Journal of Australian Taxation
|
|
Home
| Databases
| WorldLII
| Search
| Feedback
Journal of Australian Taxation |
|
PART IVA: POST-HART[*]
Comment
by
Michael D’Ascenzo
Second Commissioner of Taxation
On the 23rd birthday of Pt IVA, the general anti-avoidance provision in the Income Tax Assessment Act 1936 (Cth), the High Court handed down the final chapter in FC of T v Hart.
This decision, together with the High Court’s previous pronouncements in FC of T v Peabody, FC of T v Spotless Services Ltd, and FC of T v Consolidated Press Holdings Ltd provide substantial guidance on the application of Pt IVA.
The simple facts of FC of T v Hart are as follows:
Under a “split loan facility” a taxpayer borrowed money, applied part to a private or domestic venture (often, as in this case, the purchase of a principal place of residence), and applied the balance to the acquisition (here the refinancing) of an asset to be used for the purpose of gaining or producing assessable income. The loan agreement provided for the borrower to direct the application of the whole of the periodical payments required under the loan agreement to the satisfaction of that part of the loan used for private or domestic purposes. Interest on the balance of the loan was allowed to accrue and be capitalised and compounded.[1]
The Australian Taxation Office (“ATO”) had issued a Public Ruling on this arrangement – referred to as a Split Loan – in 1998.[2]
The issue was litigated as an ATO funded test case before Gyles J in Hart.[3]
The split loan issue is important because:
the real effect and substance of the arrangement was to make the payment of interest on the capital sum paid in reduction of the residential loan deductible for taxation purposes.[4]
Gyles J’s approach to the matter was similar to that taken in TR 98/22. Having found that there was no realistic possibility that, if the respondents had not taken up the offer of the “wealth optimiser structure”, they could have arranged finance, on the terms applicable to the investment part of the loan, Gyles J concluded:
These High Court authorities [Spotless Services and Consolidated Press] decide that it is the particular shape, form or structure of the scheme, rather than a general description of the transaction which is under scrutiny. In the present case, to concentrate upon the commercial object or outcome of the transaction as a whole is to focus on a false issue and make the same error as that of the Full Court in Spotless Services. It is appropriate to concentrate upon the narrower scheme propounded by the respondent, explained by reference to the wider transaction. When I consider the matters prescribed by s 177D(b) and, in particular (i), (ii), and (iv), in the light of the findings I have made, the proper conclusion is that, as Beaumont J held in Spotless Services, without taxation benefits the particular form, shape or structure of this transaction made no sense. To take the words of Hill J at first instance in CPH Property (98 ATC 4983 at 5000; [1998] FCA 1276; (1998) 88 FCR 21 at 42) (approved by the Full Court of the Court and the High Court):
... a conclusion would be drawn that the dominant purpose ... was to bring about the result that a deduction would be allowed ... which, but for the scheme, would have been disallowed ...
Interest incurred in relation to payment of capital in repayment of a residential loan is not deductible and, if claimed, would be disallowed.
It is to be concluded that at least Austral and those taking the Wealth Optimiser Loan entered into the scheme for the purpose of enabling the taxpayer entering the transaction to obtain the tax benefit I have identified. I should say that my view would be the same if the wider scheme propounded by the respondent were adopted, as it is the particular shape, form or structure of the scheme which is to be considered.[5]
The Full Federal Court allowed the taxpayer’s appeal.[6] The Court considered that the relevant scheme was the borrowing of money for use in financing and refinancing the two properties on the terms of the “Wealth Optimiser” loan facility,[7] and that the dominant purpose of the scheme was to secure the acquisition or retention of the properties rather than the tax benefit. Conti J, who agreed with the approach and reasoning of Hill and Hely JJ on the Pt IVA issue, said:
In reaching their respective conclusions, both Hill and Hely JJ identified and applied the approach taken by Full Courts in Eastern Nitrogen Ltd v FC of T 2001 ATC 4164; [2001] FCA 366; (2001) 108 FCR 27 and in FC of T v Metal Manufacturers Ltd 2001 ATO 4152; [2001] FCA 365; (2001) 108 FCR 150, where the adoption by business enterprises of lease finance transactions instead of money lending transactions in the traditional sense was found to fall outside of the operation of Part IVA, upon the basis that although one of the purposes of the taxpayer in each case was to obtain a tax benefit, the prevailing or most influential purpose of each taxpayer was to obtain a large financial facility on the best terms reasonably available.[8]
In a unanimous decision the High Court disagreed with the Full Federal Court’s approach to the application of s 177D of the Income Tax Assessment Act 1936 (Cth) to the facts in Hart.[9]
Gleeson CJ and McHugh J emphasised the reference in FC of T v Spotless Services Ltd to “the particular scheme” and that it was the obtaining of the tax benefit which directed the taxpayers in “taking steps they otherwise would not have taken by entering into the scheme”.[10] They concluded:
Let it be assumed that, in the present case, even if the “wealth optimiser structure” had not been available, the respondents would have borrowed money to buy their new home, and also borrowed money in order to retain their former home as an income-earning investment. The “wealth optimiser structure” depended entirely for its efficacy upon tax benefits generated by arrangements between the respondents and the lender that had no explanation other than their fiscal consequences. What “optimised” the respondents’ “wealth” was the tax benefit earlier described: not the deductibility of interest as such; but the deductibility of additional interest on loan account 2 contrived by the particular form of the borrowing transaction.[11]
Gummow and Hayne JJ held:
There could be no doubt in these matters that the terms on which the loan was made available were explicable only by the taxation consequences for the respondents. If the scheme was identified as “all the steps leading to, and the entering into, and the implementation of the loan arrangements” the manner in which that scheme was entered into strongly suggested that the respondents (each a relevant taxpayer) entered into that scheme for the dominant purpose of obtaining a tax benefit. Further, if the scheme was identified in this way, the respondents, by giving the directions they did, carried out the scheme for that same dominant purpose. But so too, if the scheme is identified more narrowly (as the making of the relevant provisions in the loan agreement and the giving of directions under those provisions) the like conclusion would be reached. Both the manner in which that (narrower) scheme was entered into, and the manner in which it was carried out, strongly suggested the conclusion described.
It is then important to return, for a moment, to an aspect of the issues discussed earlier concerning the identification of the scheme. The conclusions just described, as being indicated by the manner in which the scheme was entered into or carried out, are indicated by a consideration of how else the loan might have been arranged. They are not conclusions which depend upon identifying the scheme in one of the ways put forward by the Commissioner rather then another.
As has already been pointed out, it would be wrong to treat any conclusion drawn from the first of the eight matters mentioned in s 177D(b) as determinative. All eight must be considered. When the remaining seven are examined in these matters it will be seen that either they tend to point to the same conclusion as the manner in which the scheme was entered into or carried out, or they are neutral. None points against the conclusion 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 enabling each respondent to obtain a tax benefit in connection with the scheme.
As Hill J rightly pointed out, the form and substance of the scheme (s 177D(b)(ii)) also point to the purpose of a relevant person obtaining a tax advantage. What was one advance, to be repaid by 300 installments, was treated as if it were two separate loans. The only persons obtaining any advantage from the treatment were the respondents. And the only advantages which they obtained depended upon the taxation treatment resulting from the application of payments and accumulation of interest for which the scheme (however identified) provided. It was these results in relation to the operation of the Act (but for Pt IVA) which would be achieved (s 177D(b)(iv)) and these results would improve the financial position of the respondents (each a relevant taxpayer) (s 177D(b)(v)). The only other consequence for them would be the compounding of interest attributable to the investment portion of the loan (s 177D(b)(vii)). No other person (in particular, neither the lender nor the lender’s agent) would gain or suffer financially (s 177D(b)(vi)) or sustain any other consequence (s 177D(b)(vii)). And the only connection between the lender, the lender’s agent and the respondents was that created by the loan arrangement, apart, of course, from the relationship of marriage between the respondents.[12]
Cullinan J agreed:
From the matters to which I have referred it is easy to conclude, inevitable in fact that a court do so, that the respondents entered into a scheme for the [dominant] purpose of obtaining a tax benefit. What other purpose or purposes could have made commercial or other sense?[13]
It may be that the respondents did wish to make an investment and to change their residence. These were entirely irreproachable and proper objectives. But the means adopted to achieve these results could readily, and should be objectively concluded to be a scheme for the [dominant] purpose of enabling the respondents to obtain a tax benefit, and that is so no matter which of the alternative definitions as to the width of the schemes, within which what occurred here falls, is preferred.[14]
The structure of Pt IVA requires there to be a scheme, a tax benefit and a dominant purpose.
In Hart the High Court held that the definition of a scheme is very broad as “it encompasses not only a series of steps which together can be said to constitute a ‘scheme’ or a ‘plan’ but also (by its reference to ‘action’ in the singular) the taking of but one step. The very breadth of the definition of ‘scheme’ is consistent with the objective nature of the inquiries that are to be made under Pt IVA”.[15]
According to Gummow and Hayne JJ the reference in FC of T v Peabody[16] to the circumstances that are incapable of standing on their own without being “robbed of all practical meaning” must now be understood as having been directed to the issues of procedural fairness which underlay the issue presented in that case.[17] Nevertheless, it is inappropriate to seize upon and isolate one event or a series of events which standing alone may appear to have a complexion which it or they cannot truly bear when other connected events are taken into account.[18] Moreover, the scheme must relate to the tax benefit obtained: “in any case a wider or narrower approach may be taken to be the identification of a scheme but it cannot be an approach that divorces the scheme from the tax benefit”.[19]
The Court explained that “the concepts of ‘tax benefit’, ‘scheme’ and ‘scheme to which this Part applies’ all have their part to play in deciding whether the power given to the Commissioner by s 177F(i) can be exercised ... the various terms must be given operation in the interrelated way which s 177F(i) requires”.[20] Thus the identification of the tax benefit and the identification of the scheme are inter-related.[21] For example the tax benefit in Hart was not the whole of the interest on the investment part of loan. Rather it was the additional interest that resulted from the “special, non-standard” features of the arrangement. These features, which defined the “wealth optimiser structure” and distinguished it from standard financing arrangements was held to be definitive of the scheme in connection with which the tax benefit was obtained: “the wealth optimiser aspect of the structure, not divorced from the borrowing, gave the borrowing its distinctive character that constituted the scheme”.[22]
This outcome in Hart, whether based on the narrower or wider scheme is consistent with the approach taken in FC of T v Consolidated Press Holdings Ltd where the Court found that the interposition of ML6 between ACP and CPIL (UK) resulted in a tax benefit. In Consolidated Press the High Court held:
The fact that the overall transaction was aimed at a profit making does not make it artificial or inappropriate to observe that part of the structure of the transaction is to be explained by reference to a s 177D purpose. Nor is there any inconsistency involved, as was submitted, in looking to the wider transaction in order to understand and explain the scheme and the eight matters listed in s 177D.[23]
Taking this practical approach the High Court considered the “fundamental”, “central” and “critical” question to be whether having regard to the eight matters in s 177D(b) it would be concluded 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 enabling the relevant taxpayer (alone or with others) to obtain a tax benefit in connection with the scheme.
The inquiry required by Pt IVA is an objective, not subjective, inquiry.[24] Part IVA does not require, or even permit, any inquiry into the subjective motive of the taxpayer or others who entered into or carried out the scheme or any part of it.[25] Rather than asking why the taxpayer acted as they did, the inquiry requires a comparison between the scheme in question and an alternative postulate.[26]
The Court has confirmed that the inquiry directed by Pt IVA requires a comparison between the way things are done (the particular scheme) and alternative possibilities, and that the dividing line between “ordinary transaction” and tax avoidance schemes that came within the purview of Pt IVA is to be found in a consideration of the eight objective matters listed in s 177D(b). For example, Cullinan J focused on “the means adopted” to achieve what overall was a commercial result.[27] Similarly Gleeson CJ and McHugh J considered that the deductibility of the additional interest on the investment part of the loan was “contrived by the particular form of the borrowing transaction”, and that it was the obtaining of tax benefits which directed the taxpayers in taking steps they otherwise would not have taken.[28]
The presence of a discernable commercial end does not determine the answer to the question posed by s 177D.[29] This is because “a particular course of action may be ... both tax driven and bear the character of a rational commercial decision.[30]
While business transactions are normally influenced by tax considerations, a transaction may take such a form that there is a particular scheme in respect of which a conclusion of the kind described in s 177D is required, even though the particular scheme also advances a wider commercial objective.[31]
The application of Pt IVA is sensitive to the facts. Consequently, “always the question must be whether the terms of the Act apply to the facts and circumstances of the particular case”.[32]
The Court noted that tax considerations influence the form of most business transactions and the presence of a fiscal objective does not mean that a person entered into or carried out a scheme for the dominant purpose of obtaining a tax benefit. Gleeson CJ and McHugh J explain it this way:
Furthermore, even if a particular form of transaction carries a tax benefit, it does not follow that obtaining the tax benefit is the dominant purpose of the taxpayer in entering into the transaction. A taxpayer wishing to obtain the right to occupy premises for the purpose of carrying on a business enterprise might decide to lease real estate rather than to buy it. Depending upon a variety of circumstances, the potential deductibility of the rent may be an important factor in the decision. Yet, if there were nothing more to it than that, it would ordinarily be impossible to conclude, having regard to the factors listed in s 177D, that the dominant purpose of the lessee in leasing the land was to obtain a tax benefit. The dominant purpose would be to gain the right to occupy the premises, not obtain a tax deduction for the rent, even if the availability of the tax deduction meant that leasing the premises was more cost-effective then buying them.[33]
Gummow and Hayne JJ make a similar point:
The bare fact that a taxpayer pays less tax, if one form of transaction rather then another is made, does not demonstrate that Pt IVA applies. Simply to show that a taxpayer has obtained a tax benefit does not show that Part IVA applies.[34]
The solution turns upon the identification, among various purposes of that which is dominant – that is the ruling, prevailing or most influential purpose.[35] The conclusion about purpose required by Pt IVA is formulated by reference to, and only by reference to, the eight factors specified in s 177D(b). Hart re-affirms the objective nature of the test. In Spotless Services the manner in which the taxpayer took steps which maximised their after tax return indicated the presence of the dominant purpose to obtain a tax benefit. Similarly in Hart the manner in which the scheme was entered into was only explicable by the tax consequences.
Hart again shows the importance of “manner”, “form and substance” and “timing” to the inquiry required by Pt IVA. Generally speaking, a finding as to the dominant purpose of a relevant taxpayer is sensitive to these factors, especially the particular way or means adopted to achieve the desired result.[36] To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require a consideration of what other possibilities existed.[37]
For example, as Cullinan J notes in relation to s 177D(b)(ii) – the form and substance of a scheme:
An aspect of the question to which s 177D(b)(ii) gives rise, is whether the substance of the transaction (tax implications apart) could more conveniently, or commercially, or frugally have been achieved by a different transaction or form of transaction.[38]
The application of general anti-avoidance rules, whether in legislative form or by way of judicial approaches, will always involve some element of judgment and perspective in applying the law to the facts. However, not only does Australia have a legislative framework to guide that analysis, but we now also have the benefit of substantial judicial guidance from the High Court about the operation of Pt IVA.
The propositions which may now be taken as decided are summarised below:
1. The definition of scheme in s 177A is wide. A scheme could be narrowly defined provided it met the statutory definition of scheme.[39] There is no limitation in the Act that requires schemes to “stand on their own feet”.[40]
2. The concepts of “scheme”, “tax benefit” and “scheme” to which Pt IVA applies are inter-related. Accordingly the definition of scheme must be related to the tax benefit obtained.[41]
3. Determining whether a tax benefit has been obtained “in connection with a scheme”[42] involves a predication (reasonable expectation rather than a possibility) as to the events that would have taken place.[43]
4. Part IVA is a last resort measure. If an amount is not included in the assessable income and another provision of the Act operates to counter that scheme by requiring it to be so included, the amount cannot be a tax benefit obtained by the taxpayer concerned, and Pt IVA will be inapplicable.[44]
5. The fundamental question is whether having regard to the eight matters listed in s 177D(b) it would be concluded 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 enabling the relevant taxpayer (alone or with others) to obtain a tax benefit in connection with the scheme.[45]
6. The inquiry directed by Pt IVA requires a comparison between the scheme in question and an alternative postulate. The drawing of conclusions about the existence of a scheme, tax benefit and purpose requires consideration of what other possibilities existed.[46]
7. Part IVA does not authorise consideration of evidence of the subjective purpose or motivation of a particular person. The subjective state of mind of a person is not a matter listed in s 177D(b) to which regard may be had. Rather the section requires consideration of the eight matters listed in s 177D(b) and not to other matters. The subjective state of mind of a person is not such a matter.[47]
8. The reference to dominant purpose in a case where more than one purpose is present is a reference to the “ruling, prevailing or most influential” purpose.[48]
9. The conclusion as to dominant purpose maybe reached not only with respect to the dominant purpose of the taxpayer, it may be reached by reference to the dominant purpose of any other person or persons so long as they are persons who entered into or carried out the scheme or any part of it.[49] Likewise, the purpose of an advisor may be attributed to the taxpayer in an appropriate case.[50]
10. It is possible to arrive at the conclusion as to purpose by making a global assessment of the facts, so long as it is clear that the relevant eight factors are taken into account.[51]
11. Some of the eight factors (there is clearly some overlap among them) may point one way, others may point in the opposite direction, and some may be neutral: it is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers.[52]
12. There is no inconsistency between a finding that the purpose of a person lay in the pursuit of commercial gain in the course of carrying on a business and a finding that the dominant purpose was to enable the relevant taxpayer to obtain a tax benefit.[53]
13. The circumstance that less tax is paid if one form of transaction rather than another is adopted does not necessarily lead to a conclusion that Pt IVA applies.[54] The solution turns up on the identification, among various purposes, of that which is dominant – manner, and form and substance are important in this regard.[55]
[*] Part of a speech by M D’Ascenzo presented to the Tax Institute of Australia at the QLD State Convention (September 2004).
[1] [2004] HCA 26, para 21 (per Gummow and Hayne JJ) (“Hart”).
[2] Draft Public Rulings on Split Loan were issued in 1997 (TR 97/D7) and 1998 (TR 98/D7) and the final issued in 1998 (TR 98/22).
[3] 2001 ATC 4708.
[4] Ibid 4725 (per Gyles J); cited in [2004] HCA 26, para 11 (per Gleeson CJ and McHugh J).
[5] 2001 ATC 4708, 4729.
[6] Hart 2002 ATC 4608 (per Hill, Hely and Conti JJ).
[7] Gleeson CJ and McHugh J agreed that it was inappropriate to exclude the fact of the borrowing from the putative scheme because the borrowing was an indispensable part of that which produced the tax benefit: [2004] HCA 26, para 9.
[8] 2002 ATC 4608, 4627; see also ibid 4624 (per Hill J).
[9] [2004] HCA 26 (per Gleeson CJ, McHugh, Gummow, Haync and Cullinan JJ).
[10] Ibid para 17 (per Gleeson CJ and McHugh J) citing FC of T v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404, 423 (per Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ) (“Spotless Services”).
[11] [2004] HCA 26, para 18 (per Gleeson CJ and McHugh J).
[12] Ibid paras 68-71.
[13] Ibid para 95.
[14] Ibid para 96.
[15] Ibid para 43 (per Gummow and Hayne JJ). Note also ibid para 89 (per Cullinan J). His Honour makes the point that “something done which is less than the whole of an arrangement or agreement may be capable of itself being a scheme”. This may include for example, an agreement or undertaking, or a course of action consisting of the giving notice of an election and paymet in accordance with it.
[16] (1994) 181 CLR 359 (“Peabody”).
[17] [2004] HCA 26, para 46.
[18] Ibid para 90 (per Cullinan J).
[19] Ibid para 9 (per Gleeson CJ and McHugh J).
[20] Ibid para 37 (per Gummow J).
[21] Ibid para 6 (per Gleeson CJ and McHugh J).
[22] Ibid para 12 (per Gleeson CJ and McHugh J).
[23] 2001 ATC 4343, 4360 (per Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ) (“Consolidated Press”).
[24] [2004] HCA 26, para 37 (per Gummow J).
[25] Ibid para 65 (per Gummow and Hayne JJ).
[26] Ibid para 66 (per Gummow and Hayne JJ).
[27]Ibid para 96 (per Callinan J).
[28] Ibid para 18 (per Gleeson CJ and McHugh J).
[29] Ibid para 16 (per Gleeson CJ and McHugh J); and paras 51-54 (per Gummow and Hayne JJ).
[30] Ibid para 52 (per Gummow and Hayne JJ) citing Spotless Services [1996] HCA 34; (1996) 186 CLR 404, 416 (per Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ).
[31] [2004] HCA 26, paras 15-16 (per Gleeson CJ and McHugh J).
[32] Ibid para 52 (per Gummow J).
[33] Ibid para 15.
[34] Ibid para 53
[35] Spotless Services [1996] HCA 34; (1996) 186 CLR 404, 416 (per Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ).
[36]Note the purpose of Pt IVA of effectuating a position akin in essence of the views expressed in Newton v FC of T [1958] UKPCHCA 1; (1958) 98 CLR 1 that a general anti-avoidance provision should apply where is could be predicated from looking objectively at an arrangement that it was implemented in that way so as to avoid tax: Explanatory Memorandum to the Income Tax Laws Amendment Bill (No 2) 1981 referred to in [2004] HCA 26, para 86 (per Cullinan J).
[37] [2004] HCA 26, para 66 (per Gummow J).
[38] Ibid para 66.
[39] Consolidated Press [2001] HCA 32; (2001) 207 CLR 235.
[40] Hart [2004] HCA 26.
[41] Ibid.
[42] Ibid para 91 (per Cullinan J) considers the word “connection” to have a wider import than for example “result”.
[43] Peabody (1994) 181 CLR 359.
[44] Hart [2004] HCA 26
[45] Peabody (1994) 181 CLR 359; Spotless Services [1996] HCA 34; (1996) 186 CLR 404; Consolidated Press [2001] HCA 32; (2001) 207 CLR 235; and Hart [2004] HCA 26.
[46] Hart [2004] HCA 26.
[47] Consolidated Press [2001] HCA 32; (2001) 207 CLR 235; and Hart [2004] HCA 26.
[48] Spotless Services [1996] HCA 34; (1996) 186 CLR 404.
[49] Spotless Services [1996] HCA 34; (1996) 186 CLR 404; and Hart [2004] HCA 26.
[50] Consolidated Press [2001] HCA 32; (2001) 207 CLR 235.
[51] Consolidated Press [2001] HCA 32; (2001) 207 CLR 235; and Hart [2004] HCA 26.
[52] Hart [2004] HCA 26.
[53] Spotless Services [1996] HCA 34; (1996) 186 CLR 404; Consolidated Press [2001] HCA 32; (2001) 207 CLR 235; and Hart [2004] HCA 26.
[54] Spotless Services [1996] HCA 34; (1996) 186 CLR 404; and Hart [2004] HCA 26.
[55] Spotless Services [1996] HCA 34; (1996) 186 CLR 404; and Hart [2004] HCA 26.
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/journals/JlATax/2004/11.html