Lawmakers act after tax cases flop in Australia

Lawmakers in Australia have struck out a key defence in tax management cases after a string of spectacular flop prosecutions.

Australia has a general anti-avoidance rule that has been triggered in around 80 cases over the past five years.

When the Australian Taxation Office has managed win cases when showing that a transaction has no commercial aim but is merely a construct to minimise tax.

However, in some cases, say lawyers, the ATO has tried to apply the law to a number of cases where proper financial transactions were carried out, but the tax saving outcome was unintentional.

“He has also been successful where he has identified that some aspect of the transaction or arrangement is not capable of commercial explanation,” said Stewart Grieve of lawyers Cors Chambers Westgarth.

“However, the commissioner has failed to stick to his knitting. He has sought to apply the law in circumstances where he should not have done so. In particular, he appears to consider erroneously that the rules ought to apply automatically whenever the tax and economic outcomes of a transaction or arrangement differ.

“Cases in point include AXA, BHP, Ashwick and Futuris.”

Lawyers claim the misinterpretation of the general anti-avoidance rule have led to uncertainty in many cases.

In the past two years, taxpayers have won nine of the last 15 general anti-avoidance rule cases to come before tribunals or the courts.

“Of greater concern to the ATO than the ratio of losses is the nature of those losses. In several cases, the ATO was not even able to show that the taxpayer had obtained a tax benefit, “ said Grieve.

“This was because each time the taxpayer demonstrated that, but for the identified scheme, it would have done nothing and so would not have had an amount included in assessable income or would have done something that produced a tax outcome at least as favourable as the one achieved under the scheme.

“The ATO has always believed that the threshold for identifying a tax benefit is low. It considers all it needs to show is that there is a reasonable alternative course of action to the scheme that would have produced a less favourable tax outcome to the taxpayer. The courts however disagree. They say what is required is the identification of the most reasonable alternative course of action to the scheme and that this may necessitate the conduct of a detailed forensic exercise.”

As a result, from March 2012, the ATO is removing the taxpayer defence under general anti-avoidance rules that, but for the scheme it would have done nothing or done something that produced a tax outcome at least as favourable as the outcome under the scheme.

The revamped general anti-avoidance rule will likely presuppose there is a tax benefit if a tax advantage, like a tax deduction or amount not included in assessable income, is generated by the scheme identified.

“How can taxpayers deal with the uncertainty associated with the general anti-avoidance announcement? As unsatisfactory as it undoubtedly is, until such time as the changes are known, the most sensible approach for taxpayers is to assume that any transaction or arrangement they enter into after 1 March 2012 that produces a tax advantage will give rise to a tax benefit,” said Grieve.

“The question of whether the general anti-avoidance rule could apply to the transaction or arrangement would then be determined by reference to whether it can said that a person entered into the transaction or arrangement with the main purpose of the taxpayer obtaining the tax benefit.”

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