The Assistant Treasurer has just released on Fri 16.11.2012, for public comment, draft legislation and explanatory material on amending Pt IVA.
The draft legislation was prepared following consultation with a roundtable of independent experts and with the benefit of formal advice from senior barristers. [Though significantly, this draft has not been seen by either the round table or independently briefed counsel.]
The Assistant Treasurer said the draft amendments do not change the core operation of the “purpose” test in Pt IVA. He said the amendments focus on the definition of “tax benefit”. They will not affect taxpayers unless they have obtained a tax advantage from an arrangement entered into with a relevant tax avoidance purpose, he said.
“To minimise any potential for taxpayers to obtain unintended tax advantages in the interim”, the amendments will apply to arrangements that are entered into or commenced from today [Fri 16.11.2012]. Mr Bradbury said the amendments will apply from today rather than from the original date of announcement, in recognition of the unique role that Pt IVA plays in the income tax laws and the additional time spent consulting with the roundtable and senior barristers.
The Government intends to introduce legislation into Parliament in the Autumn 2013 sittings.
The draft legislation and explanatory material on the measure can be obtained from the Treasury website.
COMMENTS on the draft legislation will close on Wednesday, 19 December 2012.
[FJM Note: the key change proposed to Part IVA is the insertion of a new s177CB, which will require a person to ignore the tax effect on the taxpayer (or other person) of entering into the scheme, when inquiring what the taxpayer (or other person) could reasonably be expected to have done, had they not entered the scheme (see s177CB(1)(a) below). However, the person applying Part IVA would still be allowed to assume that the taxpayer (or other person) entering into the scheme, would still achieve the same ‘non-tax effects’ of the scheme (see s177CB(1)(b) below). As an example, we could take the recent RCA case, where a significant dividend was paid before disposing of the shares to an off-shore group member, which had as one of its effects, reducing the CGT on the sale. So, on an application of these proposed provisions, it would not be permissible to consider the reduction in the CGT, in what the taxpayer could reasonably be expected to do, had it not entered the scheme (of paying the dividend). But it would be permissible to consider the non-tax effect of paying the resources to the shareholder prior to the sale. If this could not be achieved in any other way, the alternative postulate may still be to ‘do nothing’, so there is no ‘tax benefit’.]
[LTN 223, 16/11]
Extract from draft legislation – proposed s177CB
177CB Assumptions relating to alternative postulates
(1) In deciding whether paragraph 177C(1)(a), (b), (ba), (bb) or (bc) is satisfied on the basis of a postulate that is an alternative to the entry into or carrying out of a scheme:
(a) assume that each person (whether or not a participant in the scheme) would have acted or refrained from acting, as the case requires, without regard to any person’s liability (or potential liability) to tax or withholding tax in any year of income; and
(b) if the scheme achieves, or would achieve, one or more non‑tax effects for the taxpayer—assume that each person (whether or not a participant in the scheme) would have acted or refrained from acting, as the case requires, intending to achieve for the taxpayer:
(i) the same non‑tax effects as the scheme achieves, or would achieve, for the taxpayer; and
(ii) all the other non‑tax effects that were achieved, or would be achieved, for the taxpayer in connection with the scheme; and
(c) if the scheme does not achieve, or would not achieve, any non‑tax effects for the taxpayer—assume that all events or circumstances that actually happened or existed but did not form part of the scheme would still have happened or existed.
(2) For the purposes of paragraph (1)(b), have regard to the matters to which regard must be had under subsections 177D(1) and (2) in deciding whether this Part applies to the scheme, so far as those matters relate to the taxpayer.
(3) In this section:
non‑tax effect means an effect other than:
(a) an effect relating to the taxpayer’s liability to tax (or withholding tax) in any year of income; or
(b) an effect that is incidental to achieving an effect, for the taxpayer, covered by paragraph (a).
Government overreaches with Pt IVA changes: Tax Institute
The Tax Institute says the Government’s proposed changes to Pt IVA, released [on 16.11.12] “are an overreaction to recent court cases”.
“The Government’s proposed sweeping changes … will increase taxpayer uncertainty and negatively affect already dwindling business sentiment,” said Tax Institute Senior Tax Counsel, Robert Jeremenko. He said the proposed changes extend well beyond the Government’s announced intention of correcting minor defects in the law highlighted by recent court cases. “By changing laws that have been in place for more than 30 years and have been extensively ruled upon by the courts, there is significant potential for widespread confusion and uncertainty,” Mr Jeremenko said.
Mr Jeremenko said that under the Government’s proposed changes, the current ‘tax benefit’ test will be significantly diminished, requiring taxpayers to consider the difficult “dominant purpose” test in almost all cases where tax considerations have been taken into account when making commercial decisions. “The proposed tightening of the rules is an unnecessary overreach by the Government that will take years of costly court proceedings to fully realise”, he said.
Source: Tax Institute media release, 16 November 2012
[LTN 224, 19/11]