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Our journal article, “The Changing Tides of Part IVA: Guardian and Minerva Insights,” delves into the evolution of Australia’s General Anti-Avoidance Rule (GAAR) and its application under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936).

Part IVA serves as a key mechanism to counter tax avoidance schemes. We examine its historical development, focusing on the significant amendments made in 2013.

Two recent Federal Court cases — FCT v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] and Minerva Financial Group Pty Ltd v FCT [2024] — are the first to interpret the amendments. We highlight how these cases signal a shift in the legal landscape, making it more challenging for taxpayers to avoid taxes while also leaving certain areas of ambiguity in need of further judicial clarification.

Why the 2013 amendments were enacted

The 2013 amendments to Part IVA were enacted in response to growing concerns that taxpayers were successfully avoiding taxes by exploiting loopholes in the interpretation of the law.

Historically, courts often allowed taxpayers to present hypothetical scenarios, including the argument that they “would have done nothing” in the absence of a tax-avoidance scheme. This “do nothing” argument is seen in cases like FCT v AXA Asia Pacific Holdings Ltd and FCT v Futuris Corporation Ltd. The defence created a significant obstacle for the Commissioner of Taxation in proving that a taxpayer had gained a “tax benefit” through avoidance schemes.

Another issue lay in the interpretation of the “dominant purpose” test. Taxpayers could claim that obtaining a tax benefit was not their primary goal, but rather a commercial side effect.

To address these issues, the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 introduced Section 177CB.

Section 177CB sought to restrict the types of alternative postulates that could be considered when assessing tax benefits and the dominant purpose of a scheme. Under the new framework, courts must disregard tax-related outcomes and focus on the commercial substance of the arrangements.

As a result, taxpayers can no longer rely on the “do nothing” defence, and the scope for hypothetical alternative actions is significantly narrowed. The 2013 amendments were designed to restore the effectiveness of Part IVA in combating tax avoidance.

Interpreting Part IVA post-2013: The Guardian and Minerva cases

The Guardian and Minerva cases are the first judicial interpretations of Part IVA post-2013 amendments.

In the Minerva case, Minerva undertook a series of restructuring steps, including the creation of the Minerva Holding Trust (MHT), which redirected proceeds from Secure Funding into a trust silo. Minerva Financial Group Trust (MFGT) became the beneficiary of MHT, with the majority of distributions going to MFGT at a lower withholding tax rate.

Although the Commissioner argued that this restructuring constituted a tax avoidance scheme under Part IVA, the full Federal Court found that, while a tax benefit existed, the dominant purpose of the restructuring was not to obtain this benefit.

The court determined that the restructuring was driven primarily by legitimate commercial reasons, such as preparing for an initial public offering and managing financial operations more efficiently. As a result, Minerva was successful in its appeal.

Notably, the Minerva case did not require the court to engage with the newly introduced Section 177CB.

In contrast, the Guardian case engaged with Section 177CB, offering important insights into its application.

Mr. Springer established AIT Corporate Services (AITCS) and arranged for AIT to make income distributions to AITCS, which led to unpaid present entitlements (UPEs). To mitigate the tax impact, AIT paid AITCS’s income tax, and AITCS paid AIT a fully franked dividend, which was then distributed to Mr. Springer at a lower tax rate than unfranked distributions.

The full Federal Court found that this series of transactions constituted a scheme, and Mr. Springer received a tax benefit through these arrangements. Crucially, Section 177CB was engaged, and the Court applied it to disregard the tax consequences of the scheme in evaluating alternative postulates.

The Court concluded that the dominant purpose of the scheme was to achieve a tax benefit, with the structuring and timing of the transactions clearly focused on reducing Mr. Springer’s tax liabilities. The Commissioner was successful in this case.

Where does that leave Part IVA?

The Guardian decision illustrates that Section 177CB plays a crucial role in supporting the Commissioner’s position regarding the existence of a tax benefit.

The taxpayer can no longer rely on hypothetical tax outcomes when proposing an alternative postulate, complicating their defence strategy. Taxpayers may now face assessments based on transactions they might not have considered reasonable alternatives under the questioned scheme.

Taxpayers now need to provide stronger non-tax reasons when defending against a Part IVA challenge. They must prove the most likely course of action they would have taken without the scheme, without relying on tax-related outcomes. This shift places a greater burden on taxpayers to demonstrate a clear commercial rationale for their actions.

While the “do nothing” argument is more constrained under the new framework, it is not entirely dead.

Section 177CB(4) only excludes tax considerations when assessing alternative postulates, meaning that a “do nothing” defence could still be valid if non-tax reasons support it. However, this defence now requires a more nuanced approach, and taxpayers must be careful not to rely too heavily on tax considerations.

In the Guardian case, the Court followed the traditional sequence of analysis, addressing the tax benefit first and then the dominant purpose. This raises the question of whether a single postulate might be enough under both Sections 177CB and 177D.

A concern is the potential for the Commissioner to use section 177CB(4)(b) to propose a postulate once seen as unreasonable due to its tax implications. Then, under section 177D, the purpose is argued to avoid the substantial tax consequences of this now ‘reasonable’ alternative, putting taxpayers in a difficult position.

Final thoughts

The Guardian and Minerva cases highlight the increasing difficulty taxpayers face in contesting the existence of a tax benefit under the amended Part IVA.

The inclusion of Section 177CB has tilted the balance in favour of the Commissioner. Yet, the precise interaction between Sections 177CB and 177D remains somewhat unclear, and future cases will likely offer further insights.

As the tax community awaits further guidance from the Australian Taxation Office, these recent cases underscore the need for a solid commercial rationale when defending against tax avoidance claims. For now, taxpayers and their advisors must navigate a more challenging legal landscape while awaiting more case law to clarify Part IVA’s application.

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