Part IVA

If the GAAR applies, a number of administrative penalties may be imposed.

The below penalties can both potentially apply where there is a contravention of Part IVA.

In relation Subdivision 284-C of the Taxation Administration Act dealing with ‘schemes’, the penalty amount is determined as follows:

• Calculate the value of the benefit received under the scheme. This amount is referred to as the ‘scheme shortfall amount’.
• Calculate the ‘base penalty amount’ by multiplying the scheme shortfall amount by 50%, or 25% if it is reasonably arguable that the adjustment provision does not apply.

In relation to Subdivision 284-B of the Taxation Administration Act, the penalty amount related to a false or misleading statement is determined as follows:

• Calculate the value of the benefit obtained. This amount is referred to as the ‘shortfall amount’.
• Calculate the ‘base penalty amount’ by multiplying the shortfall amount by 75% for a statement demonstrating an intentional disregard of taxation law, 50% for a statement demonstrating a reckless disregard of taxation law, or 25% for certain statements made from a reasonably arguable position.

These above penalty rates may be higher for significant global entities in contravention of Part IVA.

In relation to Subdivision 284-B and Subdivision 284-C, the ‘base penalty amount’ can be increased (by 20%) where, for example:

• Steps were taken by the relevant taxpayer to prevent or obstruct the ATO from discovering the scheme shortfall amount or shortfall amount.
• The relevant taxpayer became aware of the scheme shortfall amount or shortfall amount and the taxpayer did not inform the ATO about it within a reasonable time.

The ‘base penalty amount’ can be reduced (by 20% to 100% depending on the circumstances) where:

• The ATO advises it will be conducting an audit of the relevant taxpayer and after that time the relevant taxpayer informs the ATO (in the approved form) about the scheme shortfall amount or shortfall amount. The disclosure needs to have the effect of saving the ATO significant time and / or resources in undertaking the audit.
• The relevant taxpayer voluntarily informs the ATO (in the approved form) about the scheme shortfall amount or shortfall amount before the earlier of: (i) the day the ATO tells the taxpayer that a tax audit is to be conducted for that period, or (ii) the day the ATO makes a public statement requesting entities to make voluntary disclosure by a particular day about a scheme or transaction that applies to the relevant taxpayer’s financial affairs.

Despite the above tests, the ATO retains discretion to reduce or entirely remit administrative penalties from time to time as it sees fit.

An essential element of the GAAR is that there must be a ‘scheme’. A scheme is defined in the ITAA36 as, ‘any agreement, arrangement, understanding, promise or undertaking – whether express or implied and whether legally enforceable or not – and any scheme, plan, proposal, course of action or course of conduct.’

Cleary, there is a wide net over the types of communications and plans that will constitute a scheme. That means any allegation from the ATO that there was a scheme will be practically difficult to counter.

A scheme can be ‘entered into’ by a single party without the involvement of others. For example, a scheme can be entered into by an advertiser on behalf of the taxpayer. Further, the taxpayer which obtains the tax benefit under the scheme can be caught by Part IVA even if they have not personally entered into the scheme or been privy to it.

Note that a company can enter into a scheme via its controlling directors (or potentially its shareholders).

A common point of contention in GAAR matters is the way the scope of a scheme is (and is allowed to be) be defined and identified by the ATO. For example, it may be argued that a large number of interrelated actions, when taken together, constitute ‘the scheme’. Alternatively, it may be argued that a single action or a single aspect of a larger number of actions constitutes ‘the scheme’.

The ATO is also permitted to argue a number of ‘schemes’ and put forward a case in respect of each alleged scheme. For example, the ATO could argue that Action A + Action B + Action C collectively constitute the scheme whilst also arguing that, in the alternative, Action A (alone) constitutes the scheme. Each proposed scheme will need to be tested against Part IVA.

The framing of the actions that comprise the scheme is the key foundation point for determining whether a tax benefit (if any) has been achieved and for determining the objective purpose of the scheme.

An essential element of the GAAR is that the scheme must carried out with the ‘sole or dominant purpose’ of obtaining a tax benefit. The relevant purpose is tested at the time the scheme is entered into or carried out.

The first major point to make here is that Part IVA was introduced into the Australian tax landscape with the intention that it would not apply to mere tax planning or normal business and family arrangements. Rather, the provision was purposed to target tax avoidance schemes marked by ‘contrived, artificial, and blatant’ features intentionally designed to minimise or defer tax outcomes for a taxpayer.

However, the ATO (often with agreement by the courts) has taken a wide approach in interpreting the scope of Part IVA. This is at least partly due to the fact the intended exclusions for tax planning and normal business and family arrangements were not defined nor specifically drafted into Part IVA itself (the intended exclusions instead appear in the EM to the introducing Bill). This has created a statutory interpretation problem that may have somewhat diminished the role of those intended safeguards in relation to Part IVA.

Further ‘Part IVA’ challenges for taxpayers include:

• That ‘sole or dominant purpose’ is determined objectively, meaning it is entirely possible for a taxpayer to inadvertently enter into a scheme which is found to offend the GAAR.
• The provision is intending to catch commercial behaviours which are perceived as acting against the ‘spirit’ of the tax law. Therefore, by nature, the provision is necessarily vague and flexible so as not to become a rules-based provision (that can more easily be bypassed).
• The onus rests on the taxpayer to show that Part IVA should not apply.
• The line between mere ‘tax planning’ and ‘tax avoidance’ (or ‘tax evasion’ which is a more egregious form of tax circumvention) is very difficult to draw and shifts over time. Consider the operation of a business through a trust. A trust can be a tax effective vehicle (that produces ‘tax benefits’) as it enables taxable income to be split among multiple beneficiaries in order to reduce overall tax outcomes. Is the operation of a business through a trust structure a contravention of the GAAR? What about distributions from a discretionary trust to a bucket company in order to cap rates of tax on the distributed income to the corporate rate? What about holding onto an asset for 12-months to access the 50% CGT discount? Are these examples of tax planning or tax avoidance?

Although Part IVA is a vague provision, the ITAA36 does provide some guidance relevant to the assessment of purpose. Specifically, the below 8 factors must be weighed up (only these – no other factors may be taken into account) in determining if there is a ‘sole or dominant purpose’.

It is important to understand that ‘purpose’ is determined by an objective assessment of the state of the mind of the participants in the scheme by contemplating the actions undertaken by them. If a reasonable person would conclude that the scheme was entered into for a dominant purpose of enabling a taxpayer to obtain a tax benefit, then the purpose element would be satisfied. The actual / subjective intention of the taxpayer is not relevant evidence to the assessment of purpose.

8 key factors determining purpose

The 8 key factors in the ‘purpose’ framework include:

• The manner in which the scheme was entered into or carried out. Note that unnecessarily complex arrangements (particularly where simpler arrangements were open to the taxpayer) tend to point towards a tax benefit purpose. Similarly, arrangements without a commercial basis point towards a tax benefit purpose.
• The form and substance of the scheme. Note that a difference in the form and substance of an arrangement tends to point towards a tax benefit purpose. As above, unnecessarily complex ‘form’ / ‘substance’ may also point towards a tax benefit purpose.
• The time at which the scheme was entered into and the length of the period during which it was carried out. Note that an arrangement which shows a ‘flurry’ of activity just prior to the end of the income year end may point towards a tax benefit purpose. Also, arrangements where tax benefits are obtained at the earlier stages of a scheme (front-loaded) can also point toward a tax benefit purpose.
• The income tax result that, but for Part IVA, would be achieved by the scheme.
• Any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme. Note that a scheme which improves financial outcomes for the taxpayer (aside from the obvious financial benefits of tax saved) tends to point away from a tax benefit purpose.
• Any change to the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result, or may reasonably be expected to result, from the scheme. Another party obtaining a financial benefit from the scheme tends to point towards a tax benefit purpose.
• Any other consequence for the relevant taxpayer, or for any person referred to in (f), of the scheme having been entered into or carried out. ‘Other benefits’ can include elevated reputation and increased legal protection.
• The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in (f). The nature of the connection is capable of pointing towards or away from a tax benefit purpose, depending on the circumstances.

The enquiry as to ‘purpose’ is a separately undertaken in relation to all the participants of the scheme. And the purpose element may be contravened where only a single participant demonstrates the requisite purpose. It is not relevant that the relevant taxpayer (who obtains the tax benefit) lacks the requisite purpose.

Note that the decision to enter into a lower tax arrangement, compared to a higher tax arrangement does not necessarily demonstrate a tax benefit purpose.

A taxpayer may argue against a tax driven purpose on the basis that there is commercial viability to a scheme – aside from the obvious commercial benefits of lower or deferred tax. However, note that commercial viability is not always mutually exclusive from a tax driven purpose. In this way, a scheme which is a commercially viable scheme may still satisfy the ‘purpose’ element of the GAAR if an objective enquiry into purpose finds that the dominant purpose was to achieve s tax benefit. That said, the stand-alone commerciality of actions comprising the scheme may be useful evidence to repel the GAAR by showing that a non-tax purpose that was the prevailing driver of the scheme. A merely incidental tax purpose will not aggrieve Part IVA.

An essential element of the GAAR is the achievement of a ‘tax benefit’ in connection with the scheme. A tax benefit includes where a taxpayer gains one of the following advantages because of the scheme:

• A deduction is allowed.
• A receipt is not assessable income.
• An amount does not attract withholding tax.
• A capital loss is recognised.
• A foreign income tax offset is allowed.
• Other benefits e.g. related to the loss carry back tax offset, the innovation tax offset, the exploration credit, the R&D tax offset are obtained.

For the GAAR to apply, it must be established on reasonable grounds that the tax advantage would not have been achieved if the scheme had not been entered into. This means it is necessary to make a prediction about what the taxpayer would have done instead of entering into the scheme. That alternative course of action is commonly referred to as the ‘alternative postulate’. To be valid, the alternative postulate must be reasonable and sufficiently reliable. Section 177C and 177CB of the ITAA36 provide two pathways for arguing the alternative postulate: the (i) ‘would have’ test, commonly referred to as the annihilation approach; and (ii) the ‘might reasonably be expected to have’ test, commonly referred to as the ‘reconstruction approach’.

The annihilation approach

The annihilation approach involves a determination of alternative tax outcomes to the taxpayer if all the events surrounding the scheme occurred except for the events which are part of the scheme itself. That is, the test determines what tax result would have eventuated without the involvement of the events comprising the scheme – hence the use of the term ‘annihilation’.

For a basic example of the annihilation approach: Person A owns shares in Company A. The cost base of the shares is $50,000. Following acquisition, the market value of the shares decreases. Person A ultimately wants to retain the shares but also wants to crystalise the loss on the shares to incur a capital loss that can be used to offset other capital gains made by the taxpayer. Therefore, Person A sells the parcel of shares for $40,000 and immediately re-acquires the parcel of shares for $40,000. In this situation, Person A obtains a tax benefit being the recognised capital loss of $10,000.

Under the annihilation approach, we take away the events which form part of the scheme. Assume the ‘scheme’ is defined as the action of selling and re-acquiring the shares. If we ‘annihilate’ those actions, then Person A would never have incurred a $10,000 capital loss.

Assuming the other elements of the GAAR are satisfied, the $10,000 tax benefit would be cancelled and further penalties could be imposed.

The reconstruction approach

The reconstruction approach involves a determination of tax outcomes to the taxpayer if they entered into a reasonable alternative arrangement.

The re-structured arrangement must be ‘reasonable’ having regard to the substance of the scheme and what commercial objectives were being pursued and likely to be achieved.

If a scheme is a component of a wider arrangement, then the reconstruction of the scheme may need to occur in the context of the wider arrangement. It may also be necessary to reconstruct the wider arrangement itself where the scheme is a central feature of the wider arrangement.

The explanatory memorandum to the 2013 Bill which introduced amendments to Part IVA provides a number of examples to illustrate key operating principles of the reconstruction approach.

Example 1

The first example shows how the reconstruction approach works:

Mr and Mrs Heginbothom want to borrow money to acquire both a family home and a holiday house that they plan to rent to holidaymakers. They borrow the money under an arrangement in which the repayments are applied exclusively to the borrowing in relation to the family home. The result is that the deductible interest payments are increased for the holiday home borrowing and the non-deductible interest payments for the family home borrowing are minimised. Merely annihilating the scheme would not leave a sensible result because there would be no borrowing at all, so some reconstruction is necessary. It is therefore necessary to consider what might reasonably be expected to have happened if the scheme had not been entered into. A reasonable alternative in this case might be that the Heginbothoms took out two loans, one for each of the homes they wished to acquire, each of which was entered into on normal commercial terms.

Example 2

The second example shows how the substance of the alternative postulate should correspond to the substance of the scheme in order for the alternative postulate to be a ‘reasonable alternative’.

Assume Paul & Co placed $1 million dollars on deposit for 12 months for a return of $50,000, payable in arrears. The income produced by the investment is exempt for taxation purposes. From Paul & Co’s perspective, the substance of the transaction is an investment for a fixed term carrying a right to a non-contingent return. A reasonable alternative to this transaction would be an investment of the same amount, for the same period at a comparable risk and for a comparable return. An investment in ordinary shares would not represent an investment of comparable risk and comparable return.

Example 3

The third example shows how the alternative postulate should be achieving a similar non-tax result and consequence for the taxpayer to be a ‘reasonable alternative’.

Gadget Co negotiates, with the assistance of its selling agent, Banker Co, to sell its Sydney factory to Widget Co for $500,000. However, rather than transferring the factory directly to Widget Co, Gadget Co enters into a complex transaction that involves the factory passing through the hands of Banker Co before it is finally transferred to Widget Co. Gadget Co realizes $475,000 from the transaction and Banker Co takes the $25,000 balance. The transaction is constructed in such a way that Gadget Co is not liable for capital gains tax on the disposal of the property. From Gadget Co’s perspective, the end result achieved by the transaction was the disposal of its factory to Widget Co for $500,000. A reasonable alternative to the transaction, that would have achieved the same non-tax effect for Gadget Co, would have been for Gadget Co to dispose of the factory directly to Widget Co for $500,000 and for Gadget Co to have paid Banker Co a fee reflecting the value of its services in finding a buyer.

Example 4

The fourth example show how a wider transaction (of which the scheme is a component) might need to be reconstructed where the scheme component is integral to the wider transaction and for there to be a ‘reasonable alternative’.

Assume that in order for Kerry-Anne to secure a tax deduction for borrowing money to invest in an offshore company (Offshore Co) it is necessary for her to interpose a resident Australian company. She does this by using the borrowed funds to buy shares in an Australian shelf company (Oz Co). In turn, Oz Co buys ordinary shares in Offshore Co. Oz Co performs no other role. The Commissioner makes a Part IVA determination on the basis that the interposition of Oz Co is a scheme to which Part IVA applies. Objectively viewed, the interposition of Oz Co achieves two effects. One is securing a deduction for interest on the borrowing, and the other is the acquisition of shares in Offshore Co. A correct alternative postulate should be another way in which Kerry-Anne could reasonably be expected to have acquired ordinary shares in Offshore Co. An alternative postulate that involved Kerry-Anne lending the borrowed monies to Offshore Co would achieve a different effect. So too would be a postulate that involved Kerry-Anne investing the borrowed monies in a completely different company.

Importantly, it is no longer possible for a taxpayer to argue that a ‘reasonable alternative’ to a scheme is that no action would have been taken because tax outcomes would have deterred the taxpayer from entering into arrangement altogether. Similarly, it is not possible for taxpayer to seek to undermine a ‘reasonable alternative’ because of tax outcomes. This legislative position is understandable but is clearly at odds with the practical reality that people are likely to give weight to tax outcomes when deciding whether or not to enter into a commercial transaction.

Of course, it is entirely possible that circumstances arise where a ‘reasonable alternative’ is not available to the taxpayer. E.g. where the transaction could have only been undertaken in one particular way. In that case, unless the annihilation approach could be applied, the GAAR would not apply.

Note that a tax benefit which flows from the exercise of an agreement, choice, declaration, election, selection, notification or option expressly provided for in the ITAA36 or ITAA97 will not aggrieve the GAAR. For example, the achievement of a tax benefit in response to the making of a family trust election as permitted under the Acts.

However, a taxpayer may be subject to the GAAR where the taxpayer is objectively perceived as positioning their circumstances to take advantage of such an agreement, choice, declaration, election, selection, notification or option.

The ATO has issued substantial guidance on the application of Part IVA. There are also many private rulings that can be viewed on the ATO legal database. Note that the ATO is internally guided by PS LA 2005/24 in its approach to Part IVA.

The ATO views expressed in some of these rulings are summarised below:

• A scheme whereby a financing unit trust is used as a conduit for the payment of interest from a property investor to a financier in the way contemplated in IT 2512.
• A scheme whereby an administration entity is set up to provide administration services to professional practices to provide private use cars and other fringe benefits to employees in the way contemplated in IT 2494.
• A scheme whereby a lessor provides a person with a lease incentive payment where the reason for the payment was not truly to induce the person to enter into the lease in the way contemplated in IT 2631.
• A scheme whereby a taxpayer uses a unit trust to make interest on a home loan deductible. It involves the person borrowing to acquire units in a unit trust to which they are a trustee (or director of the corporate trustee) and claiming interest deductions on the borrowings. The trust acquires a private property which is leased to the taxpayer. The trust claims deductions for outgoings related to the property such as water, council rates and insurance and makes distributions to the taxpayer which are assessable but less than the value of interest deductions claimed by the taxpayer in the way contemplated in Taxation Ruling 2002/18.
• A scheme whereby a capital gain is streamed to a corporate beneficiary in circumstances where the amount that corporate beneficiary is taxed on outweighs the amount that corporate entity receives and where the corporate entity is then liquidated (with limited capital to pay the tax debt) in the way contemplated in Taxation Alert 2013/1.
• A scheme whereby a trust is used to attain a deduction for interest related to an uncommercial trust arrangement in the way contemplated in Taxation Determination 2009/17.
• A scheme whereby an employer pays an employee for services rendered through an employee benefits trust which involves a loan to the employee from the trustee that is used to purchase ordinary units in the trust in the way contemplated in Taxation Ruling 2010/10.
• A scheme whereby a taxpayer owns private and non-private property and enters into an ‘investment loan interest payment arrangement’ whereby non-deductible interest is minimised (i.e. interest in relation to the component of the overall borrowing related to the private residence), and where deductible interest is maximised (i.e. interest in relation to the component of the overall borrowing related to the investment property) in the way contemplated in Taxation Determination 2012/1.
• A scheme involving an incorporated professional practice retaining profits at the entity level or purchasing income producing property in the way contemplated in IT 2503 (partially withdrawn).
• A scheme involving lessor partners entering into a leveraged lease transaction which has the effect of front-loading outgoings in order to effectively defer tax in the way contemplated in IT 2051.
• A scheme involving an employee remuneration trust arrangement that operates outside of the employee share scheme rules in Division 83A of the ITAA97 and in the way contemplated in Taxation Ruling 2018/7.
• As above but in relation to equity leases per IT 2169.
• A scheme whereby two parties enter into a sale and leaseback arrangement which involves non-market value conditions in relation to the sale price, the lease charge and/or the residual value of the asset in the way contemplated in Taxation Ruling 2006/13.
• A scheme whereby an entity pays marked-up services fees to an associated service entity (referred to as a ‘Phillips arrangement’) in the way contemplated in Taxation Ruling 2006/2.
• A scheme where a life policy premium is paid by an employer (usually exempt from fringe benefits tax) on behalf of an employee where those premiums are exempt income to the employee and where it is expected that the employee will obtain the amounts paid as premiums shortly after they are paid in the way contemplated in Taxation Determination 92/164.
• A scheme whereby an employer effectively pays an employee for services rendered through a trust by issuing the employee with bonus units in lieu of a direct salary under an employee benefits trust arrangement in the way contemplated in Taxation Ruling 2010/6.
• A scheme whereby an employer and employee agree to defer salary (and therefore, the derivation of income for tax purposes) by, for e.g., the employer providing the employee with a loan until salary is paid which will later be credited against the outstanding loan balance in the way contemplated in Taxation Determination 2010/11.
• A scheme whereby a traditional security (a security that is not issued at a discount of more than 1.5%, does not bear deferred interest and is not capital indexed) is traded or assigned but not at arm’s length in the way contemplated in Taxation Ruling 96/14.
• A scheme whereby an IPP is not appropriately rewarded for the services they provide to a business or receives a reward which is substantially less than the value of those services in order to reduce the tax payable on their overall economic return, and/or where an IPP attempts to alienate amounts of income flowing from their personal exertion in the way contemplated in Practical Compliance Guideline 2021/4.
• A scheme whereby a taxpayer provides professional services and engages an arranger to organise a partnership with another unrelated party to re-characterise income as partnership income and where the taxpayer assigns part of their interest in the partnership to a related party in order to split income in the way contemplated in Taxation Determination 2002/24.
• A scheme whereby a trustee resolves to confer present entitlement to non-resident beneficiaries that are never intended to receive the benefit of the purported distributions as contemplated in IT 2344, or similarly a scheme designed to provide a non-resident beneficiary with entitlement to interest income derived by a resident trust estate from associated entities and where a deduction is claimed by the borrower in the group for the amount of interest paid in the way contemplated in IT 2466.
• A scheme involving a deduction claim under s 70B of the ITAA 1936 related to the sale of a stapled security sold at a loss or upon the occurrence of an Assignment Event as contemplated in Taxation Determination 2009/14.
• A scheme whereby there is a disposal of a CGT asset under a ‘capital gains tax reduction arrangement’ where tax outcomes are improved because it involves a combination of an internal re-structure and the sale of shares in a relevant subsidiary or holding company in the way contemplated in Taxation Determination 2003/3.
• A scheme involving a profit-washing arrangement where chains of trusts and a company with losses are utilised in the way contemplated in Taxation Determination 2005/34.
• A scheme whereby accumulated profits are distributed by a private company to a shareholder in a tax effective manner under a dividend access share arrangement in the way contemplated in Taxation Determination 2014/1 (note this applies to section 177E and 177F of the ITAA36).
• A scheme involving a ‘wash sale’ whereby an asset is sold and then re-acquired shortly thereafter (usually to crystallise a capital loss without the taxpayer bearing any economic exposure to fluctuations in the market value of the asset) in the way contemplated in Taxation Ruling 2008/1.
• A scheme where a trustee distributes income to a beneficiary but where the benefit of the income to which the beneficiary is presently entitled is taken by another person in the way contemplated in Taxation Ruling 2022/4.
• A scheme where foreign income is held out as gift receipt or loan from a related overseas entity in the way contemplated in Taxpayer Alert 2021/2.
• A scheme involving the use of a New Zealand discretionary trust and seeking to take advantage of the absence of taxation under NZ domestic law on non-NZ source income of a trust in the way contemplated in Taxation Ruling 2005/14.
• A scheme involving the interposition of a holding company in order for individuals to access retained earnings tax-free in the way contemplated in Taxpayer Alert 2023/1.
• A scheme where there is a consolidation re-structure. There is generally a heightened risk of Part IVA applying where a taxpayer is undertaking a re-structure.

There have been a number of cases which are helpful guidance in interpretating and illustrating the application of Part IVA in practice. It is beyond the scope of this article to delve into the detail of each case. However, certain key principles extracted from those cases have been scattered throughout this article.

A number of these cases are listed below for reference (short party name reference only).

Peabody, Spotless Services, AXA Asia Pacific Holdings, Trail Bros, RCI, Futuris, British American Tobacco Australia, Lenzo, Trail Bros Steel & Plastics Pty Ltd, Grollo Nominees, CC (NSW) Pty Ltd (in liq), Eastern Nitrogen, Vincent, Consolidated Press Holdings, Hart, Clough Engineering, Howland-Rose, Puzey, Brody, Sleight, Calder, Krampel Newman, Princi, Carter, Tolich, Pridecraft, Case 2/2004, McCutcheon, Walters, Cumins, Clampett, McPherson, Iddles, Burrows, Metal Manufactures, Forward, Barham, O’Brien, Cooke, News Australia Holdings, Macquarie Bank Limited, Ashwick, Orica, Noza Holdings, WD & HO Wills, Mochkin, Citigroup, BHP Billiton Finance, Macquarie (Mongoose), Dan & ors, Fletcher, Fabry, Channel Pastoral, Track & Ors, Meredith, Case W 58, Case Y13, Zoffanie, Guardian AIT, Minerva, Mylan.

Note that a number of these cases were decided prior to the Part IVA amendments of 2013. Remember that those changes involved a clearer separation of the two tests: ‘the ‘would have’ test, and the ‘might reasonably be expected to have’ test. The changes also clarified that tax outcomes should not be taken into account in contemplating a reasonable alternative postulate. The outcome and reasoning of the pre-2013 decisions may therefore need to tempered against those changes.

One the most recent cases was Minerva Financial Group where the Full Federal Court decided in favour of the taxpayer. The case involved a complicated commercial arrangement and the heart of the question being considered was whether the decision of a trustee to make tax effective distributions to beneficiaries should be subject to Part IVA.

The court made several insightful statements about its present view on the operation of the GAAR. Of particular note was the following statement:

‘Merely because a taxpayer chooses between two forms of transaction based on taxation considerations does not mean that it is to be concluded, having regard to the factors listed in the s 177D [the 8 factors addressed in this article], that the dominant purpose of the taxpayer was to obtain a tax benefit….it is not merely enough to point to the fact that less tax has been paid under a form of transaction that was ultimately selected and executed.’

Dividend stripping and franking credit schemes

Part IVA contains sections dealing with dividend stripping schemes and franking credit schemes. The operation of those provisions – specifically, section 177E and section 177EA of the ITAA 1936 – is outside the scope of this article.