Australian Federal Court delivers important judgment on anti-avoidance provisions

In this update we analyse the Full Federal Court’s recent judgment on anti-avoidance provisions, with significant implications for taxpayers.

In an important recent decision (Commissioner of Taxation V Guardian), the Full Federal Court on 24 January 2023 in part applied Part IVA to allow the Commissioner to include an amount of income in respect of the year ended 30 June 2013.

Although this decision involves arguably circular arrangements including the distribution of trust income to a corporate beneficiary of a discretionary trust and related party dealings, the judgment provides important indicators for the practical application of the revised Part IVA. Further, the Full Court did not apply Section 100A that specifically relates to “reimbursement agreements.”

Part IVA generally applies where a scheme is entered into with the sole or dominant purpose of obtaining a tax benefit. In other words: it is objectively concluded that one of the parties to the scheme entered into or carried out the scheme for the purpose of the taxpayer obtaining the tax benefit.

In these circumstances, the relevant individual was held to have obtained a tax benefit in the form of the non-inclusion of an amount in his assessable income for the 2013 year.

In potentially applying Part IVA, and in particular the dominant purpose test, it is important to analyse the eight objective factors set out in Section 177D, which does not permit an enquiry into the subjective motive or state of mind of any person. Further, the dominant purpose is to be tested according to the relevant eight factors either as appropriate when the scheme was entered into or carried out.

As are commonly the critical factors, the manner in which the scheme was entered into or carried out and/or the form and substance of the scheme (particularly any material differences between the form and substance) are generally the principal factors to be evaluated.

In these circumstances, the Court determined that the form of the 2013 related scheme reflected the implementation of a strategy developed to allow the individual to obtain the relevant tax benefit. Other commercial benefits identified related to risk minimisation on transition to retirement and wealth accumulation did not diminish the dominant purpose of obtaining the tax benefit.

The Guardian decision continues the recent regular flow of important Part IVA decisions, including the Minerva Financial Group Pty Limited 2022 decision of the Federal Court.

Outstanding legislation and related tax reforms

When parliament went into the Christmas/New Year recess, important proposed tax reforms related to “off market share buy-backs’ and ‘limiting frankable distributions funded by capital raisings”, were unenacted and subjected to further review.

Further, the new Australian Labor Government is progressing important international tax reforms related to thin capitalisation, non-deductible payments for intangibles held in low-tax countries (including embedded royalties) and international tax transparency initiatives, as well as the OECD led Pillars 1 and 2. It is expected that the new Government will pursue further fiscal reforms as it progresses the 2023/2024 budgetary process.

The article was first published here on ITR.