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Australia To Strengthen GAAR Legislation

by Mary Swire,, Hong Kong

06 March 2012

The Australian government is to introduce legislation intended to ensure the continued effectiveness of the country's general anti-avoidance rule (GAAR).

The rule, known as Part IVA under Australia's income tax law, is to be amended as the government seeks to protect the integrity of the tax system. Making the announcement, Assistant Treasurer Mark Arbib said the reforms were needed to ensure that the GAAR rule continues to be effective in countering tax avoidance schemes that are carried out as part of broader commercial transactions.

Arbib pointed out that: "As well as directly attacking illegitimate tax avoidance, Part IVA also plays an important role in deterring the potential abuse of the tax system by the broader tax-paying community. Without Part IVA there would be significant scope for taxpayers to simply plan their way around the intended operation of the tax law, significantly undermining its integrity."

"The government understands that the vast majority of taxpayers do the right thing and pay their fair share of tax. These changes seek to clarify the operation of Part IVA to ensure that those taxpayers who are not doing the right thing cannot escape their tax obligations," he added.

Part IVA was introduced in 1981 with the intention of countering schemes that comply with the technical requirements of the tax law but, when objectively viewed, were conducted or carried out in a particular way primarily to avoid tax. As Arbib explained, for Part IVA to operate there must be a 'scheme' and a 'tax benefit' obtained in connection with the scheme. It must be reasonable to conclude that a person entered into the scheme for the 'sole or dominant purpose' of enabling a taxpayer to obtain the 'tax benefit'. If these conditions are satisfied, the Commissioner of Taxation may make a determination to cancel any 'tax benefit' obtained through the scheme.

Arbib noted that, despite Part IVA working effectively since its introduction, there was a need to clarify its operation to continue that effectiveness. "In recent cases, some taxpayers have argued successfully that they did not get a 'tax benefit' because, without the scheme, they would not have entered into an arrangement that attracted tax," he said. "For example, they could have entered into another scheme that also avoided tax, deferred their arrangements indefinitely or done nothing at all. Such an outcome can potentially undermine the overall effectiveness of Part IVA and so the government will act to ensure such arguments will no longer be successful."

The government's amendments will confirm that Part IVA was always intended to apply to commercial arrangements which have been implemented in a particular way to avoid tax. However, Arbib also said that the government was mindful that any amendments should not interfere with genuine commercial transactions and activities of taxpayers. With this view in mind, the government will now launch an extensive consultation process, with the Treasury conducting a series of roundtable discussions.

"In particular, the government will obtain advice from independent experts about how best to implement the proposed clarifications, without unintentionally affecting genuine commercial and business activity. The government will obtain this advice before preparing the draft amendments as well as during the drafting process," he said.

Arbib clarified that, to minimize any potential for taxpayers to obtain unintended tax advantages in the interim, the amendments will apply to schemes entered into or carried out after March 1. The government intends to introduce the amendments into parliament in the Spring 2012 sittings.

TAGS: compliance | tax | business | tax compliance | tax avoidance | law | Australia | legislation | standards | regulation | legislation amendments

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