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PART IVA: POST SPOTLESS
The Australian Taxation Office ("ATO") has recently delivered two major papers on the scope of Pt IVA, one of which was from the Commissioner of Taxation and the other earlier paper from the author who is the ATO's Chief Tax Counsel. The Commissioner's paper said that the ATO would be reviewing its position and providing further guidance. This article is the outcome of that review and updates the ATO's understanding of the scope of Pt IVA following the decision in FC of T v Spotless 96 ATC 5201. It examines the issues that have been clarified by the courts, including the operation of Pt IVA via determinations and assessments, and the courts' consideration of concepts such as "relevant scheme", "tax benefit", what "amount" means for the purposes of the "tax benefit" test, and "dominant purpose". To provide guidance on where to draw the line between legitimate tax planning and tax avoidance, the article explores some of the indicia or badges of avoidance. The article concludes that Spotless is a significant Pt IVA case because it highlights that the way things are done will be important and that the dominant purpose of enabling the taxpayer to obtain a tax benefit may be consistent with an objective of achieving an overall commercial benefit. It also shows that the approach adopted by the High Court in Spotless has similarities with the "predication test" espoused in Newton & Ors v FC of T [1958] UKPCHCA 1; (1958) 98 CLR 1.
By Michael D’Ascenzo
Following the High Court decision in FC of T v Spotless Services Limited,[1] there were claims by some tax practitioners that Pt IVA, the general anti-avoidance provision in the Income Tax Assessment Act 1936 (Cth) (“the Act”), could strike down ordi-nary family or commercial dealings. According to these views, even a decision to make a gift to a deductible charity rather than to a non-deductible charity, or the acquisition of a building with ongo-ing capital deductions rather than an equivalent building with no capital deduction, might fall foul of Pt IVA.
The Australian Taxation Office (“ATO”) has consistently explained to taxpayers and practition-ers that this is not so.[2] The reason for this is that there will not be the requisite dominant purpose of obtaining a tax benefit when proper consideration is given to the criteria in para (b) of s 177D of the Act.
In the Attachment to his presentation, the Com-missioner foreshadowed a review of the ATO position contained in my previous article[3] to deter-mine whether it required modification or supplementation as a result of the Spotless decison.[4] This article reflects that review.
The assessment of a taxpayer will give effect to determinations by the Commissioner pursuant to s 177F(1). The joint judgment of Brennan CJ, Daw-son, Toohey, Gandron, Gummow and Kirby JJ, (herein referred to as the High Court),[5] in Spotless held that:
The making of such a determination is the pivot upon which the operation of Pt IVA turns. In this sense, and unlike s 260, Pt IVA is not ‘self-executing’. The Commissioner is empowered to make a determination only where the objective criteria specified in par (b) of s 177D are met [FC of T v Peabody 181 CLR 359 at 382]. In particular, it is nec-essary that the taxpayer has obtained a ‘tax benefit in connection with a ‘scheme’ to which Pt IVA applied.[6]
The High Court has clearly reiterated the approach it adopted in Peabody:
Under s 177F(1), the Commissioner’s dis-cretion to cancel a tax benefit extends only to a tax benefit obtained in connection with a scheme to which Pt IVA applies. The exis-tence of the discretion is not made to depend upon the Commissioner’s opinion or satis-faction that there is a tax benefit or that, if there is a tax benefit, it was obtained in con-nection with a Pt IVA scheme. Those are posited as objective facts. The erroneous identification by the Commissioner of a scheme as being one to which Pt IVA applies or a misconception on his part as to the con-nection of a tax benefit with such a scheme will result in the wrongful exercise of the dis-cretion conferred by s 177F(1) only if in the event the tax benefit which the Commis-sioner purports to cancel is not a tax benefit within the meaning of Pt IVA. That is unlikely to be the case if the error goes to the mere detail of a scheme relied upon by the Commissioner. An error of a more funda-mental kind, however, may have that result where, for example, it leads to the identify-cation of the wrong taxpayer as the recipient of the tax benefit. But the question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connection with a Pt IVA scheme and so susceptible to can-cellation at the discretion of the Commissioner.[7]
The Full Federal Court in Grollo Nominees Pty Ltd v FC of T[8] had the opportunity to consider the application of Pt IVA to the provisions of Div 6 of the Act. The Court decided that:
a trustee is properly regarded as a taxpayer in respect of trust income for the purposes of Pt IVA;
the Commissioner is entitled to make the deter-mination under Pt IVA to a trustee who obtains the tax benefit and to give effect to the determi-nation by raising assessments to the ulti-mate beneficiaries of the net income from that trust; and
the ultimate beneficiaries may need to be traced through a chain of trusts, as was the situation in the case under consideration.
“Scheme” is defined widely in s 177A(1)(b) for the purposes of Pt IVA and includes any “action, course of action or course of conduct”.
It is clear from the High Court decision in Peabody that the Commissioner may advance alter-native schemes in support of a Pt IVA determination:
Of course, the Commissioner may be required to supply particulars of the scheme relied on [Bailey v FC of T [1977] HCA 11; (1977) 136 CLR 214] and in this case has supplied them in the form of the ten steps identified by the Com-missioner. But the Commissioner is entitled to put his case in alternative ways. If, with-in a wider scheme which has been identified, the Commissioner seeks also to rely upon a narrower scheme as meeting the require-ments of Pt IVA, then in our view there is no reason why the Commissioner should not be permitted to do so, [X Co Pty Ltd v FC of T [1971] HCA 37; (1971) 124 CLR 343 at 349 per Gibbs J] pro-vided it causes no undue embarrassment or surprise to the other side. If it does, the situ-ation may be cured by amendment, provided the interests of justice allow such a course [Bailey].[9]
Their Honours continued:
Pt IVA does not provide that a scheme includes part of a scheme and it is possible, despite the very wide definitions of a scheme, to conceive of a set of circumstances which constitutes only part of a scheme and not the scheme itself. That will occur where the circumstances are incapable of standing on their own without being ‘robbed of all practical meaning’ [see Inland Revenue Commrs v Brebner [1967] 2 AC 18 at 27] .... That, of course, does not mean that if part of a scheme may be identified as a scheme in itself the Commissioner is precluded from relying upon it as well as the wider scheme.[10]
While there was extensive discussion by the Full Federal Court in Spotless about the precise descrip-tion of the scheme, all members agreed that there was a scheme as defined in s 177A.[11] The High Court agreed. On the footing that the steps which were taken in Spotless amounted to a scheme, the High Court went on to consider whether there was the necessary dominant purpose to obtain a tax ben-efit present. The High Court did not find it necessary to comment on the Commissioner’s for-mulation of the scheme in this case.
The High Court in Spotless described the scheme as “the particular means adopted by the tax-payers to obtain the maximum return on the money invested after payment of all applicable costs, including tax”.[12] This formulation is similar to the second way in which Cooper J had identified the scheme in the Full Federal Court.[13]
It follows that in identifying the scheme, refer-ence should be made to the particular means adopted by the taxpayer to achieve the desired out-come. However, the High Court has shown a willingness to determine its own description of the relevant scheme on the basis of the particular facts of the case.
On the other hand, the description of the scheme identified by the High Court (and the Federal Court) in Spotless was wider than the particu-lars of the disallowance of the taxpayer’s objection that had been provided by the Commissioner. As Cooper J explained:
The scheme particularised and relied upon at first instance is not capable of standing on its own and having practical meaning (as required by the High Court in Peabody) if it is severed from the antecedent conduct, including the offer, or from the subsequent conduct in concluding the loan agreement in the Cook Islands.[14]
Spotless therefore is a case where the High Court considered that the whole series of steps con-stituted the scheme, and each individual step was seen as part of the scheme rather than each step being seen as a scheme in itself.[15]
The application of the test in s 177C(1) requires a reasonable expectation that an amount would have been included in assessable income or that a deduction would not have been allowable if the scheme had not been entered into or carried out.
Determining whether a tax benefit has been obtained in connection with a scheme (that is, deter-mining what might reasonably have happened but for the scheme) involves a prediction as to the events which would have taken place:
A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be suffi-ciently reliable for it to be regarded as reasonable.[16]
The terms of s 177C make reference to assess-able income or an allowable deduction and so “what would have been derived must be assessable income. Any capital gain or exempt income derived by the taxpayer would not satisfy the test”.[17] It is also important to have a reasonable expectation that the tax benefit occurred in the rel-evant year of income.[18]
In Spotless the taxpayers submitted that there was no possible way of knowing whether the amount actually derived from the investment in the Cook Islands or any other particular amount, would have been included in the assessable income of the taxpayers had they chosen not to make the investment that they did. The High Court construed the provision more widely:
In our view, the amount to which par (a) refers as not being included in the assessable income of the taxpayer is identified more generally than the taxpayers would have it. The paragraph speaks of the amount pro-duced from a particular source or activity. In the present case, this was the investment of $40 million and its employment to generate a return to the taxpayers. It is sufficient that at least the amount in question might rea-sonably have been included in the assessable income had the scheme not been entered into or carried out.[19]
The application of the reasonable expectation test is directed at ascertaining what would otherwise have occurred in the absence of the scheme. The High Court has made it clear that an antecedent transaction was not necessary for the purposes of Pt IVA, “the operation of Pt IVA is not so confined”.[20] While the existence of an antecedent transaction would generally make it easier to conclude that but for the scheme, an amount would have been includ-ed in assessable income in the relevant year, it is not a pre-requisite for the application of Pt IVA. More-over, the reference to the amount produced from a particular source or activity suggests that a court will have regard to the course of conduct actually undertaken or contemplated by the taxpayer in determining the existence of a tax benefit under s 177C. This may be one way in which a court may be able to avoid the conundrum produced by the argument that the “dodgier” the scheme the more likely it is that Pt IVA cannot apply because, but for the scheme the taxpayer would not have undertak-en that course of action.[21]
The exercise is reconstructive in nature and therefore it is also relevant to draw on evidence of what would be expected, according to commercial or family norms, from sources outside the bounds
of the actual events.
In concluding that a “tax benefit” in the statuto-ry sense had been obtained, the High Court noted that:
A particular application of the definition of provision of ‘tax benefit’ in s 177C(1) thus involves consideration of the particular mate-rials answering the various categories in para (b) of s 177D.[22]
While this indicates that s 177C and s 177D work in tandem, the practical effect of these com-ments are not clear. However, the suggestion is that the factors relevant to determining whether or not the dominant purpose was the obtaining of a tax benefit are also relevant to the identification of the tax benefit. For example, if we consider the facts in Peabody, it would be appropriate to take into account what actually happened to the funds and the post-scheme financial position of the relevant par-ticipants.
The factual findings in Spotless were that the taxpayers were determined to place $40 million in a short-term investment for the balance of the then current financial year. The Court concluded that in the absence of any acceptable alternative proposal for off-shore investment at interest, the taxpayer would have invested the funds in Australia and the amount derived would have been included in the assessable income of the taxpayers.
In other words, the Court said that but for the scheme, the taxpayers would have received income from an Australian investment at applicable rates.
As the effect of the scheme was to manufacture a Cook Island source for the interest receipts, thereby making them exempt under s 23(q), and having regard to the definition of “assessable income” and “exempt income” in s 6(1), no more would be required for the purposes of determining whether or not there was a tax benefit.
On the basis that there is a tax benefit, that is for the purposes of s 177 (1)(a) an amount not being included in the assessable income of the taxpayer for a year of income where that amount might rea-sonably be expected to have been included but for the scheme, what is “that amount”?
The Commissioner had, up to the High Court appeal stage, regarded Spotless as a case involving source. So the Commissioner had raised assess-ments on the actual amounts received by the taxpayers from the Cook Island investment. The Pt IVA determination which, at first instance and before the Full Federal Court, had been the Com-missioner’s alternative argument was also based on this amount as being the tax benefit.
Both the Full Federal Court and the High Court observed that it could reasonably be concluded that the amount the taxpayers would have received on the Australian investment would have been not less than the amount of interest in fact received from the investment.[23] While this amount was not neces-sarily the maximum tax benefit that might reasonably be expected to have been earned if the funds had been invested in Australia, it was never-theless a tax benefit for the purposes of s 177C. The High Court concluded:
Accordingly, there is no error adverse to the taxpayers in identifying the amount of the ‘tax benefit’ as an amount equal to the inter-est less the Cook Islands withholding tax.[24]
These comments indicate that in making a determination it is permissible for the Commissioner to base a Pt IVA determination on an amount that is no more than the maximum amount that might rea-sonably be expected to have been included if the scheme had not been entered into or carried out. This approach is also supported by s 177F(1) which allows the Commissioner to determine that the “whole or part” of the tax benefit is to be included in assessable income, or is not to be included as a deduction, as appropriate.
In making a determination, the ATO would have regard to the full range of facts and circumstances about the case that is available to it in deciding on the amount of tax benefit that is to be cancelled. Considerations of fairness and reasonableness which underpin the exercise of the discretion in s 177F(3) would be relevant in making the determi-nation. This also would depend on the facts and circumstances of the particular case.
Considerations of fairness would often suggest that the Commissioner should determine that the amount over and above the benefit actually received, controlled by, or applied at the direction of the relevant taxpayer should not be included in the taxpayer’s assessable income. For example, in a case like Spotless, where the actual receipts were less than the income which the taxpayer might oth-erwise have received, the amount of the tax benefit which the Commissioner is likely to cancel under Pt IVA would not be more than the amount actually received under the arrangements. However, there may be schemes where the Commissioner will include in the taxpayer’s assessable income amounts siphoned off to promoters or others.[25]
If subsequent to the making of a determination, there has been included in the assessable income of any person an amount that would not have been so included, or an amount would have been allowable, but for the scheme, it is open to the Commissioner to determine that that amount or part thereof should not be so included or should be allowed, as the case may be, provided it would be fair and reasonable to do so (s 177F(3)). The Commissioner will make these consequential adjustments in appropriate cases but usually not until the substantive issues have been finalised.
Not all “schemes” or “tax benefits” as defined in Pt IVA are caught in Pt IVA. It is only in respect of those schemes and tax benefits which satisfy the objective criteria in s 177D that Pt IVA applies. The determination that the person, or one of the per-sons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax ben-efit in connection with the scheme, requires an evaluation and careful weighing of the objective factors contained in s 177D(b).[26]
The facts of Spotless put into sharp focus the application of Pt IVA to an arrangement which pro-duced a commercial result by a means which was driven by tax considerations.
In that case the High Court held that:
The references in this passage [Cooper J in FC of T v Spotless 32 ATR 309 at 345; 95 ATC 4775 at 4811] on the one hand to a ‘rational commercial decision’ and on the other to the obtaining of a tax benefit as ‘the dominant purpose of the taxpayers in making the investment’ suggests the acceptance of a false dichotomy...A person may enter into or carry out a scheme, within the meaning of Pt IVA, for the dominant purpose of enabling the rele-vant taxpayer to obtain a tax benefit where that dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business.[27]
The High Court explained that “much turns upon the identification, among various purposes, of that which is ‘dominant’.”[28]
The High Court interpreted dominant as indi-cating “that purpose which was the ruling, prevailing, or most influential purpose”[29] and made it clear that the conclusion to be reached “is the conclusion of a reasonable person”.[30]
An important notion acknowledged with appar-ent approval in Spotless is that the adoption of one particular form of transaction over another may be influenced by revenue considerations and that this is to be expected.[31] So the threshold test for the application of Pt IVA will not necessarily be whether the arrangement would have been entered into but for the existence of the tax benefit. Cer-tainly if this test is satisfied Pt IVA will not apply. However, even where an arrangement would not have been entered into but for the tax benefit, Pt IVA still requires one to determine whether the obtaining of the tax benefit was the prevalent pur-pose for the carrying out of the scheme in a particular way, or whether there were more influ-ential commercial reasons for the way things were done. For example, in Spotless the High Court gave significant weight to the manner in which the scheme was entered into and the form and sub-stance of the scheme. It explained that:
in the context in which they appear in par (i), the terms ‘manner’ and ‘entered into’ are not given any restricted meaning. ‘Manner’ includes consideration of the way in which and the method or procedures by which the particular scheme in question was estab-lished.[32]
It also considered the time at which the scheme was entered into and the length of the period during which it was carried out, and commented that those “considerations throw further light upon the form and substance of the scheme (para (ii)) and the man-ner in which the scheme was carried out (para (i))”.[33] It took the view “that the form and sub-stance of the EPBC proposal had been to take steps to ensure that the source of the interest was located in the Cook Islands. The ‘dominant purpose’ of the taxpayers in doing this was to achieve a tax benefit in Australia in the form of the exemption under s23(q) of the Act. Without that benefit, the proposal would have ‘made no sense’“.[34]
On the facts in Spotless, the High Court consid-ered that the manner in which the taxpayers took steps which maximised their after tax return indi-cated the presence of the dominant purpose to obtain a tax benefit.[35]
As the criteria in s 177D(b) require considera-tion of the manner in which the scheme was entered into and the form and substance of the arrange-ments, the degree of contrivance, artificiality, elaborateness, non-commerciality and unusualness of the transactions will be relevant considerations. So the approach adopted by the High Court in Spotless has similarities to the “predication test” expressed by Lord Denning in Newton & Ors v FC of T:
In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explana-tion by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section.[36]
In Spotless, the Commissioner submitted to the High Court that the badges of tax avoidance are rel-evant to a consideration of the eight matters under s 177D just as they were to a consideration of s 260.
It is dangerous to nominate any particular factor and say that its presence is indicative of a scheme caught by Pt IVA. There needs to be an evaluation of all the factors in s 177D(b). For example, it goes to the manner in which a scheme is entered into and carried out if an elaborate or roundabout way of achieving an economic effect is adopted where that result could have been achieved more directly. If the only difference between the more direct method of achieving the same result and the roundabout method adopted is a tax benefit, then this would be a strong indicator that Part IVA might apply. But even in such a case there may be valid non-tax com-mercial reasons for the elaborateness of the
particular arrangement such that its prevailing pur-pose cannot be characterised as tax avoidance.
There are a number of features the presence of which in an arrangement are likely to lead a rea-sonable person to carefully consider the possible application of Pt IVA. For example, these features include the following, which are relevant to the fac-tors in s 177D(b):
transactions between related or unrelated parties which are not at arms length;[37] transactions which do not occur at market rates/value; arrangements involving a clear and blatant trans-fer of tax benefits;[38] the artificial creation of deductions or losses;[39] arrangements involving round robin of cheques;[40] use of non-recourse or limited recourse loans which limit the parties’ risk in relation to any debts; arrangements where the taxpayer is not subject to significant risks when the tax benefit is taken into accout because of the existence, for exam-ple, of a “put” option;[41]
arrangements representing a roundabout way of conducting an activity;[42]arrangements where the transaction or series of transactions produces no economic gain or loss, for example where the whole scheme is self can-celling; and arrangements which lack economic substance and are not rationally related to any useful non-tax purpose, for example inter-group or related party dealings that merely produce a tax result.
In gaining a better appreciation of what might be regarded as indicia of avoidance, insights can be gleaned from cases on s 260 such as Jacques v FC of T,[43] Newton’s case, Peate v FC of T[44] and FC of T v Gulland; Watson v FC of T; and Pincus v FC of T,[45] and, subject to caution, from approach-es adopted in other jurisdictions. The analysis is invariably directed at predicating whether the arrangement – to use the vernacular – is a “tax dodge”.
For example, since people are in business to make a profit, paying manifestly too much or too little for anything calls for explanation. This is equally true whether taxpayers are related to each other or not. In such circumstances, the tax effects and the actual effect on the parties involved should be carefully scrutinised (paras 177D(b)(iv) and (vi)).
On a similar theme, under French law there is a doctrine of the “abnormal management act” which applies where a taxpayer acts contrary to its own business interest. The same considerations influ-enced the findings that Pt IVA applied in CC (New South Wales) Pty Ltd (In liq) v FC of T[46] and in Clough Engineering Limited v FC of T.[47] For example, in CC (New South Wales), Sackville J found it relevant for the purposes of s 177D(b)(v) that the scheme was likely to leave CC (New South Wales) in a substantially worse financial position.
Similarly, arrangements which produce tax results by the use of dealings which have no eco-nomic effect between associated entities, and even unassociated entities, call for careful consideration. Self-cancelling transactions, matched transactions that create a tax effect where there is no economic effect, and round-robin financing arrangements are relevant in this regard.
In the recent United States case of ACM Part-nership, South Hampton – Hamilton Company, Tax Matters Partner v Commissioner of Inland Revenue (Colgate-Palmolive)[48] Laro J said:
We are convinced that tax avoidance was the reason for the partnership’s purchase and sale of the Citicorp Notes. We do not suggest that a taxpayer refrain from using the tax laws to the taxpayer’s advantage. In this case, how-ever, the taxpayer desired to take advantage of a loss that was not economically inherent in the object of the sale, but which the taxpayer created artificially through the manip-ulation and abuse of the tax laws. A taxpayer is not entitled to recognise a phantom loss from a transaction that lacks economic substance.[49]
These sorts of considerations are relevant in relation to s 177D(b) and, in particular, para (ii) of the provision. For example, in Clough Engineering it was relevant that there was no greater amount of working capital after the transaction even though the transaction exposed the taxpayer to an accruing liability for interest. In CC (New South Wales) it was relevant that the scheme did not affect the cash flow of the parties concerned and was implement-ed by a series of book entries.
Nevertheless, the wide ranging enquiry under-taken by the High Court in Spotless in relation to both the requirements of s 177C (the existence of a tax benefit) and s 177D (the existence of a dominant purpose by one of the persons who entered into or carried out the scheme or part thereof) highlights the sensitivity of the application of Pt IVA to the specific facts of the particular case.[50]
The High Court has made it clear that:
Pt IVA is to be construed and applied according to its terms, not under the influ-ence of ‘muffled echoes of old arguments’concerning other legislation [and that] Pt IVA is as much a part of the statute under which liability to income tax is assessed as any other provision thereof.[51]
The particular reference to old arguments relates to the statement by Lord Tomlin in IRC v Duke of Westminster[52] which was made “in the course of rejecting a submission that in assessing surtax under the Income Tax Act 1918 (UK) the Revenue might disregard legal form in favour of the substance of the matter”.[53] The High Court made it clear that “[I]n circumstances where section 177D applies, regard is to be had to both form and substance” in determining dominant purpose.[54]
As for the comment that Pt IVA must be con-strued as an integral part of the Act, it has been observed “that the High Court appears to favour a construction of Pt IVA which is less restrictive of its operation and effect than the relatively restricted construction favoured in lower courts” and “that Pt IVA will not receive from the courts the essentially subordinate construction that they accorded to s 260”.[55]
The High Court also made it clear that the oper-ation of Pt IVA is not confined to cases where the taxpayer had diverted “an existing income stream” in such a way that it would not attract tax.[56]
Spotless is a significant decision of the High Court on the ambit of Australia’s general anti-avoidance provision. The important point is that Pt IVA will apply to a scheme entered into for the dominant purpose of enabling the relevant taxpay-er to obtain a tax benefit even where that purpose is consistent with the pursuit of a commercial gain.
In drawing the line between avoidance and ordi-nary business and family dealings, Pt IVA requires a practical and common sense evaluation of the fac-tors in s 177D(b). For example, in Spotless the High Court looked at, amongst other things, the way things were done and the form and substance of the arrangements in concluding that they were predominantly shaped, and not just influenced by, tax considerations.
[1] 96 ATC 5201.
[2] M Carmody, "Part IVA - Where to Draw the Line" Taxation Institute of Australia, 13th National Convention, Melbourne, 19 March 1997.
[3] M D'Ascenzo, "Part IVA: Commentary on Key lssues" (1996) 4 Taxation in Australia (Red Edition) 129. The article was also reproduced in [1995] (3) CCH Tax Focus (17 November) 17.
[4] See also National Tax Liaison Group Minutes, 4 September 1997. Subject to this article which reiterates the key points made in both Carmody, above n 2, and D'Ascenzo, above n 3, the general thrust of those papers remain current ATO thinking.
[5] McHugh J delivered a separate judgment but also found for the Commissioner noting that: "the facts of the present case show much more than a switch of investments resulting in a tax benefit. The elaborate nature of the scheme and its attendant circum-stances lead inevitably to the conclusions that the scheme was not merely tax driven but that its dominant purpose was to enable the taxpayer to obtain a tax benefit by participating in the scheme" (96 ATC 5201, 5212).
[6] Ibid 5205.
[7] FC of T v Peabody 94 ATC 4663, 4669-4670 ("Peabody").
[8] 97 ATC 4585.
[9] 94 ATC 4663, 4670.
[10] Ibid.
[11] FC of T v Spotless Services Limited 95 ATC 4775, 4797 and 4805.
[12] 96 ATC 5201, 5210.
[13] 95 ATC 4775, 4805.
[14] Ibid. Cooper J concluded that it was possible to identify a scheme in Spotless within the meaning of s 177A in two alterna-tive ways: "The first is to do as [Lockhart J] did and identify the scheme as: - '[t]he offer and the acceptance together with the intervening acts and probably the steps commencing with the receipt by the taxpayers of the information memorandum and other documents earlier than 5 December...' [93 ATC 4397, 4416]. The second way to identify a relevant scheme is to say that the scheme was the proposal of the taxpayer to invest $40m on deposit in the Cook Islands and to pay Cook Islands withholding tax on the interest earned, and the taking of all necessary steps to implement the proposal".
[15] Peabody 93 ATC 4104, 4111 (per Hill J). See also the discussion on the meaning of the words "robbed of all practical mean-ing" in D'Ascenzo, above n 3.
[16] Peabody 94 ATC 4663, 4671. See also Dunn v Shapowloff [1978] 2 NSWLR 235, 249.
[17] 95 ATC 4775, 4807 (per Cooper J). Now note that the scope of s 177C has been extended to include withholding tax: Income Tax Assessment Act 1936 (Cth), s 177CA.
[18] In Peabody 94 ATC 4663, 4672, for example, the Court held that there was no reasonable expectation that the funds would be received by Mrs Peabody in the year to which the assessment related.
[19] 96 ATC 5201, 5211. "The characterisation of the 'amount' for the purpose of s 177C as the particular sum of money received from EPBCL as interest, as contended for by the taxpayers, is too narrow. No doubt there are circumstances where, for exam-ple, a pre-existing income stream is diverted, the amount as a particular amount of income remains the same and comes from the same source. However, an amount of income may be identified more generally as the income produced from a particular source or activity" (95 ATC 4775, 4808 (per Cooper J)).
[20] 96 ATC 5201, 5208.
[21] For example, refer to the discussion in relation to private ruling requests in D'Ascenzo, above n 3.
[22] 96 ATC 5201, 5211.
[23] Ibid; 95 ATC 4775, 4797 and 4809.
[24] 96 ATC 5201, 5211.
[25] For example, in Newton & Ors v FC of T [1958] UKPCHCA 1; (1958) 98 CLR 1, the taxpayers were shareholders in a company that wanted to declare substantial dividends. To avoid paying tax on these dividends, the shareholders and the company entered into an arrange-ment with another company (the promoter). As a result of this arrangement, an amount of £102,404 from the planned dividend wound up as a profit for the promoter. However, once the Court found that avoiding tax was a purpose of the arrangement, it also found that the amount of £102,404 could be treated as income derived by the original shareholders as "that profit is seen to be nothing more nor less than remuneration which the original shareholders allowed Pactolus [the promoter] to retain for ser-vices rendered" ((1958) [1958] UKPCHCA 1; 98 CLR 1, 11).
[26] Refer generally to D'Ascenzo, above n 3. See also the consideration of the criteria in s 177D(b) by Sackville J in CC (New South Wales) Pty Ltd (In liq) v FC of T 97 ATC 4123 and by the AAT in Clough Engineering Limited v FC of T 97 ATC 2023 ("Clough Engineering").
[27] 96 ATC 5201, 5206.
[28] Ibid.
[29] Ibid. Note that this is arguably inconsistent with the approach in the Explanatory Memorandum to the Income Tax Laws Amendment Act (No 2) 1981 (Cth) which stated that dominant purpose means "outweighing all other purposes put together".
[30] 96 ATC 5201, 5210.
[31] Ibid 5206.
[32] Ibid 5209.
[33] Ibid.
[34] Ibid 5210. See also 95 ATC 4775, 4797 (per Beaumont J).
[35] 96 ATC 5201, 5206 and 5210; 5211 and 5212 (per McHugh J).
[36] [1958] UKPCHCA 1; (1958) 98 CLR 1, 8. This is not surprising as Pt IVA was intended to effect "a position akin to that which appears to emerge from the decision of the Privy Council in Newton" (Explanatory Memorandum to the Income Tax Laws Amendment Act (No 2) 1981 (Cth), 3; the Treasurer's Second Reading Speech in respect of the Income Tax Laws Amendment Bill (No 2) 1981, Com-monwealth, Hansard, House of Representatives, 27 May 1981, 2684); see also B Shaw, "Would a Stranger Part IVA Lead to a Reduced Need for Retrospective Legislation" (1997) Law Council of Australia Taxation Workshop (14-16 February) 7-8.
[37] It is arguable that "connection" in s 177D(b)(viii) can be interpreted broadly to bring into play the aspects of arms length deal-ings which were relevant in Collis v FC of T 96 ATC 4831 and, in any event, non-arms' length dealings would be relevant for the purposes of paras 177D(b)(i),(ii),(iv),(v) and (vi).
[38] In some cases the incidence of economic risk is the substance of a transaction and is relevant to the issue of form and sub-stance in s 177D(b)(ii). An example of this might be an arrangement which had the effect that a legal owner of an asset (seek-ing to claim depreciation benefits) did not bear the normal risks and incidence of ownership, and there was no prevailing com-mercial non-tax explanation for such an outcome.
[39] In the United Kingdom, Lord Nolan commented in IRC v Willoughby [1997] 4 All ER 65, 73: "...The hallmark of tax avoid-ance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability". See also Ramsay v IRC [1981] UKHL 1; [1982] AC 300, Furniss v Dawson [1983] UKHL 4; (1984) 55 TC 324; Ensign Tanker (Leasing) Ltd v Stokes (Inspector of Taxes) [1992] 1 AC 655, and IRC v McGuckian [1997] UKHL 22; [1997] 3 All ER 817.
[40] See, for example, Clough Engineering 97 ATC 2023.
[41] Even where there is a speculative possibility of "blue sky" profits.
[42] The Swedish general anti-avoidance provision uses this type of test.
[43] [1923] HCA 70; (1924) 34 CLR 328.
[44] (1964) 111 CLR 443.
[45] 85 ATC 4765.
[46] 97 ATC 4123.
[47] 97 ATC 2023.
[48] 73 TCM 2189.
[49] Ibid 2215.
[50] The Commissioner has said that Pt IVA issues will be considered where they arise in the context of factual matters covered by Public Rulings, and that if taxpayers are uncertain about the potential application of Pt IVA to their factual circumstances or proposed arrangements, they can seek a Private Ruling :see Carmody, above n 2, 3. To assist taxpayers, the ATO is considering the feasibility of publishing "case notes" on its Pt IVA decisions made in respect of private ruling requests, subject to the secre-cy provisions of the tax law. The ATO has also recently established a Pt IVA Panel, including eminent external tax experts, to provide advice on Pt IVA matters.
[51] 96 ATC 5201, 5205. In this regard Y Grbich, "Does Spotless Excise Barwick's Ghost?" in R Deutsch (ed), Tax Catch-Ups A Prospect Intelligence Report (1997) 88, 116 has argued: "There is rejection of the muffled echoes of old arguments about other legislation, which would seem to be targeted at old UK common law doctrines about reading down penal tax statutes and those oft quoted UK judgments selectively trotted out at the start of many text books to legitimise tax avoidance. There is a specific rejection for Australian conditions of Lord Tomlin's celebrated dicta from IRC v Duke of Westminster [1936] AC 1 that it is all right to organise your affairs to dodge tax. But most significant of all, the general anti-avoidance provisions in Part IVA are removed from that illegitimate margin of tax law and are now 'as much a part of the statute under which income tax is assessed as any other provision'".
[53] 96 ATC 5201, 5205.
[54] Ibid. See also M D'Ascenzo, "Substance versus Form" (1997) 3(10) Asia-Pacific Tax Bulletin 330.
[55] Shaw, above n 36, 2.
[56] 96 ATC 5201, 5208.
Michael D'Ascenzo is a Second Commissioner of Taxation and former Chief Tax Counsel for the Australian Taxation Office (ATO). As such he is responsible for interpretative decisions made by the ATO including its Public Rulings Program. Michael has held various senior posi-tions within the ATO, including national responsibility for its Audit and International operations, and leadership of the 1992 changes to self assessment. He has also worked on assignment with the International Monetary Fund. He holds LLB and BEc(ANU) degrees and is admitted as barrister and solicitor. He is also a graduate of Harvard Business School's Program for Management Development.
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