What is Part IVA?

Part IVA of the 1936 Tax Act is a General Anti Avoidance Provision (‘GAAR’) that applies to strike down any Australian income tax benefits arising from a transaction where the  Commissioner of Taxation ("the Commissioner"), who is the head of the Australian Taxation Office ("ATO"), can successfully establish that the dominant purpose of a party involved in the transaction was to reduce the incidence of Australian income tax.

What are the elements of Part IVA?

The Commissioner may make a determination that Part IVA applies to cancel a tax benefit obtained by a taxpayer where all three elements are present:

  1. There is a scheme;
  2. A taxpayer obtains a tax benefit; and
  3. Having regard to several objective criteria in the legislation, the sole or dominant purpose of a person who entered into or carried out the scheme was to enable the taxpayer to obtain the tax benefit.
If just one of the above three elements is not present then Part IVA may be able to be successfully defended by a taxpayer.  The information provided on each page provides further information on each of the three elements. Whilst there is almost always a scheme, good arguments may be identified that either (1) there is not a tax benefit or (2) that the requisite dominant purpose is not established.  
In considering the application of Part IVA, taxpayers should be aware of the potential impact of the Commonwealth Government's announcement of 1 March 2012 (discussed further in tax benefit).

How and when can Part IVA be applied?

Unlike many provisions in the Australian taxation law, Part IVA does not apply automatically.  Rather the Commissioner must make a determination that Part IVA applies.  This will generally occur during or after an ATO audit.
The ATO will often issue a position paper allowing the taxpayer to comment upon the position.  Thereafter the Commissioner will take the position to the ATO internal GAAR panel, where the taxpayer will also be allowed to present its case.  After the GAAR panel process, the Commissioner will often issue an amended assessment.  

Why does Part IVA matter?

If the Commissioner can successfully apply Part IVA, the Commissioner can cancel the taxation benefit achieved from the scheme thereby resulting in the taxpayer having to pay the tax that was otherwise saved.  
In addition to cancelling the taxation benefit, the Commissioner may impose a further penalty equal to either 25% or 50% of the taxation saved from the scheme (depending on the nature of the scheme) as well as interest on the unpaid tax between the time when it was otherwise due to be paid until such time as the tax is actually paid.

Is there anything that can be done?

A taxpayer may be able to construct a defence so that a Part IVA determination is not issued in the first place or the determination ultimately unsuccessful.

LegislationPart IVA of the Income Tax Assessment Act 1936. Sections 177A, 177C, 177CA, 177D, 177F.

Date: 16 March 2012.

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