SESSION 6: PART IVA: DOMINANT PURPOSE - AN ANALYSIS OF THE EIGHT FACTORS. Anthony Portas, CTA

Transcription

1 SESSION 6: PART IVA: DOMINANT PURPOSE - AN ANALYSIS OF THE EIGHT FACTORS Anthony Portas, CTA

2 Overview Overview of Part IVA Introduction to Dominant Purpose Test The 2013 Changes to Part IVA The Dominant Purpose Test: Some history High level principles An analysis of each of the 8 Factors ATO guidance: PSLA 2005/24 Impact of the 2013 amendments Conclusions

3 1. An Overview of Part IVA Part IVA is the general anti-avoidance provision of the Australian income tax law. Broadly, it applies where: a taxpayer enters into a scheme; the taxpayer obtains a tax benefit from the scheme; and the circumstances indicate that the obtaining of that tax benefit was the dominant purpose of one of the parties.

4 1. The Legislation: Dominant Purpose (s177d) Scheme for purpose of obtaining a tax benefit (1) This Part applies to a scheme if it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of: (a) enabling a taxpayer (a relevant taxpayer) to obtain a tax benefit in connection with the scheme; or (b) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme; whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers.

5 1. The Legislation: Dominant Purpose (s177d) Have regard to certain matters (2) For the purpose of subsection (1), have regard to the following matters: (a) the manner in which the scheme was entered into or carried out; (b) the form and substance of the scheme; (c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (e) 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; (f) any change in 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; (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out; (h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

6 2. Introduction to Dominant Purpose Test This presentation will focus only on the Dominant Purpose test More particularly the 8 Factors: The intention behind each factor What the Courts have said about each factor How many cases have considered each factor, and whether they thought it was for, against or neutral a tax purpose To compare and contrast the relevant cases for each factor, and bring out key principles and any inconsistencies that exist; and To reach a conclusion on each of the 8 factors, including which have been considered as most important by the Courts. 38 Dominant Purpose Cases - Appendix

7 3. The 2013 Changes to Part IVA Mostly the 2013 amendments were to tax benefit element Arose due to a number of cases deciding that no tax benefit arose Section 177CB inserted contains strict conditions applicable to the tax benefit analysis. Certain factors to be considered, and relevant tax costs to be disregarded One of the stated purposes of the change was to return the dominant purpose test to be the fulcrum or pivot around which Part IVA operates Section 177D (Dominant Purpose Test) was replaced to make it clearer. However, the 8 factors were not changed. Does existing Dominant Purpose case law remain relevant?

8 4. Dominant Purpose: Some Historic Context Part IVA arose due to deficiencies in former GAAR (s260) Newton s Case (1957 High Court) stated s260 was long overdue for reform Newton s Case (1958 Privy Council) Predication Test : Long line of cases that were decided in favour of taxpayers : Work within ATO and Government to replace s : Part IVA commenced based on Newton s predication test

9 5. The Dominant Purpose Test: High Level Principles Determining purpose: objective v subjective analysis Two or more purposes the meaning of dominant The significance of commercial purpose or motive Tax considerations can be taken into account The role of the counterfactual in the Dominant Purpose analysis Whose purpose is relevant? When is purpose tested? There is no but for test The significance of evidence

10 6. The Dominant Purpose Test: 8 Factor Analysis Analysed 38 key cases from AAT Case W58 (1989) through to Orica (2015) Appendix to Paper contains full case analysis across each of the 8 factors. Includes reasoning from the cases on each of the factors. It is comprehensive, and colour coded. Categorises the cases per next slide

11 Part IVA: 38 Key Cases (in categories) No. Category No. of Cases Cases 1 Employment Contribution Schemes 2 Pridecraft, Trail Bros 2 Investment in Mass Marketed Schemes (agriculture, films etc) 8 Vincent, Puzey, Krampel Newman, Sleight, Cooke, Calder, Tolich, Lenzo 3 Personal Services Structuring 3 Case W58, Case Y13, Mochkin 4 Sale & Leasebacks 2 Eastern Nitrogen, Metal Manufacturers 5 Internal Restructures 2 News Limited & Noza 6 Internal Restructure before Divestment 6 Peabody, McCutcheon, British American Tobacco, RCI (James Hardie), Futuris, Track & Ors 7 Structuring a New Investment 2 Spotless, Consolidated Press 8 Tax Effective Divestments 2 Axa, Macquarie (Mongoose) 9 Intra-group Debt Forgiveness 2 BHPB Finance, Ashwick (Fosters) 10 Tax Loss Utilisation 2 CC (NSW) (in liq), Clough Engineering 11 Other 7 Hart, Citigroup, Channel Pastoral, Zoffaines, Macquarie Finance, Orica, WD & HO Wills TOTAL 38

12 The 8 Factor Analysis (Appendix: Case colour coding) Red factor points towards tax purpose (ATO) Green factor does not indicate a tax purpose (Taxpayer) Grey factor is neutral. Is neither for or against tax purpose White catch-all other category, where factor was considered irrelevant, it was not considered, or it was simply not clear from the judgement which way the factor pointed. Each factor, and the overall conclusion on dominant purpose has a colour coding

13 The 8 Factor Analysis: Two Overriding Principles Global or individual assessment of factors Balancing or weighting the factors

14 6.3 The 8 Factors: An Introduction The first three might be thought to deal with the level of artificiality or contrivedness: (1) The manner in which the scheme was entered into or carried out. (2) The form and substance of the scheme. (3) The timing and duration of the scheme. The next three look at the financial impacts: (4) The result achieved but for Pt IVA. (5) The change in financial position of the taxpayer. (6) The change in the financial position of a person connected with the taxpayer. The final two look to other factors and connections: (7) Any other consequences for the taxpayer or another person connected with the taxpayer. (8) Nature of the connection between the taxpayer and other person.

15 6.4 Factor # 1 - Manner No definition of manner in Part IVA High Court in Spotless (1996): the terms manner and entered into are not to be given any restricted meaning. Manner includes consideration of the way in which, and method or procedure by which, the particular scheme in question was established

16 6.4 Factor #1 Manner: Case Principles Specific features indicate tax benefits Complexity not supported by commercial needs Commercial reasons not supported by the facts Transaction does not make commercial sense without the tax benefit Tax saving a by-product of transaction done for predominantly commercial reasons Conclusion on Factor # 1 - Manner

17 6.5 Factor # 2 Form & Substance Earlier loss utilisation cases did not compare form versus substance In Eastern Nitrogen in discussing the meaning of this factor, it was noted as follows: It may be that this factor is intended to require a comparison between the form of the scheme and its substance Accordingly, it suggests that you look at the legal form of the scheme, and consider whether that is the same as what is happening in substance.

18 6.5 Factor # 2 Form & Substance However, this was considered slightly differently in the later decision of Futuris, whereby at first instance it was stated: I do not accept the submission that if the form and substance of the scheme are consistent the form and substance of the scheme cannot point to a dominant tax purpose. it is not necessary that there be a difference between form and substance before the form and substance of the scheme becomes relevant Macquarie (Mongoose) favoured Eastern Nitrogen

19 6.5 Factor # 2 Form & Substance: Categories Form = Substance (with no tax benefit purpose) [Uncontroversial] Form = Substance (with tax benefit purpose) Form Substance (with tax benefit purpose) [Uncontroversial] Form Substance (with no tax benefit purpose)

20 6.5 Factor # 2 Form & Substance: Case Principles Transactions could take a simpler form Passive investors v direct investors Deductions materially greater than cash outlay Failure to comply with legal agreements Unnecessary steps or features included Conclusion on Factor # 2 Form & Substance

21 6.6 Factor # 3 Time & Timing Must consider both the time entered into the scheme and length of time it was carried out No guidance as to what is good or bad time or timing First of the 8 factors considered neutral by the Courts In only 1 case (Consolidated Press) did the timing factor point in a direction opposite to the overall dominant purpose conclusion

22 6.6 Factor # 3 Time & Timing: Case Principles Flurry of activity at year-end Duration of the scheme Timing is explained by other factors Timing associated with a divestment Conclusion on Factor # 3 - Timing

23 6.7 Factor # 4 Result but for Part IVA Quite a curious inclusion in the list of 8 First factor where large number of judgements in other catch-all category. That is, either irrelevant, not considered or not clear No real principles, but considered as follows: Cases decided for the ATO (factor pointed towards tax purpose) Cases decided for the Taxpayer (factor pointed away from tax purpose) Neutral (factor points neither for or against tax purpose) Conclusion on Factor # 4 Result but for Part IVA

24 6.8 Factor # 5 Change in Taxpayer Financial Position Requires a consideration of any change in the financial position of the relevant taxpayer Requires a comparison with and without Part IVA Cases do not suggest a tax purpose exists just because financial position has improved Where ATO wins on dominant purpose factor never pointed against ATO Where Taxpayer wins on dominant purpose factor only in favour of taxpayer in 50% of cases

25 6.8 Factor # 5 Change in Taxpayer Financial Position: Case Principles Financial position change due to commercial factors Financial position does not change except by the tax benefit Tax deductions greater than cash outlay Certainty of financial upside relative to certainty of tax deductions Comparison of pre-tax positions relative to alternatives Conclusion on Factor # 5 Change in taxpayer financial position

26 6.9 Factor # 6 Change in Financial Position of Persons Connected 34 cases 9 rated neutral & 19 in other category. Thus, in only 6 cases was this factor either for/against a tax purpose Some case principles: Promoter s fees Income splitting Intergroup transactions Conclusion on Factor # 6

27 6.10 Factor # 7 Other Consequences Eastern Nitrogen held that other referred to those consequences other than fiscal or financial An analysis of 34 cases: 4 pointed towards tax purpose, 4 against, 8 neutral and 18 in unclassified other category Some principles: Enhanced reputation in capital markets Asset protection Other matters

28 6.11 Factor # 8 - Connection between the parties Factor does not make it clear whether the existence of a connection is positive or negative for tax purpose Accordingly, this has evolved from the cases Comparison of the cases based on whether related party or not: Arm s length parties Related party (restructure) transactions Related party (other) transactions

29 6.12 Conclusions on the 8 Factors Probing the what and the how to determine the why Low number of appeal cases have overturned lower court judgements on dominant purpose Factors # 1-3 (manner, form/substance & timing) are most important in deciding the cases Factor # 4 (Result but for Part IVA) mostly decided against the taxpayer Factor # 5 (Financial position) not always against the taxpayer just because tax benefit creates an improved financial position Factors # 6 8 (Change in other s financial position, other consequences & connections) - classified as neutral or other in 75% of cases

30 7. The Dominant Purpose Test: Other Observations ATO Guidance: PSLA 2005/24 Dominant Purpose & The 2013 Amendments Emphasising dominant purpose test as the fulcrum or the pivot of Part IVA analysis Do the changes to tax benefit counterfactual also have knock-on implications for dominant purpose analysis? The pure counterfactual versus the restricted counterfactual This is likely to be an area of future contention

31 8. Conclusions Part IVA principles have developed from case law Practitioners need a deep knowledge of the cases the Appendix to the paper contains a comprehensive analysis focused on dominant purpose The principles that have evolved from each of the 8 factors are not always clear. In fact, they are sometimes inconsistent The cases indicate that the first 3 factors are the most important The judiciary could assist by fully explaining their reasoning on each of the 8 factors

32 Anthony Portas, CTA 2016 Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.