This Case Decision Summary illustrates the approach taken by the Commissioner of Taxation in applying Part IVA to a real fact situation. The facts have been simplified to focus on key practical issues.
To properly apply Part IVA, the law must be applied to all the relevant facts. In particular, an eight step test must be applied to determine whether, on the facts, a particular scheme objectively has the dominant purpose of obtaining a tax benefit not intended by the law. Where the scheme simply takes advantage of the intended operation of a structural feature of the law, Part IVA will not apply because the required dominant purpose will not exist.
In applying the dominant purpose test, regard must be had to the manner in which the scheme is carried out; that is, whether the scheme bears the stamp of tax avoidance. The Full Federal Court in Bellinz Pty Limited v Federal Commissioner of Taxation 98 ATC 4634 at 4647; 39 ATR 198 at 212 has noted the difficulty in applying Part IVA prior to the scheme being carried out, because the execution of the scheme may in fact be different to that originally proposed. Even where the scheme has been carried out, the Court has noted that a difficulty in coming to a view on the application of Part IVA is to ensure that all relevant facts are considered, including those concerning the manner in which the scheme is carried out.
This Case Decision Summary has been withdrawn.
ATO Case Decision
Case Decision Number:
CDS10331
Subject:
Does Part IVA (Income Tax Assessment Act 1936 (ITAA 1936)) apply to a trust distribution of business income by a family trust to a resident company, which is an existing beneficiary, and owned by family beneficiaries under the trust:
1) in a year where the company tax rate is lower than all other regular beneficiaries’ tax rates?
2) as for 1), except the company has tax losses?
Decision:
1) No.
2) No.
Facts:
A trust deed of a family trust presently allows for both income and corpus to be distributed at the discretion of the trustee. Beneficiaries include a company owned by family members.
Reasons for Decision:
1) Distributions to beneficiaries on differing rates of tax to obtain the best overall outcomes for the beneficiaries, is not in itself something that would attract the operation of Part IVA (ITAA 1936).
2) Assuming subdivision 175-A (Income Tax Assessment Act 1997) will not apply,this simply amounts to the effective rate of tax in that year being different.
Legislative References:
Income Tax Assessment Act 1936 Part IVA
Income Tax Assessment Act 1997 subdivision 175-A
Keywords:
Beneficiaries
Carry forward losses
Company losses
Company tax
Family trusts
Income alienation
Losses
Part IVA
Personal services income
Prior year losses
Schemes & shams
Tax avoidance
Tax benefits under tax avoidance schemes
Tax planning, avoidance & evasion
Trusts
FOI Number:
I2000331