Expanding scope of the Australian general anti-avoidance rule
December 2023 | SPECIAL REPORT: CORPORATE TAX
Financier Worldwide Magazine
December 2023 Issue
This article addresses the expanding scope of the Australian general anti-avoidance rule (GAAR) and is relevant to corporate groups with a presence in Australia or that may be considering an investment in Australia. It is also potentially relevant to other jurisdictions experiencing this trend, such as Canada where the government has recently released draft legislation to expand the scope of the Canadian GAAR.
Traditionally, GAARs have been considered provisions of last resort. They enable revenue authorities to attack artificial or contrived schemes where the regular tax rules apply in a manner and give rise to tax outcomes that were not intended. However, in Australia there has been a steady expansion of the scope of the GAAR, primarily through legislative amendment. There is an increasing risk that the Australian Taxation Office (ATO) will seek to apply the Australian GAAR to arrangements otherwise considered conventional. In that context, it is important to maintain a good document trail of decisions (and their commercial rationale) as a transaction develops. Having this material available to provide to the ATO may help to prevent it from developing an adverse case theory during an audit or review and will ultimately be required as evidence to defend the arrangement if the matter is litigated.
What is a GAAR?
A growing number of jurisdictions have implemented a GAAR. In broad terms, a GAAR is a rule designed to prevent the abuse of the tax system by enabling the revenue authority to deny tax benefits that otherwise arise under tax legislation. Each GAAR is adapted to its local context. However, many, including the Australian GAAR, share the following features: identification of a ‘scheme’, quantification of a ‘tax benefit’ resulting from that scheme, and a purpose test to determine whether one or more scheme participants had the purpose of enabling the taxpayer to enjoy that tax benefit. Additional penalties may apply where the revenue authority successfully applies the GAAR.
In any tax system there is a tension between certainty for the taxpayer, which promotes simple rules, and protection of the revenue. A GAAR pushes that balance toward protecting the revenue and inevitably creates additional uncertainty for taxpayers. This uncertainty increases as the scope of the GAAR expands and the revenue authority’s propensity to use the GAAR increases.
Importantly, in Australia, the application of the GAAR is not subject to the application of Australia’s tax treaties, and generally a taxpayer will not be able to obtain relief from double tax under a treaty if the GAAR is applied. In contrast, where other rules, such as transfer pricing rules, apply the taxpayer may be able to seek a compensating tax adjustment in the treaty partner jurisdiction, which mitigates the net increase in tax paid by the group globally.
The Australian experience
In late 2014, after a series of reports by non-governmental organisations and media criticising the tax practices of large multinational groups, the Australian government initiated an inquiry into corporate tax avoidance. In 2016, at the instigation of the Australian government, the ATO formed a tax avoidance taskforce. Since that time, the Australian government has provided the taskforce with more than A$1.6bn of funding and has further expanded the scope of the GAAR. It has a clear expectation of receiving a return on this investment. The taskforce has been an active user of the GAAR and the ATO claims to have raised an additional A$27.7bn in tax revenue from the taskforce’s activities since its inception.
Legislative expansion. The Australian government has made various amendments to the GAAR over the past 10 years and further amendments are proposed. These fall into three categories.
The first category aims to overcome perceived deficiencies in the drafting of the GAAR that enabled taxpayers to deny the application of the GAAR by raising certain technical arguments before the courts. For example, some taxpayers were successful in arguing that there was no tax benefit in relation to their arrangements, and hence the GAAR could not apply, because in the absence of the relevant scheme, the transaction giving rise to the tax benefit would not have taken place. We expect that any similar future technical interpretations of the GAAR that favour taxpayers would be addressed by further legislative changes.
The second category expands the scenarios in which the GAAR can apply, for instance by extending the categories of tax attributes considered to give rise to a ‘tax benefit’. In its most recent budget, the Australian government announced that it would further expand the scope of the GAAR to include schemes that enable a taxpayer to access a lower rate of withholding tax and schemes that achieve an Australian income tax benefit even if the dominant purpose of the scheme was to reduce foreign income tax.
The third category uses the framework of the GAAR to address more specific areas of tax avoidance, such as the Diverted Profits Tax (DPT) amendments, which are aimed at imposing tax on profits that are artificially diverted from Australia. Although referred to as a separate tax, technically the DPT operates within the GAAR legislative provisions. These amendments impose different substantive and administrative requirements compared to the general provisions of the GAAR. For example, the DPT applies where only one of the principal purposes of the scheme is to obtain a tax benefit. This is a lower threshold than the requirement in the general provisions that there be a sole or dominant purpose of obtaining a tax benefit. Further, under the DPT, the ATO has additional time to raise assessments, tax is imposed at a higher rate and is payable in full almost immediately, the taxpayer cannot object to the assessment for 12 months to allow the ATO further time to investigate, and the taxpayer must provide any additional evidence within that 12 months if it wishes to later seek to rely on that evidence in litigation. There is a risk that over time one or more of these amendments could be incorporated into the general provisions of the GAAR.
Administrative expansion. The GAAR, excluding the more specific modifications such as the DPT, has been described consistently by the ATO as a ‘last resort measure’. However, in practice, the GAAR is invariably a feature of large business audits of multinational enterprises.
Recent cases demonstrate the ATO’s willingness to seek to expand the interpretation of the scope of the GAAR with the potential effect of covering types of transactions that would not typically be considered artificial or contrived. For example, the Federal Court decision in Minerva Financial Group Pty Ltd v. Commissioner of Taxation could be interpreted as meaning that the GAAR can apply to a trustee exercising its discretion to distribute trust income to lower taxed beneficiaries. The decision of the Full Federal Court on appeal is currently reserved. Similarly, in Mylan Australia Holding Pty Ltd v. Commissioner of Taxation, the ATO appears to be seeking to apply the GAAR to the choice to fund an acquisition by debt, which gives rise to interest deductions, rather than equity. The Federal Court has not yet handed down its decision in that case.
Legislative interpretation. The judicial interpretation of the GAAR has been slow to evolve. This may be because many GAAR cases are complex, both factually and technically, and thus are difficult to litigate, prone to settlement and if litigated then likely to be confined to their facts and not give rise to principles of general application. Decisions of lower courts and tribunals provide limited assistance in interpreting the scope of the GAAR. Further decisions from the High Court on Australia’s GAAR will be helpful, particularly in relation to the operation of the legislative modifications that have been made to the GAAR provisions.
Conclusion
The ATO can be expected to at least consider the application of the GAAR, in addition to other provisions, when conducting an audit or other review of any transaction of significant size or value. The ATO’s current focus areas include funding and arrangements involving intangibles. Addressing the potential application of the GAAR in these areas can be challenging, as arrangements are often complex, involving many steps and the interaction of a number of variables. This generally means that there are various choices open to the taxpayer. For example, in providing funding, the choices available include the choice (and type) of equity or debt, the currency (and whether it will be hedged), the term of the debt and whether security or a guarantee will be provided. The various theoretical alternatives to the transaction undertaken could form the basis of an argument that the GAAR applies if one or more of those alternatives would have resulted in a higher Australian tax liability.
Taxpayers should take steps to reduce the opportunities for revenue authorities to apply a GAAR. The Australian GAAR is not subject to the protection of tax treaties and can lead to exposure to higher penalties. There are also potentially significant reputational issues that need to be managed if a company is seen to be involved in a ‘tax avoidance’ dispute. The best way for a taxpayer to attempt to ensure that a revenue authority does not pursue a GAAR argument is by having a good document trail of the decisions made, including their commercial rationale, as the relevant transaction or arrangement was evolving. The taxpayer’s tax advisers, both internal and external, will have a strong interest in ensuring that this type of evidence is available to provide to the revenue authorities. However, it cannot be left to the tax advisers to ensure these documents are created as this will likely be viewed with suspicion by revenue authorities and the probative value of the materials may be discounted.
Stewart Grieve is a partner and Don Spirason is a special counsel at Johnson Winter Slattery. Mr Grieve can be contacted on +61 3 8611 1353 or by email: stewart.grieve@jws.com.au. Mr Spirason can be contacted on +61 3 8611 1379 or by email: don.spirason@jws.com.au.
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Stewart Grieve and Don Spirason
Johnson Winter Slattery
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