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This Case Decision Summary has been withdrawn.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:
Does Part IVA (Income Tax Assessment Act 1936 (ITAA 1936)) apply to:
1) a $300,000 part prepayment of quarterly rent on 30 June (which is due in August)?
2) a $1.8 million prepayment for consumable stores, equivalent to 12 months of purchases?
by a company with an estimated taxable income of $2 million?
2) The goods will be delivered over the 12 months, as ordered. The prepayment document does not specify particular model numbers or quantities. It is generic, in that it can be used against all goods sold by that supplier. The payments are actually made to an external third party, and are not inflated.
Reasons for Decision:
1) There is a tax benefit, which is the increased deductions. An arrangement such as this to pay an otherwise deductible amount earlier in time, on its face, does not attract the operation of Part IVA (ITAA 1936).
2) Again, a prepayment of what would otherwise be a deductible expense will not necessarily attract Part IVA (ITAA 1936). This is a legitimate business expense that has been chosen to be paid earlier.
Income Tax Assessment Act 1936 Part IVA
Advance expenses & payments
Deductions & expenses
Tax planning, avoidance & evasion