SESSION 6: PART IVA:

DOMINANT PURPOSE - AN

ANALYSIS OF THE EIGHT

FACTORS

Anthony Portas, CTA

Overview

Overview of Part IVA

Introduction to Dominant Purpose Test

The 2013 Changes to Part IVA

The Dominant Purpose Test:

Some history

High level principles

An analysis of each of the 8 Factors

ATO guidance: PSLA 2005/24

Impact of the 2013 amendments

Conclusions

1. An Overview of Part IVA

Part IVA is the general anti-avoidance provision of the

Australian income tax law. Broadly, it applies where:

a taxpayer enters into a scheme;

the taxpayer obtains a tax benefit from the scheme; and

the circumstances indicate that the obtaining of that tax benefit

was the dominant purpose of one of the parties.

1. The Legislation: Dominant Purpose (s177D)

Scheme for purpose of obtaining a tax benefit

(1) This Part applies to a scheme if it would be concluded (having regard to the matters in

subsection (2)) that the person, or one of the persons, who entered into or carried out the

scheme or any part of the scheme did so for the purpose of:

(a) enabling a taxpayer (a relevant taxpayer) to obtain a tax benefit in connection with the

scheme; or

(b) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax

benefit in connection with the scheme;

whether or not that person who entered into or carried out the scheme or any part

of the scheme is the relevant taxpayer or is the other taxpayer or one of the other

taxpayers.

1. The Legislation: Dominant Purpose (s177D)

Have regard to certain matters

(2) For the purpose of subsection (1), have regard to the following matters:

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

(b) the form and substance of the scheme;

(c) the time at which the scheme was entered into and the length of the period during which the scheme

was carried out;

(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the

scheme;

(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may

reasonably be expected to result, from the scheme;

(f) any change in the financial position of any person who has, or has had, any connection (whether of a

business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result

or may reasonably be expected to result, from the scheme;

(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of

the scheme having been entered into or carried out;

(h) the nature of any connection (whether of a business, family or other nature) between the relevant

taxpayer and any person referred to in paragraph (f).

2. Introduction to Dominant Purpose Test

This presentation will focus only on the Dominant Purpose

test

More particularly the 8 Factors: The intention behind each factor

What the Courts have said about each factor

How many cases have considered each factor, and whether they

thought it was ‘for, against or neutral’ a tax purpose

To compare and contrast the relevant cases for each factor, and bring

out key principles and any inconsistencies that exist; and

To reach a conclusion on each of the 8 factors, including which have

been considered as most important by the Courts.

38 Dominant Purpose Cases - Appendix

3. The 2013 Changes to Part IVA

Mostly the 2013 amendments were to ‘tax benefit’ element

Arose due to a number of cases deciding that no tax benefit arose

Section 177CB inserted – contains strict conditions applicable to

the tax benefit analysis. Certain factors to be considered, and

relevant tax costs to be disregarded

One of the stated purposes of the change was to return the

dominant purpose test to be the ‘fulcrum’ or ‘pivot’ around which

Part IVA operates

Section 177D (Dominant Purpose Test) – was replaced to make it

clearer. However, the 8 factors were not changed.

Does existing Dominant Purpose case law remain relevant?

4. Dominant Purpose: Some Historic Context

Part IVA arose due to deficiencies in former GAAR (s260)

Newton’s Case (1957 High Court) – stated s260 was long

overdue for reform

Newton’s Case (1958 Privy Council) – Predication Test

1957 – 1977: Long line of cases that were decided in

favour of taxpayers

1978 - 1981: Work within ATO and Government to replace

s260

1981: Part IVA commenced – based on Newton’s

predication test

5. The Dominant Purpose Test: High Level Principles

Determining purpose: objective v subjective analysis

Two or more purposes – the meaning of dominant

The significance of commercial purpose or motive

Tax considerations can be taken into account

The role of the counterfactual in the Dominant Purpose analysis

Whose purpose is relevant?

When is purpose tested?

There is no ‘but for’ test

The significance of evidence

6. The Dominant Purpose Test: 8 Factor Analysis

Analysed 38 key cases – from AAT Case W58 (1989)

through to Orica (2015)

Appendix to Paper – contains full case analysis across

each of the 8 factors. Includes reasoning from the cases

on each of the factors. It is comprehensive, and colour

coded.

Categorises the cases per next slide

Part IVA: 38 Key Cases (in categories)No. Category No. of Cases Cases

1 Employment Contribution Schemes 2 Pridecraft, Trail Bros

2 Investment in Mass Marketed Schemes

(agriculture, films etc)

8 Vincent, Puzey, Krampel Newman, Sleight, Cooke, Calder,

Tolich, Lenzo

3 Personal Services Structuring 3 Case W58, Case Y13, Mochkin

4 Sale & Leasebacks 2 Eastern Nitrogen, Metal Manufacturers

5 Internal Restructures 2 News Limited & Noza

6 Internal Restructure before Divestment 6 Peabody, McCutcheon, British American Tobacco, RCI

(James Hardie), Futuris, Track & Ors

7 Structuring a New Investment 2 Spotless, Consolidated Press

8 Tax Effective Divestments 2 Axa, Macquarie (Mongoose)

9 Intra-group Debt Forgiveness 2 BHPB Finance, Ashwick (Fosters)

10 Tax Loss Utilisation 2 CC (NSW) (in liq), Clough Engineering

11 Other 7 Hart, Citigroup, Channel Pastoral, Zoffaines, Macquarie

Finance, Orica, WD & HO Wills

TOTAL 38

The 8 Factor Analysis (Appendix: Case colour coding)

Red – factor points towards tax purpose (ATO)

Green – factor does not indicate a tax purpose (Taxpayer)

Grey – factor is neutral. Is neither for or against tax

purpose

White – ‘catch-all’ other category, where factor was

considered irrelevant, it was not considered, or it was

simply not clear from the judgement which way the factor

pointed.

Each factor, and the overall conclusion on dominant

purpose has a colour coding

The 8 Factor Analysis: Two Overriding Principles

Global or individual assessment of factors

Balancing or weighting the factors

6.3 The 8 Factors: An Introduction

The first three might be thought to deal with the level of artificiality or contrivedness:

(1) The manner in which the scheme was entered into or carried out.

(2) The form and substance of the scheme.

(3) The timing and duration of the scheme.

The next three look at the financial impacts:

(4) The result achieved but for Pt IVA.

(5) The change in financial position of the taxpayer.

(6) The change in the financial position of a person connected with the taxpayer.

The final two look to other factors and connections:

(7) Any other consequences for the taxpayer or another person connected with the taxpayer.

(8) Nature of the connection between the taxpayer and other person.

6.4 Factor # 1 - Manner

No definition of ‘manner’ in Part IVA

High Court in Spotless (1996):

“the terms ‘manner’ and ‘entered into’ are not to be given any restricted

meaning. ‘Manner’ includes consideration of the way in which, and

method or procedure by which, the particular scheme in question was

established”

6.4 Factor #1 – Manner: Case Principles

Specific features indicate tax benefits

Complexity not supported by commercial needs

Commercial reasons not supported by the facts

Transaction does not make commercial sense without the

tax benefit

Tax saving a by-product of transaction done for

predominantly commercial reasons

Conclusion on Factor # 1 - Manner

6.5 Factor # 2 – Form & Substance

Earlier loss utilisation cases did not compare form versus

substance

In Eastern Nitrogen in discussing the meaning of this

factor, it was noted as follows:

“It may be that this factor is intended to require a comparison between

the form of the scheme and its substance”

Accordingly, it suggests that you look at the legal form of

the scheme, and consider whether that is the same as

what is happening in substance.

6.5 Factor # 2 – Form & Substance

However, this was considered slightly differently in the

later decision of Futuris, whereby at first instance it was

stated:

“I do not accept the submission that if the form and substance of the

scheme are consistent the form and substance of the scheme cannot

point to a dominant tax purpose…. it is not necessary that there be a

difference between form and substance before the form and substance of

the scheme becomes relevant”

Macquarie (Mongoose) – favoured Eastern Nitrogen

6.5 Factor # 2 – Form & Substance: Categories

Form = Substance (with no tax benefit purpose) [Uncontroversial]

Form = Substance (with tax benefit purpose)

Form ≠ Substance (with tax benefit purpose) [Uncontroversial]

Form ≠ Substance (with no tax benefit purpose)

6.5 Factor # 2 – Form & Substance: Case Principles

Transactions could take a simpler form

Passive investors v direct investors

Deductions materially greater than cash outlay

Failure to comply with legal agreements

Unnecessary steps or features included

Conclusion on Factor # 2 – Form & Substance

6.6 Factor # 3 – Time & Timing

Must consider both the time entered into the scheme and

length of time it was carried out

No guidance as to what is ‘good’ or ‘bad’ time or timing

First of the 8 factors considered ‘neutral’ by the Courts

In only 1 case (Consolidated Press) did the timing factor

point in a direction opposite to the overall dominant

purpose conclusion

6.6 Factor # 3 – Time & Timing: Case Principles

Flurry of activity at year-end

Duration of the scheme

Timing is explained by other factors

Timing associated with a divestment

Conclusion on Factor # 3 - Timing

6.7 Factor # 4 – Result but for Part IVA

Quite a curious inclusion in the list of 8

First factor where large number of judgements in ‘other’

catch-all category. That is, either irrelevant, not

considered or not clear

No real principles, but considered as follows:

Cases decided for the ATO (factor pointed towards tax purpose)

Cases decided for the Taxpayer (factor pointed away from tax

purpose)

Neutral (factor points neither for or against tax purpose)

Conclusion on Factor # 4 – Result but for Part IVA

6.8 Factor # 5 – Change in Taxpayer Financial

Position

Requires a consideration of any change in the financial

position of the relevant taxpayer

Requires a comparison – with and without Part IVA

Cases do not suggest a tax purpose exists just because

financial position has improved

Where ATO wins on dominant purpose – factor never

pointed against ATO

Where Taxpayer wins on dominant purpose – factor only

in favour of taxpayer in 50% of cases

6.8 Factor # 5 – Change in Taxpayer Financial

Position: Case Principles

Financial position change due to commercial factors

Financial position does not change except by the tax

benefit

Tax deductions greater than cash outlay

Certainty of financial upside relative to certainty of tax

deductions

Comparison of pre-tax positions relative to alternatives

Conclusion on Factor # 5 – Change in taxpayer financial

position

6.9 Factor # 6 – Change in Financial Position of

Persons Connected

34 cases – 9 rated ‘neutral’ & 19 in ‘other’ category. Thus,

in only 6 cases was this factor either for/against a tax

purpose

Some case principles:

Promoter’s fees

Income splitting

Intergroup transactions

Conclusion on Factor # 6

6.10 Factor # 7 – Other Consequences

Eastern Nitrogen held that “other” referred to those

consequences other than fiscal or financial

An analysis of 34 cases: 4 pointed towards tax purpose, 4

against, 8 neutral and 18 in unclassified ‘other’ category

Some principles:

Enhanced reputation in capital markets

Asset protection

Other matters

6.11 Factor # 8 - Connection between the parties

Factor does not make it clear whether the existence of a

connection is positive or negative for tax purpose

Accordingly, this has evolved from the cases

Comparison of the cases based on whether related party

or not:

Arm’s length parties

Related party (restructure) transactions

Related party (other) transactions

6.12 Conclusions on the 8 Factors

Probing the ‘what’ and the ‘how’ to determine the ‘why’

Low number of appeal cases have overturned lower court judgements

on dominant purpose

Factors # 1 - 3 (manner, form/substance & timing) – are most

important in deciding the cases

Factor # 4 (Result but for Part IVA) – mostly decided against the

taxpayer

Factor # 5 (Financial position) – not always against the taxpayer just

because tax benefit creates an improved financial position

Factors # 6 – 8 (Change in other’s financial position, other

consequences & connections) - classified as ‘neutral’ or ‘other’ in

75% of cases

7. The Dominant Purpose Test: Other Observations

ATO Guidance: PSLA 2005/24

Dominant Purpose & The 2013 Amendments

Emphasising dominant purpose test as the ‘fulcrum’ or the

‘pivot’ of Part IVA analysis

Do the changes to tax benefit ‘counterfactual’ also have

‘knock-on’ implications for dominant purpose analysis?

The ‘pure’ counterfactual versus the ‘restricted’

counterfactual

This is likely to be an area of future contention

8. Conclusions

Part IVA principles have developed from case law

Practitioners need a deep knowledge of the cases – the

Appendix to the paper contains a comprehensive analysis

focused on dominant purpose

The principles that have evolved from each of the 8 factors

are not always clear. In fact, they are sometimes

inconsistent

The cases indicate that the first 3 factors are the most

important

The judiciary could assist by fully explaining their reasoning

on each of the 8 factors

© Anthony Portas, CTA 2016

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax

Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and

opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries

in making any decisions concerning their own interests.