What is Part IVA?
Part IVA of the 1936 Tax Act sets up 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:
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 impact of the amendments made in 2013 to the Part IVA provisions (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.
While Part IVA cannot apply to alter, that is increase, a taxpayer’s taxable income until the Commissioner makes a determination, when entering into transaction or a proposed course of action, Part IVA should be considered by taxpayers as a potential consequence of the transaction or course of action. It is notable that:
- Taxpayers who fail to consider the consequences of Part IVA in such circumstances may have to pay substantial taxation, penalties (which can be almost as great as the primary tax) and penalty interest to the Commissioner at a later point in time upon a Part IVA determination being made; and
- Tax advisors who fail to properly consider Part IVA or who “scope out” the consideration of Part IVA from their advice when Part IVA is relevant may, amongst other things, be liable to their clients for significant damages in negligence.
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 as well as interest.
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 is ultimately set aside. Please contact us with any questions.
Legislation: Part IVA of the Income Tax Assessment Act 1936. Sections 177A, 177C, 177CA, 177D, 177F.
Date: 11 November 2014.