Senate

Supplementary Explanatory Memorandum

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

1. General anti-avoidance provision

A. Summary of amendments to the Bills

1.1 The general anti-avoidance provision (GAAP) will be amended to more clearly identify the circumstances in which it will be applied. The changes will be as follows:

i.

there will be an exhaustive list of factors to which the Commissioner must have regard in deciding whether the scheme was entered into for the purpose of obtaining a tax benefit;

ii.

the provision will apply only to schemes that are entered into for a purpose that is dominant as against all of the other purposes combined;

iii.

the circumstances in which the reconstruction power can be exercised will be more clearly set out; and

iv.

the GAAP will be extended to apply to a tax benefit that is obtained under a scheme entered into prior to 26 May 1992, if the scheme would have been caught by the specific anti-avoidance provisions in the existing law.

B. Explanation of the changes

1.2 The GAAP is set out in clauses 92 and 93 of the Sales Tax Assessment Bill 1992. The provision has been restructured as part of the amendments. The explanation below discusses only those parts of the GAAP that are proposed to be altered in substance.

Factors relevant to cancelling a tax benefit

1.3 The Bill will be amended to set out an exhaustive list of factors to which regard must be given in concluding whether a scheme was entered into for the sole or dominant purpose of obtaining a tax benefit.

1.4 The Bill requires that conclusion to be based on an objective consideration of relevant circumstances but does not list them [existing subclause 93(1)] . However, the actual purpose for which any person entered into or carried out the scheme is expressly excluded from the things that can be taken into account [existing subclause 93(2)] .

1.5 In response to suggestions that 'relevant circumstances' does not provide either the Commissioner or taxpayers with sufficient guidance, the Bill will be amended to include an exhaustive list of objective factors which must be taken into account in concluding the purpose for entering into the scheme. [Amendment No. 11 of the Assessment Bill (New subclause 93(2))]

1.6 The factors will provide an objective standard. The actual subjective purpose for which any person entered into the scheme is not to be taken into account. The factors will be:

•

the manner in which the scheme was entered into or carried out;

•

the form and substance of the scheme;

•

the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

•

the sales tax result achieved by the scheme (but for the general anti-avoidance provision);

•

any change in the financial position of the taxpayer that has resulted from the scheme;

•

any change in the financial position of a person who has business, family or other connections with the taxpayer, being a change that has resulted from the scheme;

•

any other consequence for the taxpayer as a result of the scheme having been entered into; and

•

the nature of the connection between the taxpayer and another person whose financial position changes as a result of the scheme.

Dominant purpose

1.7 A tax benefit under a tax avoidance scheme may only be cancelled if the scheme was entered into for the dominant purpose of obtaining a benefit. The Bill defines a dominant purpose as a purpose that is dominant when compared against each of the other purposes [existing subclause 93(3)] .

1.8 The Bill will be amended to define 'dominant purpose' to mean a purpose that is dominant as against all of the other purposes combined. If a scheme or arrangement is entered into for several purposes, and the avoidance purpose is greater than each of the other purposes but not greater than all of them combined, then the general anti-avoidance provision will not apply. [Amendment No. 11 of the Assessment Bill (New subclause 93(4)]

Reconstruction power

1.9 If the Commissioner cancels a tax benefit obtained under a tax avoidance scheme, then the Commissioner will also have the power to reconstruct events so that a proper assessment of tax may be made [existing subclause 92(2)] . There have been concerns expressed that the reconstruction power can be used to create a tax benefit. The circumstances in which the reconstruction power can be exercised will be more clearly spelt out. The power to reconstruct can only be exercised for the purposes of cancelling an already identified tax benefit, and even then only when it has been concluded that the scheme or arrangement was entered into for the sole or dominant purpose of obtaining that tax benefit.

1.10 There have been two drafting measures taken to meet the concerns expressed:

•

First, the general anti-avoidance provision has been restructured so that the reconstruction power, which can only be exercised in the cancelling of a tax benefit, will now appear after the part which deals with actually obtaining the tax benefit; and [Amendment No. 11 of the Assessment Bill (New clauses 92, 93 and 93A)]

•

Secondly, the reconstruction power itself will be amended to make it clear that the determination which the Commissioner can make can only be made after it has been ascertained that a tax benefit has been obtained under a scheme. However, there will be no change to the wording of the determination that the Commissioner may make. These words are the clearest expression, in plain English, of the extent of the Commissioner's powers. [Amendment No. 11 of the Assessment Bill (New subclause 93A(2)]

Transitional

1.11 The Bill will limit the application of the GAAP to schemes that were entered into, or commenced to be carried out, after 26 May 1992 (the date on which the existing Bill was introduced into the House of Representatives) [existing subclause 92(1)] . However, the specific anti-avoidance provisions will cease to apply once the new law starts. As a consequence, the new law would not apply to tax avoidance schemes entered into before 26 May, and which would have been caught under the existing law.

1.12 The Bill will be amended to ensure that the GAAP will be capable of cancelling a tax benefit that is obtained under a scheme entered into before 26 May 1992, if the scheme would have been caught by one of the specific anti-avoidance provisions in the existing law. [Amendment No.2 of the Transitional Bill (Clause 5)]

Consequential amendments

1.13 As part of the restructure of the general anti-avoidance provision, the Commissioner's power to make an assessment will now be contained in proposed clause 93A of the Assessment Bill, rather than clause 92 (where it now appears). There will be 4 amendments of the Bill to change references to assessments made under clause 92 to assessments made under clause 93A. [Amendments No. 1, 12, 13 and 14 of the Assessment Bill]