Part IVA - Tax Avoidance Alert
Posted on February 20, 2015
A decision of the Administrative Appeals Tribunal made on 29 January 2015 illustrates the risks of relatively ordinary schemes to minimise tax coming unstuck under the Part IVA anti-avoidance provisions. Many Part IVA cases come from “big end of town” complex corporate transactions, often with an international element. However, in Track and Commissioner of Taxation [2015] AATA 45, it was an unremarkable small to medium enterprise scenario that came under the spotlight. In basic terms, the facts were as follows:
- The Track Bros 1 Trust (the Trust) was a hybrid unit/discretionary trust which operated a business.
- In early 2005 the Unit Trust received an approach for the purchase of its business.
- The prospect of the sale caused the principals to seek advice that resulted in an elaborate scheme to reduce the Trust’s assets through distributions of capital and increasing its liabilities through related party loans.
- In the next financial year a contract to sell the business for a substantial capital gain was signed.
The Australian Taxation Office commenced an investigation a few years later that led to a determination pursuant to Part IVA of the 1936 Act to disallow the scheme, the issue of amended assessments together with a scheme shortfall penalty of 50%.
The Commissioner identified the arrangements as a scheme having the object of enabling the Trust to obtain access to the small business CGT concessions by reducing the Trust’s assets and increasing its liabilities to ensure that the Trust’s net assets at the time of the sale were less than $5,000,000. The AAT decided in favour of the Commissioner on the main point where the anti-avoidance provisions applied to cancel the tax benefits from the use of the small business capital gains tax concessions. One of the main reasons for the decision was that on the evidence, the AAT did not accept that the dominant purpose of the scheme was that of asset protection. Instead, the AAT concluded that the scheme was entered into for the purpose of obtaining a tax benefit – that of concessional CGT treatment:
“The manner in which the scheme was entered to, or carried out, points strongly to a contrivance, designed to take advantage of the small business concession threshold, in circumstances where the sale then in prospect clearly demonstrated that the assets of the business exceeded that threshold by a considerable amount. The fact of capital distributions having been made in one financial year prior to the sale in the following financial year merely emphasised the contrivance and that the contrivance was directed to obtaining a tax benefit in connection with the scheme.”
Two other interesting points emerge from the decision:
- Loans made by related entities to the Trust as part of the scheme were not sufficiently related to the CGT assets of the Trust for the purposes of calculating “the net value of the CGT assets being the amount by which the sum of the market values of the assets exceeds the sum of the liabilities of the entity that are related to the assets.”
- The Commissioner did not succeed in his assessment against corporate beneficiaries. In the three years prior to the sale of the business, income was distributed to corporate beneficiaries and so the Commissioner formed the view that distributions of the capital gain from the sale of the business would have also been to the corporate beneficiaries. However, the AAT adopted a common sense approach based on the evidence that the taxpayers took professional advice with regard to distributions and concluded that because the corporate beneficiaries were not able to access the general 50% CGT discount, distributions would not have been made to them and that instead the capital gains were received by natural person beneficiaries.
Summary
This decision shows the far reaching application of the anti-avoidance laws even before the amendments to Part IVA made in 2013. The problems sought to be addressed by the amendments in 2013 did not arise in this case because the Commissioner had little difficulty establishing the tax benefit if the scheme had not been entered into.
