Searching for a “savvy” tax administrator

The Pt IVA panel session at the Corporate Tax Retreat highlighted to me the importance of the approach that the ATO takes to the administration of our tax laws. One of the givens of our income tax system is that people should generally only pay tax on their economic gains, but a consequence of our increasingly complex laws is that transactions may, on a literal interpretation of the law, trigger significant tax liabilities even though they do not produce any economic gain.

One example provided during the panel session on Pt IVA was the acquisition by a non-resident of an Australian tax consolidated group. In the example provided, if the non-resident acquired the group directly, it might trigger CGT event L5. CGT event L5 can happen if the tax cost of assets is less than the liabilities. It is a quirk of the law that the acquisition of a tax consolidated group by a second tax consolidated group does not give rise to an L5 gain, whereas the acquisition of the same group by a single entity can give rise to a capital gain.
As an alternative to acquiring the Australian group directly, if the non-resident establishes a new Australian tax consolidated group to acquire the Australian group, it would avoid triggering CGT event L5. Could the creation of an Australian tax consolidated group to acquire another Australian tax consolidated group give rise to a tax benefit?
In an article published in the February 2014 issue of The Tax Specialist, Grant Wardell-Johnson suggested that a “savvy” tax administrator would not apply Pt IVA if an acquirer established a tax consolidated group simply to avoid the application of CGT event L5. But when the question was posed at the panel session on Pt IVA at the Corporate Tax Retreat, the ATO was unable to rule out the application of Pt IVA, although it appears that, if there were commercial reasons for the establishment of the tax consolidated group, Pt IVA should not apply.
This is but one example of many instances where a strict application of the law could give rise to an unexpected tax liability. The new Commissioner of Taxation, Chris Jordan, has indicated that he would like the ATO to exercise pragmatism in its administration of the law. I hope that that message filters down through the hierarchy to the auditors and the other individuals dealing on a face-to-face basis with taxpayers.

Michael Flynn CTA is President of the National Council at The Tax Institute.

The Tax Institute is 
Australia's leading professional association in tax. Its 13,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia.

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