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This Case Decision Summary has been withdrawn.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 when an inventor forms a new company to carry out research and development activities to receive the section 73B (ITAA 1936) tax concessions that are only available to companies?
Reasons for Decision:
On these facts, the scheme produces a tax benefit. This benefit is the subsection 73B(14) (ITAA 1936) deduction of 125 per cent of the expenditure. However, in applying the section 177D (ITAA 1936) factors, it is clear that the company bears a commercial risk. This means that the commercial result is the same as the tax result.
In addition, the Commissioner would not exercise the discretion in section 177F (ITAA 1936) to overcome this arrangement. The arrangement is something that is permitted by the ITAA 1936. The company is formed for the specific purpose of being able to take advantage of the research and development concession in the ITAA 1936, and the provision of a tax benefit in bona fide circumstances of this type is a structural feature of the Act.
Income Tax Assessment Act 1936 section 73B, subsection 73B(14), Part IVA, section 177D, section 177F
Deductions & expenses
Research & development expenses
Schemes & shams
Tax benefits under tax avoidance schemes
Tax planning, avoidance & evasion