entering into the scheme.

The eighth factor inquires into the nature of the connection between the taxpayer and any other person whose financial position is reasonably expected to change as a result of the scheme or for whom there are any other consequences from the scheme. The existence of any connection between the taxpayer and these other persons is relevant to the identification of the other factors, such as the manner of the scheme, the form and substance of the scheme, and the tax, financial and other consequences of the scheme. This factor requires the circumstance that parties are not dealing with each other at arm's length in connection with the scheme to be taken into account. For example, a transaction having the form of a loss-making transaction when only the taxpayer's position is considered may not produce a loss in substance if an associate of the taxpayer makes a corresponding non-taxable gain. In CC (NSW) Pty Ltd (In Liq.) v. Federal Commissioner of Taxation (1997) 97 ATC 4123; 34 ATR 604, the fact that the income injection scheme, if it had been effective for income tax purposes, would have transferred the right to income from the taxpayer to a unit trust with tax losses in the same corporate group, was considered by Sackville J in the context of the eighth factor at 97 ATC 4149; 34 ATR 632: The shares in both CC NSW [that is, the taxpayer company] and QAPL were held by companies within the CC Group. All units in the QUT were held by CC PL, the parent of CC NSW. The effect of the principal-agent arrangement, if implemented, was to transfer assessable income from CC NSW to the QUT, where it was available to be offset against losses.

This factor requires attention to be paid to the existence of any family relationship between the taxpayer and the persons who are affected in any way by the scheme. This could assist a taxpayer in some cases. Many dealings which would be decidedly odd between strangers may be entirely explicable between family members. For example, a businessman who gives assets to strangers for less than they are worth may be subject to suspicion but a gift to his family could stand in a different light. Of course, it would be a different matter again if the family members do not benefit in substance from the arrangement.

The presence of any of the following features whether alone or in combination in an arrangement may suggest that Part IVA applies to the arrangement. These features represent warning signs that the arrangement may be 'tax driven' and lead to a conclusion that the arrangement was entered into for the dominant purpose of enabling a taxpayer to obtain a tax benefit. The list of features is not meant to be exhaustive or exclusive and is provided only by way of guidance to officers who must consider and apply the provisions of Part IVA. The purpose in subsection 177D(2) can only be objectively ascertained by reference to the eight factors. Where any of the following features are present officers must consider the possible application of Part IVA in undertaking audits or issuing rulings to taxpayers: • the arrangement (or any part of the arrangement) is out of step with ordinary family dealings or the sort of arrangements ordinarily used to achieve the relevant commercial objective; • the arrangement seems more complex than is necessary to achieve the relevant family or commercial objective, or includes a step or a series of steps that appear to serve no real purpose other than to gain a tax advantage, for example: • transactions which interpose an entity to access a tax benefit; • intra-group or related party dealings that merely produce a tax result; • arrangements involving a circularity of funds or no real money; • the tax result of the arrangement appears at odds with its commercial or economic result, for example: • a tax loss is claimed for what was a profitable commercial venture or transaction; • the arrangement results in little or no risk in circumstances where significant risks would normally be expected, for example: • 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's risk is significantly limited because of the existence, for example, of a 'put' option; • the parties to the arrangement are operating on non-commercial terms or in a non-arm's length manner, for example: • financial arrangements made on unusual terms, such as interest rates above or below market rates, insufficient security, or deferment of repayment of the loan until the end of a lengthy repayment period; • transactions which do not occur at market rates/value; • there is a gap between the substance of what is being achieved under the arrangement (or any part of it) and the legal form it takes, for example: • arrangements where a series of transactions taken together produce no economic gain or loss, such as where the whole scheme is self-cancelling.

Subsection 177F(1) gives the Commissioner a power to make a determination cancelling 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 power 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.

Regard must be had to the individual circumstances of each case in applying Part IVA. However, where two or more taxpayers participate on the same terms in a single scheme, or in identical schemes, for example, in the case of mass marketed schemes, the individual circumstances of the case will have features in common, and there may be no further distinguishing circumstances.

In all cases a determination should be evidenced in writing and provided to the taxpayer concerned.

Where the Commissioner cancels a tax benefit that is omitted assessable income under paragraph 177F(1)(a), the relevant amount is deemed to be included in assessable income by virtue of such provision of the Act as the Commissioner determines: refer to subsection 177F(2). Therefore a provision should be specified in the determination.

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: refer to paragraphs 164 to 168. Tax officers should take particular care in determining the correct taxpayer against whom a determination and assessment should be made.

In the discussion of particular scenarios below, a reference to: • a 'single scheme' is intended to include both wider and narrower 'alternative' schemes in connection with which the same tax benefit is obtained; and • 'multiple schemes' is to be read as a reference to different schemes in connection with which different tax benefits are obtained.

If a taxpayer obtains two or more separate 'tax benefits' under Part IVA in the same counterfactual scenario, that is, if the 'tax benefits' do not all come within the same paragraph in subsection 177C(1) (for example, assessable income is omitted, and either excessive deductions are claimed or a capital loss is incurred), a separate determination should be made for each kind of tax benefit that is obtained in connection with the scheme. However, it is only necessary to issue a single amended assessment that takes into account the cumulative effect of all the individual tax benefits being cancelled.

If a taxpayer obtains a different amount of the same kind of tax benefit in different counterfactual scenarios in connection with a single scheme to which Part IVA would apply in a particular year, the correct approach is to make a single determination under subsection 177F(1) for the kind of 'tax benefit' that is obtained. The highest 'tax benefit' of the same kind for the counterfactual scenarios should be used in the determination, unless there are special circumstances (for example, the highest tax benefit would result in juridical double taxation). If a tax benefit obtained in connection with the scheme includes a tax benefit of the kind specified in paragraph 177C(1)(a), that is, an amount that was not included in assessable income, then for the purposes of subsection 177F(2), the determination cancelling the omitted income tax benefit should state the provisions of the Act, for all the alternative counterfactuals, under which the amount is deemed to be included in assessable income.

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, and if relevant, for each different kind of tax benefit obtained in connection with each scheme. However, it may only be necessary to issue a single amended assessment that takes into account all of the tax benefits being cancelled for each of the schemes in appropriate cases.

The Commissioner 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. This can occur where the Commissioner forms the view that each determination and consequent assessment could be correct, based on what is known by the Commissioner at the time. This situation commonly arises in relation to a scheme involving a trust where the trustee or any one or more of its beneficiaries may be ultimately taxable on a tax benefit obtained in connection with the scheme. 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 of the same income, and tax must only be collected from the taxpayer ultimately held to be liable.

In some cases courts have found that the taxpayer who obtained a tax benefit is not the taxpayer to which the relevant section 177F determination(s) apply. Officers should be alert to this possibility and consider the need to make determinations and raise corresponding assessments for not only the taxpayer considered most likely to have obtained a tax benefit, but for different taxpayers under different alternative postulates. Again, care should be exercised in such cases to see that double taxation does not occur.

If the tax benefit was taken into account in calculating the 'net income of the trust estate' under section 95, the standard approach is to make Part IVA determinations cancelling the relevant tax benefits in respect of both the trustee and the beneficiaries since the objective facts will usually support a conclusion that both the trustee and the beneficiaries obtained a tax benefit in connection with the scheme. However, there is nothing to prevent the Commissioner in appropriate cases from simply cancelling the tax benefit obtained by the trustee and then relying upon Division 6 of Part III to assess the recalculated net income of the trust to the relevant beneficiaries under section 97, or to assess some or all of the recalculated amount to the trustee under section 99A. A similar approach is taken to making Part IVA determinations in relation to partnerships: refer to paragraphs 170 to 172.

To give effect to a determination under section 177F, an assessment should be issued under section 166 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 is necessary to issue an amended assessment under section 170 to give effect to the determination.

If prior to making the determination under section 177F, the 'tax benefit' was included in an assessment (including an amended assessment) under sections of the Act other than Part IVA (for example, section 6-5 of the ITAA 1997), it will not be necessary to issue an amended assessment if the determination was made in connection with the consideration of an objection. When an objection to an assessment is decided, a determination under subsection 177F(1) made in connection with the consideration of the objection will be deemed to have been made when the assessment was made: subsection 169A(3). Consequently, it will be unnecessary to amend an assessment to give effect to the Part IVA determination if no change to taxable income or tax payable results. However it will still be necessary to issue and serve on the taxpayer a copy of the determination in order for Part IVA to be applied in the event that there is a tax benefit.

Where the determination is not made in connection with the consideration of an objection, officers should give effect to a determination by an amended assessment. Officers should refer to the Full Federal Court decisions in Federal Commissioner of Taxation v. Jackson (1990) 27 FCR 1; 96 ALR 586; 90 ATC 4990; 21 ATR 1012, Federal Commissioner of Taxation v. Stokes (1996) 72 FCR 160; 141 ALR 653; 97 ATC 4001, 34 ATR 478; and Puzey v. Commissioner of Taxation [2003] FCAFC 197; 131 FCR 244; 201 ALR 302; 2003 ATC 4782; 53 ATR 614 at [87] to [93].

An assessment can be defended on the following alternative bases: • the relevant amount is included in the assessable income of the taxpayer/is not deductible to the taxpayer under the provisions of the Income Tax Assessment Acts other than Part IVA; and • Part IVA operates to include the amount in the assessable income of the taxpayer/cancels the deduction of the amount by the taxpayer under the Income Tax Assessment Acts.

Where the scheme involves the 'net income of a trust estate' under Division 6 of Part III of the ITAA 1936, care should be taken to ensure that an assessment or amended assessment that gives effect to the Part IVA determination(s) issues in respect of all the appropriate taxpayers (for example, trustee and beneficiary). In this respect, refer to paragraphs 162 and 163 of this practice statement which deal with making Part IVA determinations in respect of different taxpayers for the same tax benefit in connection with the same scheme.

Care should be taken when making a Part IVA determination involving a partnership.

If a tax benefit obtained in connection with a scheme to which Part IVA applies had the effect of reducing the 'net income' of the partnership or increasing the 'partnership loss' that is calculated for the purposes of Division 5 of Part III of the ITAA 1936, then Part IVA determinations cancelling the relevant tax benefits should be made in respect of both the partnership and each individual partner. A determination cancelling each relevant kind of tax benefit obtained by the partnership should be provided to either the managing partner or another senior partner. A determination cancelling the omission of assessable income by each partner which corresponds with the reduction of their share of net income under section 92 obtained by them in connection with the scheme should be provided to each partner.

If a tax benefit obtained in connection with a scheme to which Part IVA applies has resulted in a 'partnership loss' being calculated for the partnership for the purposes of Division 5 of Part III of the ITAA 1936, and a partner is entitled to claim a share of that partnership loss as a deduction under section 92 (disregarding Part IVA), then Tax officers may need to consider if more than one Part IVA determination needs to be made for each partner. Two determinations for each partner will generally be necessary where, under the counterfactual, a 'net income' amount would have been calculated for the partnership. In such a scenario, one determination would be required to cancel the deduction obtained by the partner under section 92 for their share of the partnership loss, while the other determination would include in the assessable income of the partner under section 92 the partner's share of the net income under the counterfactual.

Where a determination is proposed to be made in situations other than described in paragraphs 157 to 172, officers should follow the referral procedure referred to at paragraph 14 of this practice statement.

Where the Commissioner has made a determination under subsection 177F(1) or (2A), he may, if in his opinion 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'. There is no time limit for making a compensating adjustment.

A compensating adjustment must generally be made where the application of Part IVA causes double taxation of the same income.

Any action to make or give effect to compensating adjustments (for example, amendment of assessments) should not as a general rule be undertaken while the application of Part IVA is subject to objection or review. Such an approach does not make the assessment giving effect to the relevant Part IVA determination(s) tentative or other than bona fide. The Commissioner will be in a position to determine whether it is 'fair and reasonable' that a compensating adjustment be made when the application of Part IVA is finally established. Any decision to make a compensating adjustment at a prior stage must be approved by a DCTC or the CTC. Where it is clear that a particular compensating adjustment is expected to be made when the application of Part IVA is established, the taxpayer should be informed of the expected compensating adjustment.

Section 177G was amended in relation to assessments for the 2004-05 year of income and later years. It now provides only that nothing in section 170 prevents the amendment of an assessment at any time if the purpose of the amendment is to give effect to a compensating adjustment under subsection 177F(3). Amendments to give effect to determinations made under subsection 177F(1) for these years are therefore covered by the general power of amendment in section 170. Item 4 in subsection 170(1) limits the time for this to within 4 years from the day on which the relevant notice of assessment is given. For income years before the 2004-05 income year, the 6 year limit in former subsection 177G(1) applies. However, in respect of these years the Federal Court decision in Vincent v. Commissioner of Taxation [2002] FCAFC 291; 2002 ATC 4742; 51 ATR 18 at [88] to [94] means that the six year period for amending assessments under Part IVA cannot be relied upon where the claimed tax benefit is unavailable under the general provisions of the income tax law. In such cases, Part IVA has no application because there was no tax benefit within the meaning of section 177C.

Where there has been 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). However, any such amended assessment must be approved by a DCTC or the CTC.

Where Part IVA applies to cancel a tax 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: sections 284-145, 284-155 and 284-160 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). The scheme shortfall amount is the reduction in tax that the taxpayer would have got from the scheme if Part IVA did not apply: section 284-150 of Schedule 1 to the TAA 1953.

It will be reasonably arguable within the meaning of section 284-15 of Schedule 1 to the TAA 1953 that Part IVA does not apply if it would be concluded in all of the circumstances, having regard to relevant authorities, that what is argued for by the taxpayer is about as likely to be correct as incorrect, or is more likely to be correct than incorrect.

The imposition of an administrative penalty under section 284-145 of Schedule 1 to the TAA 1953 may raise issues where a general anti-avoidance provision is relied on in the alternative (see for example., Federal Commissioner of Taxation v. Star City Pty Ltd (No.2) [2009] FCAFC 122; (2009) 74 ATR 447; 2009 ATC 20-129). See Practice Statement PS LA 2008/18 Interaction between Subdivisions 284-B and 284-C of Schedule 1 to the Taxation Administration Act 1953 for guidance in such cases (as well as to the Decision Impact Statement on Star City (No.2)).

Paragraph 284-145(1)(b) of Schedule 1 to the TAA requires that it be 'reasonable to conclude' that an entity entering into or carrying out the scheme 'did so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme', where 'scheme benefit' is defined in subsection 284-150(1). The nature of the 'purpose' spoken of in paragraph 284-150(1)(b) has been discussed in Lawrence v. Federal Commissioner of Taxation [2008] FCA 1497; (2008) 70 ATR 376; 2008 ATC 20-052 per Jessup J (not needing to decide the point), and Federal Commissioner of Taxation v. Star City Pty Ltd (No.2) [2009] FCAFC 122; (2009) 74 ATR 447; 2009 ATC 20-129 per Dowsett J at [74].

In the Decision Impact Statement for Lawrence the Commissioner says that the views of Dowsett J in Star City (No.2) are those which will be followed. In the latter case Dowsett J said at [74] that the language of paragraph 284-145(1)(b) of Schedule 1 to the TAA 'is not apposite to require an actual decision as to purpose. It rather addresses the availability of an inference'. In the same paragraph his Honour said that he was inclined to the view that paragraph 284-145(1)(b) posed the question 'whether a reasonable person could conclude that the relevant entity had the identified purpose'.

The Commissioner has a discretion to remit all or part of the additional tax or administrative penalty - see section 298-20 of Schedule 1 to the TAA 1953. Officers should refer to other practice statements or Taxation Rulings for guidance on the circumstances in which the Commissioner may exercise his discretion to remit the whole or part of a penalty. Officers must also take into account the advice of the GAAR Panel in deciding the level of penalties to be imposed.

Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 of the FBTAA differs from subsection 177D(2) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement: (i) a benefit is provided to a person; (ii) an amount is not included in the aggregate fringe benefits amount of the employer; and (iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

In circumstances where the Commissioner is satisfied that section 67 of the FBTAA should apply, paragraph 67(1)(c) authorises the Commissioner to cancel the tax benefit by determining that the aggregate fringe benefits amount of the eligible employer shall be increased by the amount of the tax benefit. Paragraph 67(1)(d) of the FBTAA provides the Commissioner with the authority to determine appropriate adjustments to the aggregate fringe benefits amount of the eligible employer or another employer in respect of any year of tax.

After the tax benefit has been cancelled, adjustments may be appropriate to restore the situation to what it would have been if the arrangement had not been carried out. Under subsection 67(4) of the FBTAA an employer may make a written request to the Commissioner to make a determination under paragraph 67(1)(d) of the FBTAA. The process in paragraph 67(1)(d) and in subsection 67(4) is similar to the compensating adjustment process in Part IVA (refer to paragraphs 174 to 176).

The approach outlined in this practice statement (refer to paragraphs 75 to 150) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant (except that amendments corresponding to the 2013 amendments of Part IVA have not been made to section 67) and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

Division 165 of the GST Act is a general anti-avoidance provision. It is modelled on Part IVA (except that amendments corresponding to the 2013 amendments of Part IVA have not been made to Division 165).

It gives the Commissioner the discretion to negate a 'GST benefit' that an entity gets or got from a scheme to which Division 165 of the GST Act applies. This discretion is contained in section 165-40 of the GST Act.

Before the Commissioner can exercise the discretion in section 165-40 of the GST Act, the elements of Division 165 of the GST Act must be satisfied. These may be summarised as follows: (i) the existence of a 'scheme'; (ii) an entity ('the avoider') must have obtained a 'GST benefit' from the scheme; and (iii) it must be reasonable to conclude that the sole or dominant purpose of any entity entering into or carrying out the scheme, or part of the scheme, or that the principal effect of the scheme, or part of the scheme, was the obtaining of a GST benefit from the scheme.

Regard must be had to the individual circumstances of each case in determining whether to make a declaration under section 165-40 of the GST Act to negate a GST benefit.

Division 165 of the GST Act applies whether the scheme, or any part of the scheme, was entered into or carried out inside or outside Australia: subsection 165-5(2) of the GST Act. Additionally, it only applies to schemes entered into on or after 2 December 1998 or carried out or commenced on or after that date; however, it does not apply to schemes carried out or commenced on or after that day that were entered into before that day: paragraph 165-5(1)(d) of the GST Act.

Division 165 of the GST Act and Part IVA are generally similar in their objects, structure and operation. However, there are key differences between Part IVA and Division 165 of the GST Act, and Division 165 has special features. These are highlighted in the following summary of the main provisions of Division 165 of the GST Act.

An analysis of the Part IVA cases referred to above will not be repeated. However, until any case authority on Division 165 of the GST Act develops, these cases are a useful guide to the interpretation and application of Division 165 of the GST Act, particularly where the provisions of Division 165 of the GST Act are similar to provisions of Part IVA.

For Division 165 of the GST Act to operate, the identified scheme must fall within the definition of 'scheme' in subsection 165-10(2) of the GST Act. The definition in this subsection is virtually identical to the one in the comparable Part IVA provisions (subsections 177A(1) and 177A(3)). Accordingly, paragraphs 55 to 61, in relation to the definition of a scheme in Part IVA, apply equally to the definition of a scheme in Division 165 of the GST Act.

Given the very wide definition of 'scheme' in subsection 165-10(2) of the GST Act, this element will in most cases be easily satisfied.

Division 165 of the GST Act requires that an entity gets a 'GST benefit' from a scheme. Subsection 165-10(1) of the GST Act provides that an entity gets a 'GST benefit' if apart from Division 165: (a) an amount payable by an entity under the GST Act is, or could reasonably be expected to be, smaller than it would be apart from the scheme or a part of the scheme; (b) an amount payable to an entity under the GST Act is, or could reasonably be expected to be, larger than it would be apart from the scheme or a part of the scheme; (c) all or part of an amount payable by an entity under the GST Act is, or could reasonably be expected to be, payable later than it would have been apart from the scheme or a part of the scheme; or (d) all or part of an amount payable to an entity under the GST Act is, or could reasonably be expected to be, payable earlier than it would have been apart from the scheme or a part of the scheme.

Consideration of the GST consequences, but for the operation of Division 165 of the GST Act, of an alternative hypothesis or postulate - what would have happened or might reasonably be expected to have happened if the scheme (or part of the scheme) had not been carried out - is required. For guidance, refer to paragraph 75 and following paragraphs above regarding counterfactuals in the Part IVA context.

A special feature of Division 165 of the GST Act, absent from Part IVA, is that Division 165 expressly provides that a GST benefit can arise even if there is no economic alternative to the scheme which produced the benefit. Subsection 165-10(3) of the GST Act provides that a GST benefit can arise even if an entity could not have engaged economically in activities other than the scheme activities. In this way, an entity will not be able to argue against the existence of a GST benefit on the basis that it would not have entered into any type of transaction had the actual scheme not been entered into: Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 at paragraph 6.335.

Subsection 165-10(1) of the GST Act is not directed only at liabilities (permanent differences) but is additionally directed at timing benefits. The benefit in paragraph 165-10(1)(c) of the GST Act concerns the deferral of attribution of a liability to GST or an increasing adjustment, and the benefit in paragraph 165-10(1)(d) of the GST Act concerns the acceleration of attribution of entitlement to an input tax credit or decreasing adjustment: refer to paragraph 201.

The GST benefits referred to in subsection 165-10(1) of the GST Act operate in relation to net amounts payable by and to a taxpayer for a particular tax period, such as a particular month or quarter: sections 33-3 and 35-5 of the GST Act. Accordingly, in addressing the existence of a GST benefit, officers must determine the effect of a scheme or part of a scheme on net amounts on a tax period by tax period basis.

This may mean that a GST benefit could be obtained from a scheme even though a greater amount of GST would be payable under the GST Act over a period of time as a result of the scheme.

For Division 165 of the GST Act to operate, it is also necessary that a sufficient causal nexus between the GST benefit and the identified scheme exists. Paragraph 165-5(1)(a) of the GST Act provides that the GST benefit must be obtained 'from' the scheme. Subsection 165-10(1) of the GST Act provides that the GST benefit may also be obtained from 'part of a scheme'.

Paragraph 165-5(1)(b) of the GST Act essentially constitutes an exclusion from the definition of GST benefit. It provides that Division 165 of the GST Act will only operate if the GST benefit that has otherwise arisen is not attributable to the making of a choice, election, application or agreement expressly provided for by the GST law. This requires a consideration of how the entity obtained the GST benefit. In Federal Commissioner of Taxation v. Unit Trend Services Pty Ltd [2013] HCA 16 the High Court said at [60]: The identified GST benefit is not attributable to the making of a choice by the entity or some other entity if: (a) the GST Act or another relevant law does not operate to confer the identified GST benefit by reference to that choice: or (b) the choice made in fact as part of the scheme would have been made in any event without the scheme.

An exception to the exclusion in paragraph 165-5(1)(b) now exists in subsection 165-5(3). Although not applicable to the proceedings in Unit Trend the High Court indicated by way of obiter that the subsection would only be called into play where it had first been found that the relevant GST was attributable to an eligible statutory choice. The Court said at [67]: The insertion of s 165-5(3) in Div 165 cannot be regarded as an acknowledgement by the Parliament that, without it, Div 165 would not have encompassed a situation such as that of present concern. Section 165-5(3) ensures the application of Div 165 to the case where the scheme was entered into for the purpose of generating the statutory choice relied upon by the avoider. Section 165-5(1)(b) may apply without the need to invoke s 165-5(3) where the statutory choice arises as a step in a scheme. There may be cases where the avoider has not manipulated circumstances to confect the occasion for the making of the statutory choice, but nevertheless the GST benefit can be seen as not attributable to that choice. ...

For Division 165 of the GST Act to operate, the drawing of a conclusion about purpose and effect is necessary. Specifically, paragraph 165-5(1)(c) of the GST Act provides that, taking account of the matters listed in section 165-15, it must be reasonable to conclude that either: (i) an entity entered into or carried out the identified scheme, or a part of the scheme, with the sole or dominant purpose of that entity or another entity getting a GST benefit from the scheme; or (ii) the principal effect of the identified scheme, or a part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly.

Accordingly, Division 165 of the GST Act requires the drawing of a conclusion as to either purpose or effect. A determination as to whether either conclusion would be reasonable must be arrived at by taking into account the same twelve matters set out in subsection 165-15(1) of the GST Act.

The dominant purpose test in Part IVA, found in section 177D (see also subsection 177A(5)), is essentially mirrored in the test in subparagraph 165-5(1)(c)(i) of the GST Act. Accordingly, the propositions contained in paragraphs 117 to 150 are equally applicable to the dominant purpose test in Division 165 of the GST Act.

However, the application of the dominant purpose test in Division 165 of the GST Act requires consideration of the twelve matters in subsection 165-15(1). Subsection 177D(2) only requires consideration of eight factors. This difference in the matters to be considered in determining purpose (and effect) is addressed separately below.

Division 165 of the GST Act contains an alternative basis for a tax avoidance conclusion, being the principal effect test in subparagraph 165-5(1)(c)(ii) of the GST Act. There is no Part IVA equivalent to this test. Part IVA applies to a scheme only on the basis of it being concluded that a relevant person has the requisite dominant purpose.

This principal effect test focuses on the result of a scheme rather than on the purpose attributed to those entering into or carrying out the scheme. Both purpose and effect are ascertained objectively by a consideration of the matters listed in subsection 165-15(1) of the GST Act. However, the enquiry to be undertaken in relation to the principal effect test is directed to the outcome of the scheme, without regard to the imputed purpose of those entering into or carrying out the scheme. The test specifically applies to the avoider and the GST benefit obtained by the avoider: Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 at paragraph 6.344.

The effect produced by the scheme must also be 'the principal' effect. This means that the most significant or main effect of the scheme must be the securing of a GST benefit by the avoider. It is not sufficient for the GST benefit to be one of several main effects. It must be the most significant or main effect: Senate Supplementary Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 at paragraph 1.121.

The test may be satisfied even if a GST benefit, which is the principal effect of the scheme, is obtained in an indirect way. It is not confined to GST benefits directly obtained. That is, it will be satisfied even if the principal effect of the identified scheme is that the avoider got the GST benefit from the scheme 'indirectly'.

While the principal effect test is an alternative test, the criteria for its consideration mirror the objective analysis required to distinguish ordinary commercial dealings from tax avoidance arrangements.

The propositions contained in paragraphs 117 to 129 concern the correct approach to the consideration and weighing up of the eight factors in subsection 177D(2) in determining purpose. Where context permits, and with due allowance being made for the absence of the principal effect test in Part IVA, these propositions will generally be equally applicable to a consideration and weighing up of the twelve matters in subsection 165-15(1) of the GST Act in determining purpose or effect.

As indicated above, subsection 177D(2) in Part IVA requires regard to be had to eight factors in considering whether it can be concluded that a relevant person has the requisite purpose, whereas subsection 165-15(1) in Division 165 of the GST Act requires regard to be had to twelve matters.

The matters in paragraphs (a), (b), (f), (g), (h), (i) and (j) of subsection 165-15(1) of the GST Act correspond to the factors in paragraphs (a), (b), (d), (e), (f), (g) and (h) of subsection 177D(2). Paragraph 165-15(1)(b) of the GST Act also refers to the form and substance of a scheme but, in addition to paragraph 177D(2)(b), elaborates on the meaning of the 'form and substance' of a scheme by indicating that this includes 'the legal rights and obligations involved in the scheme' and 'the economic and commercial substance of the scheme'.

The matters in paragraphs (d) and (e) of subsection 165-15(1) of the GST Act together correspond to the factor in paragraph (c) of subsection 177D(2). That is, the timing and period of a scheme are combined into one factor in Part IVA whereas the timing and period of a scheme are separate matters in Division 165 of the GST Act.

Accordingly, paragraphs (c), (k) and (l) of subsection 165-15(1) of the GST Act are the only matters in subsection 165-15(1) for which there are no equivalents in subsection 177D(2) of Part IVA.

The matter in paragraph 165-15(1)(c) of the GST Act is 'the purpose or object' of the relevant Acts. This matter requires that regard be had not only to the legislative purpose of the GST Act and the Customs Act 1901 but also to any relevant provision of these Acts. If a scheme frustrates the legislative purpose (that is, the legislative scheme), this matter will point in the direction of tax avoidance; if the outcome of the scheme is consistent with the object of the legislation, this will point against a tax avoidance conclusion. In considering legislative purpose officers should have regard to the legislative scheme provided by the legislation together with relevant extraneous material such as explanatory memoranda as appropriate.

The matters in paragraphs (k) and (l) of subsection 165-15(1) of the GST Act are, respectively, 'the circumstances surrounding the scheme' and 'any other relevant circumstances'. This requires officers considering Division 165 of the GST Act to consider the surrounding circumstances or any factor that is relevant to the question of whether the arrangement has the purpose or effect of tax avoidance. For example, in determining purpose or effect, officers could have regard to prevailing economic conditions or industry practice attending the scheme.

The propositions contained in paragraphs 130 to 150 explain the nature and meaning of the eight factors in subsection 177D(2). These propositions will be equally applicable to a consideration of the nature and meaning of the equivalent matters in subsection 165-15(1) of the GST Act.

Subsection 165-15(2) of the GST Act provides that the matters in subsection 165-15(1) of the GST Act apply to part of a scheme as if the part were the entire identified scheme from which the GST benefit was obtained: Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 at paragraph 6.347.

If the foregoing elements are satisfied, the Commissioner may exercise the section 165-40 discretion to negate the GST benefit obtained. Section 165-40 of the GST Act provides that the Commissioner may negate a GST benefit by making a declaration stating the net amount payable for a particular tax period or the GST payable on an importation to be a higher amount. It also allows for reductions in net amounts for other tax periods which may be required if the GST benefit is a timing benefit.

As is the case with the comparable Part IVA provision, subsection 177F(1), the discretion in section 165-40 of the GST Act must be exercised in good faith.

If an avoider has obtained two or more separate GST benefits under Division 165 of the GST Act in the same counterfactual scenario (for example, a permanent benefit and a timing benefit), a single declaration identifying each GST benefit and stating the avoider's net amount for the tax period should be made.

The correct approach in the case of alternative counterfactuals in respect of a single scheme is to make a single declaration identifying each GST benefit obtained by the avoider and stating the avoider's net amount for the tax period using the highest 'GST benefit'.

If an avoider has obtained more than one GST benefit from more than one scheme in a particular tax period, a single declaration should be made. This declaration must identify each GST benefit from each scheme and state the avoider's net amount for the tax period.

The word 'determination' is used in section 177F in Part IVA for the decision to cancel a tax benefit. Apart from terminology, another difference between Part IVA and Division 165 of the GST Act was that under subsection 177F(1), to give effect to a determination, the Commissioner must issue an assessment or amended assessment in the usual case. For tax periods commencing before 1 July 2012, no such requirement existed in Division 165 of the GST Act as a declaration was self-executing: section 165-50 of the GST Act provides that a declaration under section 165-40 of the GST Act has effect according to its terms for the purposes of Division 33 and Division 35 of the GST Act, despite the provisions of the GST Act outside those Divisions and Division 165.

Accordingly, the comments concerning the issue of assessments and amended assessments to give effect to Part IVA determinations, in paragraphs 164 to 168, are inapplicable in relation to tax periods commencing before 1 July 2012. Nevertheless, it is the Tax Office's practice, in the absence of extraordinary circumstances, to issue assessments. This is consistent with the Tax Office's usual practice of issuing assessments at the conclusion of GST audits where a shortfall is found to exist, even though for GST purposes the liability for GST exists independently of and without the need for an assessment.

For tax periods commencing on or after 1 July 2012 an assessment is deemed to be made when an activity statement or relevant document is lodged or received. These changes also included changes to Division 165. Subsection 165-40(1) of the GST Act now provides that the Commissioner may negate a GST benefit by making a declaration stating the net amount payable for a particular tax period, or the GST payable on an importation to be a higher amount. New subsection 165-40(2) provides that the Commissioner must take such action as is considered necessary to give effect to the declaration. This means in the usual case, that when a declaration is made in relation to a tax period commencing on or after 1 July 2012, that an amended assessment will be issued to give effect to it.

A single declaration can relate to net amounts for several tax periods and several taxable importations: section 165-60 of the GST Act.

Section 165-45 of the GST Act provides that where an entity gets a GST disadvantage due to another entity getting a GST benefit, the Commissioner may make an adjustment to compensate the disadvantaged entity. The section operates if the following conditions are met: (a) the Commissioner has made a declaration under section 165-40 of the GST Act; (b) the Commissioner considers that another entity (the loser) gets a GST disadvantage; and (c) the Commissioner considers it fair and reasonable that the loser's GST disadvantage be negated or reduced.

The comments in relation to the comparable provision in Part IVA, subsection 177F(3), in paragraphs 174 to 176, are equally applicable. There are now no substantive differences between section 165-45 of the GST Act and subsection 177F(3). [17]

In the absence of fraud or evasion, the effective time limit for the Commissioner to make a declaration under section 165-40 of the GST Act for tax periods commencing before 1 July 2012, was within 4 years after the time GST became payable by an entity. A declaration may be able to be made outside that period if the Commissioner has required payment of the relevant net amount of GST by giving a notice to the avoider within the period, but generally officers should make declarations within the 4 year period: section 105-50 in Schedule 1 to the TAA. However, any declaration made after 4 years because there has been fraud or evasion must be approved by a DCTC or the CTC.

Where a declaration is made under subsection 165-45(3) of the GST Act, for a tax period commencing on or after 1 July 2012, to give a compensating adjustment, no time limit applies to give effect to that declaration.

The same penalty regime applies to both Division 165 of the GST Act and Part IVA. Accordingly, paragraphs 179 to 184 are equally applicable.

Under the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act), Division 165 of the GST Act applies to amounts payable under the LCT Act as if they were amounts payable under the GST Act: section 13-5 and section 13-30 of the LCT Act. Accordingly, the comments in this practice statement concerning GST apply with necessary changes to LCT.

Under the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act), Division 165 of the GST Act applies to amounts payable under the WET Act as if they were amounts payable under the GST Act: section 21-5 and section 23-10 of the WET Act. Accordingly, the comments in this practice statement concerning GST apply with necessary changes to WET.

Applications of paragraph 5(1)(g) of the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 and determinations under section 19 of the Coronavirus Economic Response Package (Payments and Benefits) Act 2020 must not be made without the approval of the Chair of the Panel. These provisions are GAARs; however the processes in this practice statement will operate subject to the discretion of the Chair of the Panel for the time being in respect of them.

TCN should be engaged in relation to GAARs in accordance with Law Administration Practice Statement PS LA 2012/1 Engagement of Tax Counsel Network on high risk technical issues .