House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. J.S. Dawkins, M.P.)

Avoidance Schemes and Penalties

A. Introduction

16.1 This chapter discusses the special provision that will apply to deal with schemes designed to avoid tax. It will be known as the general anti-avoidance provision. This chapter will also discuss the special provision designed to deal with situations where a person's liability to tax (or exemption from tax) is affected by arrangements that the person has entered into with other persons otherwise than at arms length. These matters are dealt with in Parts 8 and 9 of the Sales Tax Assessment Bill 1992.

B. Explanation and Commentary

The general anti-avoidance provision

16.2 The existing law contains a number of specific anti-avoidance provisions. They suffer from two drawbacks. First they do not cover the field of avoidance schemes. Instead, they are limited by the policy maker's knowledge of the schemes being developed and are a re-active and untimely response to the problem of avoidance. Second the provisions are complex. The new law will replace the specific anti-avoidance provisions with a single general provision.

16.3 The general anti-avoidance provision (the 'GAAP' ) is based, broadly, on Part IVA of the Income Tax Assessment Act 1936. As with Part IVA, the GAAP is designed to apply in situations where, on an objective view of the particular arrangement and its surrounding circumstances, it would be concluded that the arrangement was entered into for the sole or dominant purpose of obtaining a tax benefit. In the sales tax context, a tax benefit will be defined to mean either a reduction in a tax liability or an increase in an entitlement to a credit.

16.4 Obtaining a tax benefit under a scheme: This will be the central element of the GAAP. The provision will not apply unless a taxpayer has obtained a tax benefit under a scheme.

16.5 Definition of tax benefit: 'Tax benefit' will mean either of the following:

(i)

a reduction in liability to tax; [clause 5, definition of 'reduce']

Note:

This will include obtaining an entitlement to an exemption which would not have been available but for the scheme.

(ii)

any increase in entitlement to a credit. [clause 5, definition of ' increase']

Note:

This will include obtaining an entitlement to a credit which would not have been available but for the scheme.

16.6 Definition of scheme: 'Scheme' has been defined broadly, so as to cover the widest variety of conduct or omission in which tax avoidance arrangements may be found. It includes arrangements that are not legally enforceable as well as unilateral courses of conduct.

16.7 Limitations on the operation of the GAAP: There are two conditions that must be satisfied before a taxpayer will be taken to obtain a tax benefit under a scheme. These are:

(i)

It must be established that the taxpayer would not have obtained the benefit if the scheme had not been entered into;

Note:

This test will be satisfied if it could reasonably be expected that the benefit would not have been obtained if the scheme had not been entered into. In determining whether that reasonable expectation exists, the new law will allow consideration to be given to all relevant matters including things that did not happen, but which could reasonably be expected to have happened if the scheme had not been entered into.

(ii)

It must be reasonable to conclude that the scheme was entered into for the sole or dominant purpose of obtaining a tax benefit for a taxpayer.

Note 1:

This is an objective test. It must be based on an objective consideration of relevant circumstances. The actual purpose for which a person may have entered into the scheme is not relevant.

Note 2:

'Dominant purpose' has been defined to clarify that, if there is more than one purpose, then the tax avoidance purpose must be the dominant purpose when measured against each of the other purposes. However, it does not have to be greater than the aggregate of all the non-tax avoidance purposes in order for the GAAP to apply.

Note 3:

The actual purpose for which a person enters into a scheme will not be relevant to determining whether the GAAP will apply. This will re-inforce the objective nature of the test. [clause 93]

16.8 While the conditions that establish whether or not a person has obtained a tax benefit will be objective, the GAAP will be a discretionary provision. There will be no compulsion on the Commissioner to apply the test in particular cases.

Effect of applying the GAAP

16.9 Determinations by the Commissioner: In applying the GAAP to cancel a tax benefit, the Commissioner will be authorised to make a number of determinations. These will be:

•

a determination that particular things are to be treated as not having happened;

•

a determination that particular things are to be treated as having been done by different persons or at different times;

•

a determination that particular things which did not happen are to be treated as having happened and to have been done by a particular person or at a particular time.

16.10 If the GAAP is applied and an entitlement to a credit is cancelled, then the amount that becomes payable is to be treated as an amount of tax. This will ensure that the provisions of the Assessment Bill dealing with recovery of unpaid tax will apply to these amounts.

16.11 Any amount that becomes payable because of an assessment made under the GAAP will be due for payment by the date specified in the assessment. That date must be no less than 14 days after the issue of the assessment.

16.12 Application of the GAAP: The GAAP will only apply to schemes that were entered into, or commenced to be carried out, after the date on which the new law is introduced into the House of Representatives. This will ensure that the provision is not retrospective in its application.

16.13 The GAAP will replace the specific provision in the existing law which is directed towards schemes involving the sale of goods under option arrangements and service company arrangements where an associated company of the taxpayer supplied services in relation to the goods with the object of reducing the taxable value of the goods. With these kinds of schemes the dominant purpose was to reduce the taxable value of goods. The GAAP will therefore catch these schemes. [clause 92]

Penalty

16.14 If the Commissioner applies the GAAP to cancel a tax benefit, the new law will apply an automatic penalty of double the amount of the tax benefit i.e. 200%. The Commissioner may, however, remit all or any of the penalty. The remission may be made either before or after the penalty is imposed. [clauses 98 and 100]

Special provision for non-arm's length transactions

16.15 There will be a special provision in the new law to prevent a tax benefit from being obtained by being a party to a non-arm's length transaction. Two conditions that must be established in order for the provision to apply are:

(i)

a taxpayer (or an associate of the taxpayer) must have been a party to the non-arm's length transaction; and

Note:

Non-arm's length transaction will not be defined.

(ii)

if the transaction had been at arm's length, then either the taxpayer's liability to tax would have been increased or an entitlement to a credit would have been reduced.

Note:

The second condition will be satisfied if it would be reasonable to expect that the liability or entitlement would have been different had the transaction been at arm's length. Moreover, the liability or credit entitlement can relate to any transaction, not just the non-arm's length transaction.

16.16 If both these conditions are satisfied, then the taxpayer's liability to tax, or entitlement to a credit, will be assessed on the basis of the liability or credit that would have applied if the transaction had been an arm's length transaction. [clause 94]

16.17 The non-arm's length provision will replace the provisions in the existing law relating to non-arm's length transactions. These cover:-

(a)

sales between parties where the sale is not made at arm's length.

Note:

The parties may be at arm's length but if the sale is not - that is the sale is made at deflated value - then the sale transaction is caught.

(b)

where a person has a liability on the application of goods to own use - because the goods have been acquired under quote - and has purchased the goods at a non-arm's length price.

(c)

where a person manufactures goods for another person and that person has supplied materials at a depressed price to the manufacturer. The manufacturer then in turn sells the made-up goods either direct to the person who supplied the materials or through another person to the supplier of the materials.

16.18 In all of these situations the relevant provisions do not come into operation until the Commissioner makes a finding that the Commissioner is satisfied that the goods have not been sold at arm's length.

16.19 The new law will cover all of these situations. It is expressed in terms that will cover any transaction that results in goods being sold for a non-arm's length price.

Example:

A person purchases goods at a non-arm's length price under quote. The goods are then sold to an arm's length party at a deflated value because of the low purchase price. The later sale is caught because it is linked to a non-arm's length transaction.

16.20 The new arm's length provision will also operate automatically without the need for the Commissioner to exercise any discretion. The parties to a transaction will be required at all times to ensure that goods are sold at an arm's length price. Where the goods are not sold at an arm's length price the law will operate to apply an arm's length price to the sale or other taxable dealing.

Liability for a non-arm's length dealing

16.21 A taxpayer who has dealt with goods at a non-arm's length price will be liable to pay the tax underpaid from the time payment for tax is due on the dealing, i.e. 21 days after the end of the month or quarter in which the dealing was made.

Penalty

16.22 A taxpayer who does not correctly account for tax on a non-arm's length dealing will be liable to a penalty on the basis of having lodged a false or misleading statement. The taxpayer will also be liable to a late payment penalty on the underpaid tax from the time of lodgment of the return containing details of the non-arm's length dealing.

Penalties in general

Failure to provide return or other information

16.23 A taxpayer who fails to provide a return or other information that is required to be provided under the sales tax law will be liable to a penalty. The penalty will be 200% of the tax payable on any assessable dealings involved with the failure to lodge returns or the relevant information. [clause 96]

False statements

16.24 A penalty will apply to a person who makes a false statement to a taxation officer or another person for a purpose relevant to the sales tax law and as a result of that statement, tax is underpaid. The penalty is 200% of the underpayment. It will not matter if the person making the false statement does not know it is false. The penalty applies if it is simply a false statement.

16.25 A false statement is one that is false or misleading in a material particular or omits a material particular.

16.26 A reference to a taxation officer means a person who is exercising powers or performing functions in connection with the sales tax law. [clause 97]

Remission of penalty

16.27 If the law imposes a penalty on a person for failure to provide a return or other information or for making a false statement, the Commissioner will be authorised to remit all or any of the penalty imposed. The remission may be made before or after the penalty is assessed. [clause 100]

C. Summary of Main Changes

16.28 The main changes to the existing law discussed in this chapter are: