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Australia Part IVA GAAR Guide

Australian Part IVA (General Anti-Avoidance Rules). The guide covers: the Part IVA — the General Anti-Avoidance Rules (the 'GAAR') — the 'Part IVA of the ITAA 1936' is the 'general anti-avoidance provision' that 'allows the ATO to cancel the 'tax benefit' obtained from the 'scheme' that was 'entered into for the 'dominant purpose of the tax avoidance''; the 'Part IVA' applies to the 'schemes' (the 'arrangements', the 'transactions', the 'transactions between the related parties') that 'produce the 'tax benefit' (the 'reduction of the tax liability') and the 'dominant purpose of the scheme is the 'tax avoidance'; the four elements of the Part IVA — the 'ATO must 'establish the four elements' to 'apply the Part IVA': (i) there is a 'scheme' (the 'arrangement' or the 'transaction'), (ii) the 'taxpayer obtains the 'tax benefit' from the scheme (the 'tax benefit' may be the 'reduction of the assessable income', the 'increase of the deductions', the 'reduction of the capital gain', or the 'reduction of the withholding tax'), (iii) the 'taxpayer entered into the scheme for the 'dominant purpose of the tax avoidance' (the 'dominant purpose' is the 'ruling purpose' or the 'principal purpose' — the 'purpose of the tax avoidance' must 'outweigh the non-tax purposes'), (iv) the 'scheme is the 'non-arm's length scheme' or the 'scheme that is the 'contrived scheme''; the tax benefit cancellation — if the 'Part IVA applies', the 'ATO' can 'cancel the tax benefit' by: (i) the 'including the amount in the assessable income', (ii) the 'denying the deduction', (iii) the 'adjusting the cost base', (iv) the 'treating the payment as the deemed dividend'; the 'ATO may also 'impose the penalty' for the 'tax avoidance' — the 'penalty rate' is 25% to 75% of the 'tax avoided' (the 'base penalty amount' — the '25% for the 'lack of the reasonable care', the '50% for the 'recklessness', the '75% for the 'intentional disregard'); the schemes commonly challenged under the Part IVA — the 'ATO' commonly 'challenges the following schemes' under the 'Part IVA': (i) the 'circular financing' (the 'round-robin financing' to 'create the artificial deductions'), (ii) the 'trust stripping' (the 'distribution of the trust income to the loss entities'), (iii) the 'dividend stripping', (iv) the 'capital gains streaming' (the 'direction of the capital gains to the lower-taxed entities'), (v) the 'transfer pricing adjustments' (the 'non-arm's length transfer pricing'), (vi) the 'alienation of the personal services income' (the 'PSI diversion to the company or the trust'); the Part IVA exceptions and the exclusions — the 'Part IVA does NOT apply to: (i) the 'schemes entered into for the 'genuine commercial purposes' (the 'non-tax dominant purpose' — the 'business restructure for the commercial reasons'), (ii) the 'schemes that are 'consistent with the tax law policy' (the 'tax elections and the concessions that are 'intended by the Parliament'').

Part IVA Elements

  • Scheme: The 'arrangement or the transaction' that 'produces the tax benefit'.
  • Tax benefit: The 'reduction of the assessable income', the 'increase of the deductions', or the 'reduction of the capital gain'.
  • Dominant purpose: The 'tax avoidance purpose' must 'outweigh the non-tax purposes'.

For the tax audit and the ATO compliance, see our Tax Audit & Appeals Guide →.

Penalties & Cancellation

  • Tax benefit cancellation: The 'ATO cancels the tax benefit' and 'adjusts the assessment'.
  • Penalty rates: The '25% (the lack of the reasonable care)', the '50% (the recklessness)', the '75% (the intentional disregard)'.
  • GIC on the shortfall: The 'Shortfall Interest Charge (SIC)' applies to the 'tax shortfall'.

For the GAAR rules and the general anti-avoidance, see the ATO website (www.ato.gov.au).