Question

its Australian tax law subject

Tax Avoidance: Explain the specific and general anti- avoidance provisions with examples. Students are to refer to general anti avoidance provisions – Part IVA (10 marks), anti- avoidance provisions, (5 marks), specific anti avoidance provisions, (5 marks), ATO rulings and relevant cases.

Answer 1

General Anti avoidance provision

The General Anti avoidance rules contained in Part IVA of the income tax Assesment Act 1936 may be applied by the Australian Taxation Office(ATO) to deny a taxpayer the tax benifits of a scheme they have entered into in certain circumstances.

General Anti avoidance rules is a tool for checking aggressive tax planning especially that transaction or business arrangement which are entered into with the objective of avoiding tax.

For example: "A" makes a cmpany XYZ to sell product C. The company B pays 35% of tax, but if "A" himself sold the product he would pay 40% tax. "A" has formed the company only to save 5% tax.

Ausralia indroduced such a rule way back in 1981. Later on countries like Germany ,France, ..etc too adop[ted GAAR.

Specific Anti Avoidance Rules (SAAR)

Tax payers want to reduce their tax liability through various means available to them. It may take the form of tax planning, aggressive tax planning or tax avoidance. There has always been a tussle between taxing authorities and tax payers when there is aggressive tax planning or tax avoidance.Over the years, the legislature has introduced several Specific Anti Avoidance Rules (SAAR) to plug known tax avoidance techniques.

• Section 40A(2) was introduced to stop claim of inflated expenditures by means of payment to relatives.
• Section 2(22)(e) was introduced to tax payments disguised in the form of loans or advances by a specified company to related entities.
• Chapter of Transfer Pricing was introduced to prevent shifting of taxable profits between associated entities from one tax jurisdiction to another.
• Section 94B was introduced in line with BEPS Action Plan 4 to limit interest deduction between associated enterprises.
• Section 56(2)(x) was introduced to tax transfer of specified assets between unrelated entities without
• adequate consideration.
• Section 94(8) was introduced to curb the technique of bonus stripping for reducing capital gains.

There are many examples of SAARs around the world enacted by various countries. Some examples are thin capitalization rules and CFC (controlled foreign corporation) rules which are passed to curb specific tax avoidance techniques; suffice to say these are elaborated upon in the later section on tax avoidance and counter measures.

Typically SAARs are prospective; however they can retrospective too and the increasing use of retrospective SAARs is a cause of concern for taxpayers.