Chapter 5. Form of a Statutory GAAR 5.1.

Introduction This chapter examines the various forms that a statutory GAAR may take. The analysis considers the GAARs of foreign jurisdictions with similar legal and administrative systems to Australia, in particular, New Zealand, Canada and South Africa. Recent New Zealand and Canadian jurisprudence with respect to the relevant GAARs indicates that the judiciary may be taking an approach similar to that taken by the Australian High Court with respect to section 260. [875] The South African GAAR is considered as a replacement GAAR was recently enacted in that country, with effect from November 2006. This chapter also examines statutory GAARs used in Australias GST legislation, Fringe Benefits Tax Legislation and state-based stamp duties legislation. The analyses of foreign and domestic GAARs are each made by reference to Part IVA of the ITAA36. The purpose of this chapter is to establish whether Part IVA, and the administrative practices that support Part IVA, may be expected to produce greater certainty for taxpayers than equivalent foreign provisions, or equivalent provisions in indirect taxation legislation in Australia. These findings are important because Chapter Six proposes a uniform statutory GAAR for all of Australias taxation legislation (direct and indirect). 5.2. International comparison of statutory GAARs 5.2.1. New Zealand The New Zealand GAAR originated from section 108 of the Land and Income Tax Act 1954, and then section 99 of the New Zealand Income Tax Act 1976 (NZITA). [876] These GAARs were superseded by sections BG 1 and GB 1 of the NZITA, [877] which provisions are reproduced at Appendix B. [878] The New Zealand GAAR broadly provides that a tax avoidance arrangement is void, and authorizes the Commissioner to cancel any tax benefit that arises from the arrangement. Arrangement is broadly defined to mean an agreement, contract, plan or understanding, (whether enforceable or unenforceable), including all steps and transactions by which it is carried into effect. [879] The definition of tax avoidance is not exhaustive. It is defined to include *880+ : a) directly or indirectly altering the incidence of any income tax; b) directly or indirectly relieving a person from liability to pay income tax or from a potential or prospective liability to future income tax; c) directly or indirectly avoiding, postponing or reducing any liability to income tax or any potential or prospective liability to future income tax.

A tax avoidance arrangement means any arrangement whether entered into by the person affected by the arrangement or by another person, that directly or indirectly

a) has tax avoidance as its purpose or effect; or b) has tax avoidance as one of its purposes or effects, whether or not any other purpose or effect is referable to ordinary business or family dealings, if the purpose or effect is not merely incidental. [881]

The determination is an objective one. [882] 5.2.1.1. Judicial interpretation of the New Zealand GAAR Like the Australian courts, the New Zealand courts have taken the view that the court must ascertain the true nature of a transaction. [883] Where a transaction is embodied in a number of interrelated agreements, all the agreements must be considered together. [884] Also similarly to Australia, the fiscal nullity doctrine has not been authoritatively determined as applying in New Zealand. [885] The main issues which have been litigated in New Zealand have involved the questions of whether an arrangement has caused a tax saving, and whether an arrangement has the necessary tax avoidance purpose. [886] On the issue of whether an arrangement has caused a tax saving, the courts often compare the taxpayers position prior to an arrangement and subsequent to it. [887] However, despite similarities in the recent judicial approach of the Australian and New Zealand Courts, prior to the recent Peterson [888] decision in New Zealand, judicial doctrines had been allowed to develop which threatened the ability of the New Zealand GAAR to combat tax avoidance. [889] For example, in Commissioner of Inland Revenue v. BNZ Investments Ltd, [890], the High Court and the Court of Appeal both found that, where the Commissioner alleges tax avoidance, the taxpayer must have knowledge of the arrangement and must be a party to it, before section BG1 may be applied. [891] However, section BG1 expressly applies to non-parties, and section GB1 provides that the Commissioner may adjust the tax of anyone who is affected, whether a party to the scheme or not. [892] The Privy Council overruled these points in the Peterson decision, so that the GAAR can apply where a tax advantage is enjoyed by someone who is not a party to the arrangement, or by a taxpayer with no knowledge of the details of the arrangement. [893] On the other hand, the Peterson decision has persisted with the choice principle initially developed in Australia. As had been the case in Australia under the previous GAAR, section 260 of the ITAA36, the choice principle in New Zealand may be limiting the effectiveness of the New Zealand GAAR. The choice principle emerged in New Zealand as a consequence of the decision of the Privy Council in Challenge Corporation Ltd, [894] where it appeared that a new judicial tool was developed which required a distinction between tax mitigation and tax avoidance. [895] Prior to the decision in Challenge Corporation Ltd, the making of a distinction between tax mitigation and tax avoidance had not played a role in the interpretation of the New Zealand GAAR. [896] Rather, it was held prior to Challenge Corporation Ltd that the distinction between tax mitigation and tax avoidance was unhelpful, as it describes a conclusion rather than providing a signpost to it. [897] However, Peterson appeared to

resurrect the unhelpful technique developed in ChallengeCorporation Ltd of allowing the judiciary to interpret the New Zealand GAAR by reference to their own perception of legitimate tax mitigation as opposed to tax avoidance, rather than applying the tests provided in the statutory GAAR. [898] This approach appears to promote taxpayer uncertainty. 5.2.1.2. Administrative policy for the application of the New Zealand GAAR The Commissioner released a policy statement on how the Inland Revenue Department intended to interpret section 99 of the Income Tax Act 1976 (now BG1) in 1990. However, it is submitted that this policy statement, and the more recently prepared draft New Zealand policy statement intended to eventually replace the 1990 statement [899] , may not be as significant in promoting taxpayer certainty as Australias PS LA 2005/25. This is because the New Zealand policy statement does not appear to impose the same procedural requirements upon administrators as are imposed by Australias PS LA 2005/25. The Commissioner considered that the initial 1990 policy statement was necessitated by the uncertainties arising from the broad drafting of section 99. [900] The statement provided that the Commissioners approach was founded upon an investigation of the following *901+ : i. the underlying scheme and purpose of the Act as a whole and of the specific provision under review; ii. the arrangement, to ascertain its purpose or effect; iii. whether a fair and reasonable inference can be drawn that tax avoidance is one purpose of the arrangement (other than a merely incidental purpose). This, the statement provides, involves an evaluation of the arrangement with a view to concluding whether one can predicate whether the arrangement was implemented in its particular way so as to achieve an income tax advantage. If an advantage exists, it is necessary to determine whether that advantage is merely incidental to other purposes or effects of the agreement; and iv. whether following this analysis, it can be inferred that the arrangement frustrates the underlying scheme and purpose of the legislation.

The statement further provided that the Inland Revenue Department was prepared to give rulings in relation to whether a particular situation contravened section 99 of the Income Tax Act 1976, on condition that the Department was provided with: the full facts and documentation; the names of all parties; and the taxpayers arguments as to the purpose and effect of the transaction and why section 99 did not apply. However, the rulings were not legally binding. [902] The Report of the Committee of Experts on Tax Compliance, released on 23 February 1999, was critical of the policy statement, particularly for the following reasons [903] : i. it was considered that the text of the statement applied a subjective rather than an objective test of tax avoidance;

ii. it was considered that the adoption of a four-step analysis for applying section 99 placed the burden of proof on the Commissioner; and iii. the policy statement was considered to have added an extra test to the legislation by asking whether an arrangement that was already found to involve more than merely incidental tax avoidance also frustrated the scheme and purpose of the legislation.

The Committee ultimately recommended that the policy statement be withdrawn. [904] The Commissioner has since prepared a further statement, exposure draft INA0009 Interpretation of sections BG1 and GB 1 of the Income Tax Act 2004, issued on 24 September 2004. Currently, the Inland Revenues Adjudication and Rulings section are considering the submissions received on the exposure draft, [905] , and are incorporating the Peterson decision into the draft policy statement, as the decision was handed down after the release of the draft policy statement. It is anticipated that the final version of INA0009 will replace the 1990 statement. [906] It is submitted that draft policy statement INA0009, does not appear to be designed to limit the powers of administrators. Rather, it appears that it is intended to provide guidance to administrators on the interpretation of the GAAR, to ensure its consistent application. [907] That is, it contributes to taxpayer certainty by providing guidance to taxpayers on the Inland Revenues interpretation of the New Zealand GAAR, rather than by putting in place a structure to ensure that administrators only exercise the GAAR in appropriate circumstances the approach taken in Australian practice statement, PS LA 2005/25. An advantage of the New Zealand interpretation statement is that it provides the Inland Revenue with the opportunity to discuss important aspects of statutory interpretation which may have been marred by inconsistent decisions of the judiciary. For example, the statutory GAAR provides a test for determining whether the GAAR has been breached. However, as noted above, the judiciary in Peterson have revived the tax avoidance/tax mitigation test applied in Challenge Corporation Ltd. An interpretative statement by the Inland Revenue may provide the space for the Inland Revenue Department to remind taxpayers of case law which is critical of the tax mitigation/tax avoidance test, for example, the judgment of Lord Hoffmann in ONeill v. CIR, *908+ and to remind taxpayers of the requirements of the statutory GAAR. This has the potential to improve taxpayer certainty by providing taxpayers with a complete history of all issues, rather than running the risk that taxpayers and their advisers will merely adopt the position taken in the most recent judicial decision. [909] As both the New Zealand draft policy statement and Australias PS LA 2005/25 are new and largely untested it is difficult to definitively conclude which approach makes a greater contribution to taxpayer certainty. However, it is submitted that the approach of Australias PS LA 2005/25 may be expected to be more effective in promoting taxpayer certainty, by instituting a policy requiring administrators to pass certain checks before being permitted to exercise the statutory GAAR. While a statement detailing the interpretation of the statutory GAAR by the New Zealand Inland Revenue may be expected to improve taxpayer certainty, the experience of the 1990 policy statement in New Zealand has shown that administrators may

not always follow the policy statement. [910] Further, submissions to the Inland Revenue Department on the draft policy statement INA0009 indicate that professional bodies accept that the interpretation statement cannot bind the Commissioner, but may only be expected to set out a framework for interpreting the New Zealand GAAR, which administrators are expected to follow. [911] In any case, a policy statement may provide both guidance to taxpayers on the Revenues interpretation of the statutory GAAR and impose limits on administrators empowered to exercise the statutory GAAR. Indeed, Australias PS LA 2005/25 attempts to achieve both of these aims. 5.2.1.3. Promoter penalties in New Zealand Shortly prior to the commencement of promoter penalty provisions in Australia, New Zealand enacted legislation for the purpose of deterring the promotion of tax exploitation schemes. [912] Broadly, the rationale for the introduction of promoter penalties was similar to that in Australia, that is, to ensure that penalties apply to promoters of schemes, rather than penalties only applying to taxpayers investing in the promoted schemes. [913] It would appear that promoter penalties were adopted in New Zealand, rather than a system requiring certain tax schemes be registered with Inland Revenue, because of strong opposition to a registration system by tax professionals and industry groups. [914] The promoter penalty provisions are prescribed in sections 141EB and 141EC of the Taxation Administration Act 1994 and apply to arrangements entered into from 26 March 2003. Section 141ED provides that a promoter of an arrangement is liable to a promoter penalty *915+ if: a taxpayer becomes a party to the arrangement and a shortfall penalty for an abusive tax position is imposed on the taxpayer as a result of the arrangement; and the arrangement is offered, sold, issued or promoted to 10 or more persons in a tax year.

Promoter is defined in section 141EC to mean: a person who is a party to, or is significantly involved in formulating, a plan or program from which an arrangement is offered; or a person who is aware of material and relevant aspects of the arrangement and who sells, issues or promotes the selling or issuing of the arrangement, whether or not for remuneration.

However, a promoter does not include a person whose involvement with the arrangement is limited to providing legal, accounting, clerical or secretarial services to a promoter. [916] An arrangement is broadly defined in section 3 of the Taxation Administration Act 1994 to mean a contract, agreement, plan or understanding, whether enforceable or unenforceable, including all steps and transactions by which it is carried into effect. An arrangement is treated as being offered, sold, issued or promoted to ten or more persons if ten or more persons claim tax-related benefits as a result of the arrangement. [917]

While the promoter penalties are new and untested, the Inland Revenue has indicated in informal discussions that they are aware of a trend in New Zealand away from mass-marketed schemes to boutique schemes with fewer than ten investors, which would avoid the promoter penalties. [918] 5.2.1.4. Comparison of the New Zealand GAAR with Part IVA of the ITAA36 Conclusions Similarities exist between the Australian and the New Zealand statutory GAARs, and the means of administering those GAARs. However, several lessons appear to emerge from a comparison of the Australian and the New Zealand approaches, for the purposes of improving taxpayer certainty. These lessons fall into three categories: legislative drafting; administration; and promoter penalties. From a legislative drafting point of view, the New Zealand experience suggests that drafting around the definition of arrangement is important. The language of the statutory GAAR must not allow the definition of arrangement to be read down to an extent that could not have been intended by the legislature in enacting the GAAR. It is also important for the legislation to clarify the extent to which the judicially created choice principle is intended to be used in interpreting the statutory GAAR. A study of Inland Revenues draft interpretation statement, intended to provide guidance to administrators on the operation of the New Zealand GAAR, reveals that the statement has a limited capacity to promote taxpayer certainty in that it does not impose limitations upon the powers of administrators exercising the GAAR, as Australias PS LA 2005/25 does. While the New Zealand and the Australian promoter penalty provisions are both untested, it appears that the New Zealand provisions may be less effective than their Australian counterparts, in that the provisions are limited to schemes promoted to more than ten investors. This may encourage promoters to market schemes to fewer than ten investors, rather than deterring the promotion of schemes. It is then foreseeable that the net effect may be that the New Zealand promoter penalties increase uncertainties for taxpayers, as there can be no educative publicity surrounding the promoter penalties if the Inland Revenue is effectively unable to exercise the promoter penalties. 5.2.2. Canada Section 245 of the Canadian Income Tax Act (CITA) is reproduced at Appendix C. The current section 245 of the CITA has applied since 1988, [919] and following the decision of the Canadian Supreme Court in Stubart Investments Ltd v. The Queen. [920] Amendments to section 245 of the CITA in 2004 provide that the Canadian GAAR not only applies to the CITA, but also to bilateral tax treaties. [921] Establishing a breach of section 245 of the CITA essentially involves three steps. [922] First, it is necessary to determine whether a tax benefit arises from the transaction. Section 245(1) of the CITA provides a broad definition of both tax benefit *923+ and transaction. *924+ Secondly, it is necessary to determine whether the transaction is an avoidance transaction. A transaction will not be an avoidance transaction where it is arranged primarily for bona fide purposes other than to obtain a tax benefit. Thirdly, it is necessary to determine whether the

avoidance transaction is an abusive transaction. A transaction is an abusive transaction if it would result directly or indirectly in a misuse of the provisions of the CITA or an abuse having regard to the provisions of the CITA read as a whole. 5.2.2.1. Judicial interpretation of the Canadian GAAR The first case to interpret section 245 was not heard until 1997, almost ten years after the enactment of the GAAR. [925] The Canadian Supreme Court has only heard its first appeals with respect to section 245 in 2005. [926] While the recent Supreme Court decisions added little to the judicial interpretation that has been given to the first two limbs of section 245 (whether a tax benefit arises from a transaction, and, whether a transaction is an avoidance transaction), the decisions are important in determining whether a transaction should be considered an abusive avoidance transaction for the purposes of the third limb of section 245 of the CITA. This is significant as it is this third limb of the Canadian GAAR which is considered by many to be responsible for the Canadian GAAR being a less effective tool for the Canadian Revenue Authority than the GAARs of other countries. [927] First limb tax benefit The trial judge in Canada Trustco [928] considered that the existence of a tax benefit was a question of fact. [929] This was affirmed by the Supreme Court of Canada, on appeal. [930] The Court concluded that, where the Tax Court determines that there is a tax benefit based on a proper construction of the CITA and findings supported by the evidence, appellate tribunals should not interfere. [931] Second limb tax avoidance transaction The second limb of the Canadian GAAR requires consideration of whether there is a series of transactions which results in a tax benefit, and one or more of the transactions comprising the series cannot reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit. This requires the judiciary to address the concept of series of transactions, and to address the non-tax purpose test. [932] A series of transactions is not defined in the CITA. The leading case on series of transactions is OSFC Holdings Ltd v. The Queen. *933+ In OSFC Holdings, the Federal Court of Appeal found that a series of transactions must be pre-ordained to produce a final result. [934] This appears consistent with the intention of Parliament, as the provision was said to introduce the UK step transaction doctrine. [935] The non-tax purpose test was considered by the Supreme Court of Canada in Canada Trustco, where four main findings were made [936] : the test requires a factual inquiry to determine whether the transaction was undertaken primarily for a non-tax purpose; the use of the words reasonably and primarily in section 245(3) requires an objective assessment of the factors motivating the transactions;

 it is not sufficient to establish that some alternative transaction achieving an equivalent result would have required higher taxes; and the burden of proof for appellate review is the same for the non-tax purpose test as the burden for characterizing a tax benefit.

Third limb misuse and abuse The explanatory notes to section 245(4) provided that the provision was intended to draw upon the doctrine of abuse of rights that arises in some civil law jurisdictions. *937+ In such jurisdictions, the abuse of rights doctrine permits the tax authorities to disregard the legal form of a transaction if the taxpayers predominant motive is the avoidance of tax. *938+ While the explanatory notes specified that the provision was not intended to deny tax benefits explicitly provided by incentive provisions in the CITA, provided that such transactions were carried out within the object and spirit of the provisions of the CITA read as a whole many tax practitioners considered that the introduction of section 245(4) would neutralize the effect of tax incentives. [939] Further, practitioners predicted that section 245(4) would be difficult to apply, and would be of little assistance in ameliorating the broad scope of sections 245(2) and 245(3) of the CITA. [940] However, rather than neutralizing the effect of tax incentives specifically provided for in the CITA as initially predicted by the tax profession, section 245(4) has often proved to be a barrier to the operation of the Canadian GAAR. [941] In fact, section 245(4) has been described as an escape route to the GAAR. [942] It has been suggested that the analysis of the Canadian Supreme Court in determining whether a transaction is abusive, was determined by reference to a three-stepped [943] test in Canada Trustco and Mathew [944] . Firstly, it is necessary to determine the object, spirit and purpose of the CITA provision that is said to have been abused or misused, using a purposive approach to statutory interpretation. Secondly, an abusive transaction exists where a transaction defeats or frustrates the object, spirit or purpose of the provisions of the CITA, for example, a taxpayer relies on particular provisions of the CITA to achieve a result that those provisions were meant to prevent. And thirdly, if the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer. Arnold, an advocate of judicial activism, [945] has suggested that section 245(4) of the CITA should be amended to inform the courts that their interpretation of the provision is not in accordance with the intention of Parliament. [946] Specifically, he recommends that section 245(4) be amended to include a provision requiring the courts to consider the economic substance of a transaction (or series of transactions) in assessing whether an avoidance transaction constitutes a misuse or an abuse. [947] On the other hand, Miller J in the trial decision of Canada Trustco [948] considered that section 245(4) is too amorphous for the judiciary to apply. Cassidy makes an alternative suggestion for improving section 245(4) of the CITA, which is based on the Australian experience. [949] Describing section 245(4) of the CITA as an

exception, Cassidy considers the equivalent Australian exception to be section 177C(2) of the ITAA36. As previously noted, section 177C(2) excludes from the definition of tax benefit, a benefit that is attributable to the making of a choice expressly provided by the tax legislation. [950] Cassidy notes that, whereas the Australian exception appears to be an interpretative provision, the Canadian exception seems more like a substantive provision. [951] While the Canadian exception is perhaps the major issue litigated in Canada, the Australian exception has not been a major issue in litigation, because it is clear that the Australian exception is merely an interpretative provision. Cassidy, therefore, recommends that Canada include an exclusionary element in the definition of tax benefit, as an alternative to section 245(4). It is submitted that Cassidys recommendation is supported by the reasoning of the first and only Australian GST anti-avoidance decision in VCE v. Commissioner of Taxation. [952] Whereas various commentators have noted the way in which the VCE decision relies upon similarities between the Australian income tax and GST GAARs and the usefulness of income tax cases to the application of the GST GAAR [953] , it is perhaps more important from a drafting point of view, to note the significant differences. Unlike the exception in section 177C(2) of the ITAA36, the GST exception in section 165-5(1)(b) appears to be more of a substantive provision than an interpretative provision. [954] Rather than being an exception to the definition of tax benefit, section 165-5(1)(b) is a gateway to the operation of the Australian GST GAAR. Section 165-5 broadly provides that the GAAR operates if four criteria are satisfied: an entity gets or got a GST benefit from a scheme; and, the GST benefit is not attributable to the making by the entity of a choice, election, application or agreement that is expressly provided for by the GST law (the exception, section 165-5(1)(b)); and, it is reasonable to conclude that either: an entity that carried out the scheme, or part of the scheme, did so with the sole or dominant purpose of that entity or another entity getting a *GST benefit from the scheme; or the principal effect of the scheme, or of part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly; and, the scheme is a scheme that has been or is entered into on or after 2 December 1998; or, is a scheme that has been or is carried out or commenced on or after that day (other than a scheme that was entered into before that day).

In deciding the VCE case, the Administrative Appeals Tribunal determined whether Division 165 applied to the particular transactions by addressing each of these criteria in turn. Accordingly, the exception for the making of a choice or election was afforded the status of a criterion, rather than merely being considered as an interpretative guide. Under the facts in VCE the exception in section 165-5(1)(b) did not prevent the GAAR from applying. [955] However, it is possible that the approach taken by the Tribunal may mean that section 1655(1)(b) comes to play a similar role within the Australian GST GAAR as section 245(4) plays with

respect to the Canadian income tax GAAR. That is, it may operate to prevent the operation of the GAAR in all cases other than well-accepted incidences of tax avoidance. 5.2.2.2. Administrative policy for the application of the Canadian GAAR The Canadian Revenue Authority issued Information Circular 882 General Anti-Avoidance Rule section 245 of the Income Tax Act on 21 October 1988, [956] and a supplement to that circular was issued on 13 July 1990 (Information Circular). The stated purpose of the Information Circular is to provide guidance with respect to the application of the GAAR in section 245 of the CITA. [957] The Information Circular begins with a brief explanation of the operation of section 245, and then provides examples to illustrate the approach that Revenue Canada will take in certain situations. [958] Importantly, the Information Circular provides that Revenue Canada will issue advance rulings with respect to the application of section 245 of the CITA to proposed transactions, and will publish summaries of the facts and rulings in those cases. [959] While not providing as comprehensive limitations on the powers of administrators intending to exercise the statutory GAAR as the Australian PS LA 2005/25, the Information Circular does state that, in order to ensure that section 245 of the CITA is applied in a consistent manner, proposed assessments involving the rule are required to be reviewed by the Taxation Head Office of Revenue Canada. [960] While it is not documented in the Information Circular, it appears that in practice, any application of the GAAR must be approved by the GAAR Committee, a head office committee with representatives from the Department of Finance and the Department of Justice, in addition to various divisions of the Canadian Revenue Authority. [961] Such an approach was considered by Arnold, in 1988 when the existing Canadian GAAR was first enacted, to be expected to produce greater certainty for taxpayers. [962] 5.2.2.3. Promoter penalties in Canada Canada has both a penalty regime and a scheme registration regime, both intended to deter the promotion of tax avoidance schemes. [963] Third party civil penalties Third party civil penalties commenced in Canada from 29 June 2000. [964] The penalties were intended to deter tax shelter or tax shelter-like promotions with faulty or inflated assumptions. [965] The penalties were aimed at two main sources of abuse: tax promoters who devise schemes which result in unwarranted claims for deductions (planning penalties); and tax return preparers who manufacture deductions (preparer penalties). [966] Third party civil penalties are generally $1,000, [967] however if the breach of section 163.2 of the CITA is the result of a false statement made in the course of a planning activity, the penalty amount is the greater of $1,000 or the total of the persons gross entitlements for the planning activity. Requirement for promoters to register tax shelters with the Canadian Revenue Authority

Promoters of tax shelters in Canada have been required to register the tax shelter with the Canadian Revenue Authority since 1988. [968] Broadly, section 237.1 of the CITA requires the promoter of a tax shelter to apply to the Minister for an identification number for the tax shelter, and prohibits the selling of a tax shelter without an identification number. Section 237.1(7) further requires every promoter of a tax shelter who either accepts consideration in respect of the tax shelter, or who acts as principal or agent in respect of the tax shelter in a calendar year, to file an annual information return with Revenue Canada. Penalties exist for failure to register a scheme and for failure to lodge the information return. It is submitted that the registration system which exists in Canada (and also the US and more recently the UK [969] ) may be expected to promote taxpayer certainty. Taxpayers wishing to invest in tax shelters which are acceptable to the Canadian Revenue Authority will invest in shelters which have an identification number provided by Revenue Canada. They may make enquiries with respect to the tax shelter with the Canadian Revenue Authority, quoting the identification number, prior to investing in the shelter. On the other hand, Australian and New Zealand investors cannot invest in registered shelters, but rather, may invest in schemes hoping that the promoter penalties have successfully deterred the promoter from selling schemes which breach the statutory GAAR. [970] 5.2.2.4. Comparison of the Canadian GAAR with Part IVA of the ITAA36 Conclusions There are various similarities between the income tax GAARs operating in Australia and Canada. Further, both Canada and Australia have issued detailed information circulars/rulings to taxpayers, with the intention of promoting taxpayer certainty. And each jurisdiction requires a consultative process to be followed prior to the exercise of the statutory GAAR. However, there are also differences in the approach of each country, which may be significant from a drafting point of view. In Australia, the definition of tax benefit excludes benefits arising from the structuring of an arrangement consistent with the aims of the legislation, rather than there being a specific misuse and abuse provision operating as a gateway to the statutory GAAR, as occurs in Canada. Such an exclusion provision may be less amorphous, and provide greater certainty for taxpayers. Further, rather than a promoter penalty regime, such as that which operates in Australia, greater taxpayer certainty may be afforded by a registration of schemes regime such as that operating in Canada. It may prevent taxpayer/tax adviser conflicts which potentially arise under Division 290 of the TAA53, as discussed in Chapter Four. 5.2.3. South Africa The GAAR operating in South Africa until November 2006 is reproduced at Appendix D, together with the recently enacted GAAR. 5.2.3.1. South African GAAR operating until November 2006 Like Part IVA of the ITAA36, section 103 of the South African Income Tax Act 1962 followed a GAAR which had been emasculated by the judiciary. The predecessor to section 103 was section 90 of the Income Tax Act No 31 of 1941. Section 90 simply provided that whenever the South African Revenue Service (SARS) was satisfied that a transaction or operation had been

entered into or carried out for the purpose of avoiding or reducing a liability for tax, the tax may be determined as if the transaction or operation had not been entered into or carried out. [971] In CIR v. King, [972] the judiciary constructed limits on the operation of section 90. In King, it was held that a transaction did not include the sale of income producing shares by a father to his son, enabling the son to be taxed at a lower rate. [973] The court found that it could never have been the legislatures intention that a person be taxed in circumstances where he or she deliberately takes steps to prevent income from accruing. [974] Further, it was necessary to distinguish between a situation where someone orders his or her affairs such that there is no income subject to tax and the case of a person who orders his or her affairs such that tax liability is escaped on income which is his or hers. [975] A minority but concurring judgment found that section 90 would not be used in connection with normal transactions. [976] Section 90 was later amended under the Income Tax Act 1959 to deal with the shortcomings which came to the fore in the King case. The definition of transaction was amended to include the alienation of property. Also, a further criterion was required for section 90 to apply: the SARS had to be of the view that certain abnormalities were involved in the transaction or operation. [977] Such amendments were retained in section 103 of the Income Tax Act 1962. [978] Four elements were required to be established before section 103 may be applied by the Commissioner, enabling the Commissioner to determine the liability for tax as if the transaction had not occurred, or to appropriately deal with the matter so as to prevent the avoidance [979]: scheme: there must be a transaction, operation or scheme; tax effect: the transaction must result in the avoidance, reduction or postponement of a tax; abnormality requirement: the transaction must have been entered into or carried out in a manner not normally employed for business purposes, other than obtaining a tax benefit, having regard to the circumstances; and purpose test: the transaction must have been entered into solely or mainly for the purpose of obtaining a tax benefit. A tax benefit includes any avoidance, postponement or reduction of liability for payment of any tax, duty or levy imposed by any law administered by the Commissioner. [980]

5.2.3.1.1. Perceived problems with section 103 of the Income Tax Act 1962 Commentators have noted that section 103 of the Income Tax Act 1962 has been emasculated by the judiciary tending to interpret section 103 with an over-reliance on the Duke of Westminster [981] principle. [982] It is considered that this was particularly the case in CIR v. Conhage (Pty) Limited. [983]

In November 2005, the SARS issued a Discussion Paper on Tax Avoidance, addressing concerns with section 103, and proposing amendments to the provision. [984] The SARS Discussion Paper on Tax Avoidance finds that section 103 has proven to be an inconsistent and sometimes ineffective deterrent to abusive avoidance schemes. It identifies three particular concerns: the abnormality requirement; the purpose requirement; and procedural and administrative issues. The abnormality requirement In 1986, the Margo Commission, and in 1995, the Katz Commission considered that the abnormality requirement was problematic because, if a particular form of transaction is widely used for tax avoidance purposes, then it may gain a commercial acceptability as its utilization becomes normal. [985] The Katz Commission further identified problems with the normality test and whether it was an objective test. [986] The Katz Commission recommended that a business purpose test be substituted for the normality test. [987] The recommendation was accepted by Parliament. [988] The amended abnormality requirement has only been the subject of one unreported decision. [989] In that case, the Court required that the transaction be compared with the hypothetical model of a normal transaction. [990] A normal transaction should be determined by asking: how would business people generally, not motivated by tax considerations but rather by bona fide business purposes, have structured the transaction? In the case, the court relied upon the evidence of an expert testifying on behalf of the taxpayer to find that the transaction was normal. [991] The SARS identified two main concerns with the amended abnormality requirement. [992] Firstly, it noted that arrangements cannot be neatly divided into bona fide business transactions and impermissible tax avoidance schemes rather, scheme promoters tend to hijack techniques originally developed for bona fide business purposes. [993] Secondly, SARS was concerned that, because impermissible tax avoidance schemes hijack techniques originally developed for bona fide business transactions, it is relatively easy for promoters to manufacture plausible sounding business purposes. *994+ The purpose requirement In order for section 103 to apply, it is necessary for the obtaining of a tax benefit to be the sole or main (construed to mean predominant) purpose of a transaction. It follows that, if a transaction has both a tax and a commercial purpose, the purpose requirement can only be satisfied if it is proven that the tax purpose was the predominant purpose. The SARS conclude that since most transactions in a business context have at least a colourable commercial rationale, the Commissioner is placed in the difficult position of having to disprove a taxpayers allegations through circumstantial evidence. *995+ The SARS further argue that, following from CIR v Conhage (Pty) Ltd, taxpayers argue that a commercial purpose, such as the raising of capital, is sufficient to inoculate each step in the overall transaction from challenge. [996] Further difficulties have arisen for the SARS in establishing that section 103 applies as a consequence of a judicial finding that the purpose of a transaction or operation requires a

subjective rather than an objective test. [997] That is, it is necessary to determine the purpose the taxpayers purportedly intended to achieve when they carried out their scheme. [998] Procedural and administrative issues In the November 2005 Discussion Paper, the SARS raised two further concerns in relation to section 103 involving uncertainties about the scope and application of section 103. Firstly, there is uncertainty about the extent to which section 103 may be applied to steps within a larger transaction or scheme. [999] Secondly, there is uncertainty about the Commissioners authority to assert or apply section 103 in the alternative, where another provision is also in dispute. [1000] 5.2.3.2. The SARS proposal for a new GAAR 5.2.3.2.1. Preliminary issues In the November 2005 SARS Discussion Paper which proposed a new section 103 the SARS considered the consequences of re-writing section 103. Relevantly, one concern was that the new section 103 may result in increased uncertainty for taxpayers. [1001] However, a footnote to this statement refers to a reference noting that the adoption of a GAAR creates significant uncertainty rather than specifically elaborating on the particular features of the proposed section 103 considered to create uncertainty. It appears that the basis for the concern is that uncertainty may follow from a stronger section 103. [1002] The SARS response to this concern was threefold. [1003] Firstly, it noted that the overwhelming majority of taxpayers and transactions would be unaffected by any uncertainty created by a stronger GAAR the proposed GAAR only applying to aggressive tax planning. [1004] Secondly, the SARS noted the inclusion of a non-exhaustive list of factors to be used in determining abnormality under the proposed GAAR (discussed below). And thirdly, the SARS noted that it anticipated that the Advance Tax Ruling System would be modified to permit taxpayers to obtain greater guidance and certainty with respect to section 103. [1005] In relation to the third proposal to improve certainty the Advanced Tax Ruling System some further comments were made in the SARS document following the November 2005 Discussion Paper Tax Avoidance and Section 103 of the Income Tax Act 1962 An Interim Response, prepared in March 2006 (Interim Response). [1006] The Interim Response noted that there was strong support from the public for amending section 76G(2)(a) of the Income Tax Act 1962, which gave the Commissioner the discretion to decline an application for a binding ruling involving the application of section 103. [1007] The Interim Report suggested two alternatives, and invited the public to comment on each. [1008] The first option was to limit the exercise of the discretion to situations where the ruling application either specifically calls for the application or interpretation of section 103, or involves a proposed arrangement that would raise serious concerns under section 103. [1009] The second option proposed was to include a commitment by the Commissioner in a positive ruling that section 103 would not be invoked on audit in connection with the underlying arrangement, provided that there has been full disclosure in the ruling application, and compliance with the terms and conditions set forth in the ruling. [1010]

Although there is no discussion of improving taxpayer certainty by ensuring that any decision by the SARS to exercise section 103 is previously scrutinized the Interim Response noted public submissions for a new centralized committee to have final authority for invoking section 103. [1011] The Interim Response provided that the SARS is exploring the feasibility of a centralized body to review and approve the application of the GAAR, as well as alternative approaches to maintaining consistency in the application of a GAAR. *1012+ The Interim Response further noted that it accepts public recommendations for the SARS to issue an Interpretation Note contemporaneously with the enactment of the new section 103, both to help ensure its proper and consistent application by SARS, and to provide additional guidance to taxpayers and practitioners in respect of the new provisions. [1013] The SARS also stated that they intended taking appropriate test cases to court, to provide guidance on the new section 103 as quickly as possible. [1014] 5.2.3.2.2. The SARS proposal Ultimately, the SARS proposed five main changes to section 103 in its November 2005 Discussion Paper. Firstly, the proposed new section 103 would introduce a non-exclusive set of factors to be considered in determining abnormality for schemes in the context of business and create a rebuttable presumption of abnormality where certain of those factors are present. [1015] The SARS submitted that the list of factors, although largely inherent in the existing abnormality requirement should increase certainty and clarity by providing an indication of abnormality. [1016] In the Interim Response, SARS welcomed proposals for safe harbour provisions to mitigate any uncertainty in connection with legitimate business transactions. [1017] The Interim Response also dealt with public criticism of the proposed presumption of abnormality. [1018] SARS began defending the proposed presumption of abnormality by noting that it did not presume a taxpayer to be guilty but rather as an evidentiary matter in a civil proceeding it simply shifts the burden of proof to the taxpayer under certain circumstances. [1019] The SARS further noted that the presumption of abnormality is warranted because it is the taxpayer that has chosen the form of its transaction, and the taxpayer, therefore, has the greatest access to information about it. [1020] Secondly, the new section 103 would require the purpose test to be determined objectively by reference to the relevant facts and circumstances. [1021] As under Part IVA of the Australian ITAA36, the new test would require the purpose of a transaction to be determined from the standpoint of a reasonable person in light of the relevant facts and circumstances, without regard to the taxpayers purported motive or subjective intent. *1022+ Amendments to the purpose test would also replace the current sole or main purpose test with a sole or one of the main purposes test. *1023+ Many of the comments received by the SARS on the proposed purpose test raised concerns that the new standard would catch genuine business transactions. In response, the SARS proposed that one possibility may be to include an explicit proviso that the purpose test will not be met where tax avoidance is only an incidental, subsidiary or secondary purpose as the New Zealand GAAR provides. [1024]

Thirdly, the new section 103 would apply to steps within a larger scheme, ensuring that a general business purpose for a wider scheme is not allowed to shield each step in the scheme to restore the effectiveness of section 103 following the Conhage decision. [1025] Fourthly, the new section 103 would be allowed to be applied in the alternative as is the case in jurisdictions including Australia. [1026] Further comments on this proposal were made in the SARS Interim Response which noted that the Commissioner should normally raise the issues under the specific provisions of the Act and not use section 103 as a catch-all provision. [1027] And fifthly, the proposed section 103 would introduce new penalties for scheme promoters and for taxpayers that substantially underreport their income. [1028] The Interim Response noted that each of the penalties proved controversial. [1029] With respect to the promoter penalties, comments emphasized that the penalties be properly targeted to apply to promoters rather than to tax advisers. The SARS acknowledged this comment in its Interim Response, and noted that it would take the comments under consideration in preparing the draft legislation for promoter penalties. [1030] With respect to the penalties for taxpayers substantially underreporting their income it appears that there was public concern that the penalties would effectively criminalize taxpayers who have not engaged in illegal tax evasion. [1031] The SARS responded by noting that a penalty is not always a punishment for a criminal offence and further, the imposition of a penalty for under reporting income reflects the seriousness of impermissible tax avoidance and the priority that Parliament has given to deterring tax avoidance. [1032] Interestingly with respect to penalties, submissions made by the Institute of Certified Public Accountants of South Africa, recommended additional considerations for the reform of section 103, which do not appear to have been addressed in the SARS Interim Response. [1033] One notable recommendation of the Institute was the naming of taxpayers and their facilitators found to have used impermissible tax avoidance schemes. The Institute suggested that this type of public shaming may deter tax avoidance. [1034] That is, on the taxpayer side, directors of companies would have to explain to their shareholders why the company name has been shamed. On the facilitator side, facilitators risked losing clients. It is submitted that this was a useful submission and the SARS ought to have addressed it. 5.2.3.3. Enactment of a new GAAR In September 2006, the SARS issued revised proposals for a new GAAR for South Africa. [1035] The document prescribing the revised proposals strengthens some original proposals and makes some concessions on others, following a period of public consultation. The document proposed a new GAAR to be Part IIA of Chapter Three of the Income Tax Act 1962. A new Part IIA of Chapter Three was enacted with effect from 2 November 2006. [1036] Promoter penalties were also enacted, as Part IIB of Chapter Three of the Income Tax Act 1962, with effect from 7 February 2007. [1037] It is necessary to examine each of the proposed changes recommended by the SARS in 5.2.3.2.2., to determine which proposals have been adopted in the newly enacted South African GAAR. Firstly, the legislation enacted with respect to the requirement of abnormality is

examined. While the SARS indicates in its revised proposals document that many public submissions recommended that the abnormality requirement be entirely eliminated from the GAAR, Part IIA of Chapter Three of the Income Tax Act 1962 retains the abnormality requirement in section 80A. Section 80A of the Income Tax Act 1962 provides the meaning of impermissible tax avoidance arrangements. This includes an arrangement: in a business context, that was entered into or carried out by means or in a manner which would not normally be employed for bona fide business purposes, other than obtaining a tax benefit; in a non-business context, it was entered into or carried out by means or in a manner which would not normally be employed for a bona fide purpose, other than obtaining a tax benefit; or in any context, it has created rights or obligations that would not normally be created between persons dealing at arms length.

However, section 80A of the Income Tax Act 1962 does not contain indicia of abnormality, as initially proposed by SARS. [1038] Rather, section 80A provides that an impermissible tax avoidance arrangement includes an arrangement lacking commercial substance, which may be determined by reference to a non-exhaustive list of five indicia in section 80C of the Income Tax Act 1962. [1039] The SARS explain in the revised proposals document that the reason for abandoning the indicia of abnormality, and instead adopting a shorter list of factors indicating a lack of commercial substance, was motivated by concerns from the public that the initial list of factors indicating abnormality, proposed by the SARS in November 2005, involved overlapping of factors, which could create uncertainty. [1040] Secondly, it is necessary to examine the approach of Part IIA of Chapter Three of the Income Tax Act 1962 to an objective purpose test. As noted, the revised section 103 initially proposed by the SARS provided a non-exhaustive list of factors for determining abnormality. Following the list of factors, the proposed provision provided: the sole or main purposes of an arrangement, or step therein or part thereof, must be determined objectively by reference to the relevant facts and circumstances. *1041+ Part IIA of Chapter Three of the Income Tax Act 1962 does not specifically prescribe an objective purpose test. However, it appears that a reasonable person test is prescribed by section 80G of the Income Tax Act 1962. Section 80G provides that an avoidance arrangement is presumed to have been entered into or carried out for the sole or main purpose of obtaining a tax benefit, unless the party obtaining the tax benefit proves that reasonably considered in light of the relevant facts and circumstances, obtaining a tax benefit was not the sole or main purpose of the avoidance arrangement. Thirdly, analysis of the application of the new GAAR to steps within a wider scheme is required. Section 80H of the Income Tax Act 1962 clearly states that the Commissioner may apply the GAAR to steps in, or parts of, an arrangement. Fourthly, the new GAAR may be raised by the Commissioner in the alternative (section 80I of the Income Tax Act 1962).

Fifthly, it is necessary to examine the main features of the new promoter penalties contained in Part IIB of Chapter Three of the Income Tax Act 1962. The draft Explanatory Memorandum to the Revenue Laws Amendment Bill 2006 noted that the reason for Part IIB of Chapter Three of the Income Tax Act 1962 was that the number of transactions reported to SARS under section 76A of the Income Tax Act 1962 had been disappointing Part IIB of Chapter Three of the Income Tax Act 1962 clarifies the reporting requirements. Further, the proposal for a new GAAR provided the opportunity to link the reportable arrangements legislation to the factors that are indicative of a lack of commercial substance for GAAR purposes. Part IIB of Chapter Three of the Income Tax Act 1962 did not adopt the public shaming penalties recommended by the Institute of Certified Public Accountants of South Africa. [1042] Finally, it is also necessary to examine elements of the newly enacted GAAR which were not specifically raised in the SARS initial discussion document. In particular, section 80J of the Income Tax Act 1962 introduces a new notice requirement relating to the potential application of the GAAR. The provision requires the Commissioner to issue a written notice to taxpayers prior to invoking the GAAR. The notice must state why the Commissioner believes the GAAR to apply to the particular taxpayer. Under the provision, the taxpayer is also given the opportunity to submit reasons to the Commissioner as to why the taxpayer believes that the GAAR should not be applied. Within 180 days of receiving submissions from the taxpayer, the Commissioner is required to either: Request further information from the taxpayer; Withdraw the notice; or Determine the taxpayers liability to tax under the GAAR.

In discussing this provision, the SARS revised proposal document notes that the issue of a notice would be subject to internal review and approval, to ensure that the GAAR is only raised in appropriate circumstances. [1043] The document further notes that the SARS Interim Response indicated that the Commissioner is exploring the feasibility of a centralized body to review and approve the application of the GAAR. However, the centralized body is not provided for in the legislation. 5.2.3.4. Conclusions The debate surrounding the re-writing of the South African GAAR assists in formulating a GAAR which attempts to provide greater taxpayer certainty. Relevant issues raised in the South African debate include the following: A list of prescribed factors to be used in determining whether a transaction is abnormal may provide greater certainty for taxpayers. It was suggested that safe-harbour provisions (legislation prescribing the circumstances in which the GAAR will not apply) may provide greater taxpayer certainty.

 An interpretation note explaining the SARS approach to the GAAR, to be issued by the SARS contemporaneously with the commencement of the re-written GAAR, was considered an effective means of improving taxpayer certainty. SARS recommended modifications to the Advanced Tax Ruling System so that the Commissioner may provide binding advice on the interpretation of the GAAR. Public comments on the GAAR proposed by the SARS suggested that a centralized committee with final authority for invoking the GAAR, may improve taxpayer certainty. While the rewritten GAAR imposes notice requirements on the Commissioner under section 80J of the Income Tax Act 1962, providing the taxpayer with the opportunity to make submissions to the Commissioner as to why the GAAR should not apply the proposed centralized committee is not prescribed by the legislation. Promoter penalties to address the supply-side of impermissible tax avoidance schemes may improve taxpayer certainty by limiting the supply of schemes. Submissions to the SARS recommended public shaming as a form or penalty although this recommendation was not adopted, or, it would appear, given consideration. Parts IIA and IIB of Chapter Three of the Income Tax Act 1962 were drafted to ensure correspondence between the indicia of a lack of commercial substance for the purposes of the GAAR and for the purposes of the promoter penalties.

The following section examines the GAAR in Australias GST legislation. Each of the above issues has been dealt with in the context of the Australian GST GAAR: The GST GAAR contains a list of prescribed factors for determining the purpose of a scheme. The preamble to the GST GAAR provides four examples of where the GST GAAR will not apply (safe-harbour provisions). The ATO has issued a practice statement on the application of GAARs including the GST GAAR, in addition to issuing Rulings on scenarios to which the GST GAAR applies. The ATO practice statement with respect to the application of GAARs, including the GST GAAR, clarifies that a ruling may be sought on the application of the GST GAAR to a particular scenario. The practice statement further requires that any proposal by an ATO officer to issue a GAAR determination be first reviewed by the GAAR Panel. And finally, promoter penalties legislation, which commenced in April 2006, applies to the promoters of impermissible GST avoidance schemes.

In the following section the effectiveness of these characteristics of the GST GAAR are assessed.

5.3. Australian GST GAAR The Australian GST GAAR is reproduced in Appendix E. Division 165 of the GST Act has been in place since the GST commenced. [1044] In 2006, the Administrative Appeals Tribunal had the first opportunity to consider the application of Division 165 in VCE and Commissioner of Taxation [1045] . In VCE the Administrative Appeals Tribunal noted the similarities between the GST GAAR and Part IVA of the ITAA36. [1046] The Tribunal considered that this meant that, in the absence of case law considering the GST GAAR, it should refer extensively to cases considering Part IVA of the ITAA36. [1047] Such reasoning would appear to support a uniform statutory GAAR for GST and income tax legislation in Australia. However, it is submitted that Division 165 of the GST Act may be more wide-reaching than Part IVA of the ITAA36. This carries the risk that Division 165 will be subjected to artificial limitations imposed by the judiciary, as section 260 of the ITAA36 was. Further, as previously noted in the discussion of the Canadian GAAR, the VCE decision indicates that Division 165 may be read down if the exception for transactions involving a valid GST election or choice is regarded as a substantive provision, similar to the misuse and abuse provision in the Canadian GAAR. 5.3.1. Differences between Part IVA and Division 165 Part IVA of the ITAA36 and Division 165 of the GST Act broadly operate in much the same way. Each requires a scheme and a tax benefit. Further, the dominant purpose of the scheme must be the avoidance of taxation and this purpose is determined by reference to a list of prescribed factors. There are, however, important differences between Part IVA and Division 165, which may mean that Division 165 is broader than Part IVA. Whereas, there is a preamble to Division 165, there is no equivalent preamble to Part IVA. There is also the application of Division 165 to part of a scheme. Further, the factors for determining the dominant purpose *1048+ of a scheme differ between Part IVA and Division 165. 5.3.1.1. Preamble to Division 165 Division 165 contains a preamble in section 165-1 of the GST Act. Section 165-1 states that Division 165 is aimed at artificial or contrived schemes. It then provides four examples to which Division 165 is not intended to apply to: an exporter electing to have monthly tax periods in order to bring forward the entitlement to input tax credits; or a supplier of child care applying to be approved under the A New Tax System (Family Assistance) (Administration) Act 1999 (this would make the supplies of child care GST-free); a supplier choosing under section 9-5 of the A New Tax System (Wine Equalisation Tax) Act 1999 to use the average wholesale price method for working out the taxable value of retail sales of grape wine; or

 a bank having its car fleet serviced earlier than usual, and before 1 July 2000, so that the servicing does not, at least initially, bear the GST.

Many South African commentators who made submissions the SARS following its Discussion Paper in November 2005 would perhaps wish to import a similar preamble into the South African GAAR on the basis that safe-harbour provisions may enhance taxpayer certainty. The preamble to the GST GAAR is an explanatory section in the GST legislation. The explanatory sections in the GST Act form part of the GST Act. [1049] Section 182-10(1) of the GST legislation defines an explanatory section to include any section that is the first section in a Division and that has as its heading What this Division is about (which is the case with section 1651 of the GST Act). Section 182-10(2) provides that explanatory sections form part of the GST Act, but are not operative provisions. Rather, in interpreting an operative provision, an explanatory section may only be considered: in determining the purpose or object underlying the provision; or to confirm that the provisions meaning is the ordinary meaning conveyed by its text, taking into account its context in the GST Act and the purpose or object underlying the provision; or in determining the provisions meaning if the provision is ambiguous or obscure; or in determining the provisions meaning if the ordinary meaning conveyed by its text, taking into account its context in the GST Act and the purpose or object underlying the provision, leads to a result that is manifestly absurd or is unreasonable.

While it appears that the preamble is merely introductory and descriptive, by providing four examples of where the GAAR is not intended to apply [1050] , it is submitted that section 1651 of the GST Act may unintentionally broaden the scope of the GAAR so that it applies to any transaction that does not comprise the four examples given. The reason for this conclusion is that section 182-10(2) provides very broad circumstances in which the explanatory system may be considered including determining the purpose or object of the Division. By providing examples of where Division 165 does not apply, the preamble may be construed to mean that Division 165 is intended to apply in all circumstances other than the four examples provided. The argument often made against SAARs is that, by being detailed, SAARs encourage taxpayers to interpret and apply the provisions literally rather than purposively, because the legislature has considered and identified the particular circumstances to which the anti-avoidance provision is directed. [1051] Following that logic, it may be that an overly prescriptive GAAR is prone to a literal interpretation. It is submitted that, by providing examples of circumstances where Division 165 does not apply, the preamble may legitimate the Commissioner applying Division 165 to any situation, except for the four transactions listed in the preamble. This may then mean that the judiciary will impose artificial limits on the scope of Division 165 as it did with section 260 of the ITAA36.

5.3.1.2. Part of a scheme Section 165-10 of the GST Act provides the circumstances where an entity may get a GST benefit from a scheme. Under each scenario, the benefit may arise from the scheme or a part of the scheme. On the other hand, tax benefits under Part IVA of the ITAA36 arise as a result of a scheme. [1052] The Explanatory Memorandum to the Bill introducing Division 165 noted its peculiar feature of extending the operation of Division 165 to part of a scheme, rather than just having Division 165 apply to a scheme: GST benefits may arise from a single transaction. To ensure Division 165 applies appropriately and effectively to a GST benefit arising from a single transaction, subs 165-10(1) provides that a GST benefit can arise from part of a scheme. *1053+ The interpretation of Part IVA of the ITAA36 by the Courts has indicated that a scheme cannot be a part of a scheme. In FCT v. Peabody, [1054], the High Court prevented the Commissioner from defining a scheme very narrowly: Part IVA does not provide that a scheme includes part of a scheme and it is possible, despite the very wide definition of a scheme, to conceive of a set of circumstances which constitutes only part of a scheme and not a scheme in itself. That will occur where the circumstances are incapable of standing on their own without being robbed of all practical meaning. As previously noted with respect to Part IVA of the ITAA36, it may be in the Commissioners interests to define a scheme narrowly, or to identify part of a scheme rather than a scheme. In this way, the taxpayer may be unable to demonstrate that a scheme had a commercial purpose other than the avoidance of taxation. [1055] On the other hand, if a scheme is cast more broadly, the taxpayer may find it easier to identify non-tax purposes/effects of a scheme. Accordingly, the extension of Division 165 to part of a scheme may make it easier for the Commissioner to establish a dominant tax avoidance purpose or principal tax avoidance effect. 5.3.1.3. Factors to refer to in determining the dominant purpose of a scheme The factors to which reference is made in determining the dominant purpose of a scheme differ between the GST GAAR [1056] and the income tax GAAR [1057] . Two of the more important differences involve the inclusion of additional matters to be taken into account in a determination of whether to apply Division 165. These are: the circumstances surrounding the scheme and any other relevant circumstances. The inclusion of these factors in the list of matters used to determine whether Division 165 applies may introduce a subjective element where case law relating to the comparative income tax provision has established that the matters are to be decided objectively. 5.3.1.4. Conclusions A comparison of Part IVA with Division 165 suggests that Division 165 may have a broader application than Part IVA of the ITAA36. Division 165 applies to part of a scheme which may assist the Commissioner in defining a scheme narrowly. The factors listed for determining the

dominant purpose or principal effect of a Division 165 scheme may involve subjective as well as objective considerations. Further, Division 165 provides examples of where the GAAR does not apply, which may lead to the provision being interpreted literally as applying in any circumstances other than those provided in the four examples. Recent ATO rulings on schemes and arrangements previously under risk assessment by the ATO (Division 165 Rulings), together with PS LA 2005/24, suggest that the ATO intends to exercise Division 165 cautiously. If this is the case, Division 165 may not undergo a similar course to section 260 of the ITAA36, despite being somewhat broader than Part IVA of the ITAA36. However, the recent decision of the Administrative Appeals Tribunal in VCE, while a victory for the Commissioner, may broaden the scope of Division 165, and produce greater uncertainty for taxpayers. 5.3.2. Division 165 rulings The ATO has recently issued the following rulings with respect to Division 165: GSTR 2004/3: arrangements of the kind described in Taxpayer Alert 2004/2: avoidance of GST on the sale of new residential premises; GSTR 2005/4: arrangements of the kind described in Taxpayer Alerts 2004/6 and 2004/7: use of the grouping or margin scheme provisions of the GST Act to avoid or reduce the GST on the sale of new residential premises; GSTR 2005/5: arrangements of the kind described in Taxpayer Alert 2004/8: use of the going concern provisions and the margin scheme to avoid or reduce the GST on the sale of new residential premises; GSTR 2005/3: arrangements of the kind described in Taxpayer Alert 2004/9: exploitation of the second hand goods provisions to obtain input tax credits.

At least three observations may be made with respect to the Division 165 Rulings. Firstly, the structure of each of the rulings may suggest that the Commissioner intends to apply Division 165 as a provision of last resort. The Rulings demonstrate that the scheme or arrangement is ineffective, and then in the alternative, that the scheme or arrangement is contrary to Division 165. This is also true of Part IVA of the ITAA36. [1058] Secondly, the Rulings generally conclude that Division 165 applies to the transaction at issue. However, it is noted in each Division 165 Ruling that Division 165 must be applied on a case by case basis and in each case the Commissioner must give proper consideration to the individual circumstances of entities before making a decision on the application of Division 165. Thirdly, the Rulings each address the taxpayer argument based on section 165-5(1)(b) which provides that Division 165 does not operate if the GST benefit is attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the GST law. In each case, it is determined that, while the means of achieving the scheme

make the use of a choice under the legislation, the GST benefit arising from the scheme is not attributable to that choice, but rather, is attributable to the structuring of the arrangement and section 165-5(1)(b) therefore has no application. For example, GSTR 2004/3: arrangements of the kind described in Taxpayer Alert 2004/2: avoidance of GST on the sale of new residential premises involves an arrangement where the joint venture operator of a joint venture purports to sell completed residential premises to a participant in the joint venture this transaction being excluded from GST by the GST joint venture provisions. [1059] The GST joint venture participant then sells the property to third parties as an input taxed supply of residential property, rather than a taxable supply of new residential property the transfer of the property within the joint venture was said to stop the property from being new. The joint venture members gain a competitive advantage in the market as they are selling new residential premises without adding on any GST. With respect to section 165-5(1)(b), the Ruling notes that the GST benefit arising from the scheme is not attributable to the registration of a GST joint venture under Division 51. Rather, the GST benefit is attributable to the structuring of the arrangements so that there is an intermediate sale between joint venture participants that then on-sell the property to third parties as an input taxed supply. [1060] 5.3.3. VCE and Commissioner of Taxation VCE and the Commissioner of Taxation involved the sale of real property by a vendor registered on a cash basis, to a purchaser registered on an accruals basis. The purchase price was $770,000, to be paid in four unequal instalments over between 2003 and 2018. The agreement was designed to manipulate a timing advantage between a vendor using a cash basis of accounting, and a purchaser using an accruals basis. That is, the purchaser considered that it was entitled to an input tax credit of $70,000 when the arrangement was entered into in 2003. The Administrative Appeals Tribunal found in favour of the Commissioner of Taxation, cancelled the input tax credit, and imposed penalties. In so finding, the Tribunal confirmed the position of the Commissioner in Taxpayer Alert TA2004/1 Non-arms length arrangements using GST cash/non-cash accounting methods to obtain a GST benefit, issued with effect from 8 January 2004. [1061] The Taxpayer Alert described the scenario that was found by the Tribunal to be contrary to Division 165 of the GST legislation. [1062] As noted, while the decision in VCE was a victory for the Commissioner, the reasoning of the Tribunal may indicate that Division 165 has the potential to be limited by the exception for a GST benefit obtained by a valid choice or election, in the same way that the misuse and abuse test appears to have limited the scope of the Canadian income tax GAAR. As previously noted, the Tribunal listed as the second criterion for assessment, the issue of whether the GST benefit was attributable to VCEs making an election that is expressly provided for by the GST Act. While the Tribunal notes the similarities between the GST GAAR and Part IVA of the ITAA36, the discussion of the second criterion does not draw upon Part IVA case law. Indeed, whereas the Tribunal considering VCE devoted so much analysis to this point as to suggest that the provision is a substantive provision as Cassidy has noted, decisions with respect to Part IVA

of the ITAA36 have not tended to afford such detailed analysis to the issue, with the Part IVA equivalent provision operating more as an interpretative provision. 5.3.4. Division 165 PS LA 2005/24 Application of General Anti-Avoidance Rules imposes restrictions on the ability of officers to issue a Division 165 determination, and ensures that the TCN/GAAR Panel is involved in any Division 165 determination. The Practice Statement states that this is necessary because of the seriousness of a Division 165 determination. The Practice Statement also enables taxpayers to seek rulings on the application of Division 165 to a particular transaction. Penalties related to Division 165 of the GST Act and penalties applying to promoters of GST exploitation schemes are provided in the TAA53. Schedule 1, Division 284 of the TAA53 states that it provides a uniform administrative penalty regime for all taxation laws, to enable administrative penalties to apply to entities that fail to meet their obligations under those laws in relation to, among other things, entering into schemes. [1063] Schedule 1, Division 290 of the TAA53 enables the Commissioner to seek civil penalties, statutory injunctions or undertakings, in the alternative or in combination, against promoters of schemes, such as those discussed in GSTR 2004/3, 2005/4, 2005/5 and 2005/3. [1064] 5.3.5. Conclusions While the Division 165 Rulings and PS LA 2005/24 provide some comfort that the ATO will exercise Division 165 cautiously, it is ultimately the language of the legislation that will be interpreted and applied. If Division 165 were to form the basis for the drafting of a uniform statutory GAAR, it is submitted that taxpayer certainty would be improved by removing the four examples of where Division 165 does not apply, from the preamble to Division 165. The definition of scheme should not specifically include part of a scheme, enabling the Commissioner to define a scheme so narrowly that the taxpayer is unable to demonstrate any commercial reasons for the scheme. It is further submitted that the twelve factors for determining the dominant purpose or principal effect of a scheme should exclude factors such as any other relevant circumstances, as Part IVA of the ITAA36 does. Finally, it is suggested that the exception for a GST benefit obtained under a valid GST election or choice should be an interpretative rather than a substantive provision within Division 165, to prevent the course that has ensued in Canada with respect to the exception for misuse and abuse. 5.4. Australian fringe benefits tax GAAR Section 67 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides a GAAR that is reproduced at Appendix F. The Commissioner discusses section 67 of the FBTAA in PS LA 2005/24, together with Part IVA of the ITAA36 and Division 165 of the GST Act. [1065] While section 67 of the FBTAA follows the form of Part IVA [1066] and Division 165, in that it requires: the identification of an arrangement (similar to a scheme), entered into for the sole or dominant purpose of a tax benefit the provision is somewhat shorter and less detailed. There is no preamble to section 67. There is also no list of factors indicative of the sole or dominant purpose of an arrangement.

Section 67 was considered by the Commissioner in a Taxation Ruling in 1988 [1067] . As with the GST Rulings, the Taxation Ruling identifies an arrangement used to avoid fringe benefits tax, and demonstrates that the planning is ineffective at law. It then provides that, if the Commissioner is wrong and the planning is effective at law, then it is alternatively within the scope of section 67. [1068] While the Ruling may suggest that section 67 is a provision of last resort it has been exercised by the Commissioner [1069] . However, the courts decided that the particular exercises of the provision were improper, and it was not necessary for the judiciary to make a finding with respect to section 67. [1070] The decisions were made in 2002 and 2003, prior to the GAAR Panel being involved in a decision by the Commissioner to exercise section 67 of the FBTAA. [1071] Penalties applying to taxpayers breaching section 67 of the FBTAA are provided in Division 284 of the TAA53. Penalties applying to promoters of fringe benefits tax schemes are provided in Division 290 of the TAA53. 5.5. Stamp duty GAARs Six of the eight Australian states/territories have adopted a GAAR in their stamp duty legislation [1072] each of them different. While the tax base of each state/territory differs stamp duty legislation generally operates along similar lines. [1073] Accordingly, there does not appear to be any reason for differences between the states/territories with respect to the GAAR. [1074] This is particularly so given that, in 1994 the Southern States of Australia and the ACT resolved to standardize their legislation. [1075] Further, the interpretation of legislation provisions in each of the states/territories provides that a purposive interpretation of legislation is to be preferred. [1076] While this study focuses upon the different stamp duty GAARs operating in the various Australian states and territories, it is important to note that differences also exist in the extent to which GAARs are used in state/territory pay-roll tax and land tax legislation and where they are used, the form that they take. [1077] This study focuses on stamp duty rather than pay-roll tax or land tax as it is in stamp duty that the GAARs used by the various states/territories are most diverse. The uniform GAAR proposed for all of Australias taxation legislation proposed in Chapter Six would cover state/territory pay-roll tax and land tax, in addition to state/territory stamp duty. 5.5.1. New South Wales and Tasmania NSW and Tasmania are the only two Australian jurisdictions that have not enacted a GAAR in their stamp duty legislation. However, this is not to say that a GAAR has not been considered. In NSW, a GAAR modelled on Part IVA of the ITAA36 was included in the draft consultation version of the Taxation Administration Act 1996 (NSW) which, if it were enacted, would have applied to stamp duty, pay-roll tax and land tax. [1078] During public consultation, the proposed GAAR was the subject of considerable criticism by a range of commentators and was ultimately not adopted. Criticisms were made on the basis that GAARs generally create commercial uncertainty. This point was made together with the argument that the simultaneous stamp duty re-writes imposed substantial SAARs, including the shift from stamp duty being a tax on instruments to a tax on transactions. [1079]

There were also arguments that a GAAR was particularly unsuited to stamp duty. [1080] It is submitted that this argument is merely self-serving rather than being a valid argument against the adoption of a GAAR in a stamp duty context. The argument is that, while the rewritten stamp duties legislation is moving predominantly to a transaction basis there are still situations where duty will not apply if no instrument is created. The argument continues that, a decision not to document a transaction, even though dictated by commercial imperatives, could result in the application of the GAAR where no duty would have, otherwise, been payable. [1081] Even if this were a genuine concern, it is submitted that the concern may have been allayed by including a provision akin to section 177C(2)(a)(i) of the ITAA36 and section 165-5(1)(b) of the GST Act providing: *the GAAR operates if+ the tax benefit is not attributable to the making, by an entity, of a choice, election, application or agreement that is expressly provided [by the Act+. However, neither NSW nor Tasmania ultimately adopted a GAAR, and it does not appear that the introduction of a GAAR in either state is currently on the agenda. This then begs the question of the extent to which the doctrine of fiscal nullity may be expected to apply in NSW and Tasmania. Before a GAAR existed in the Victorian stamp duties legislation, the full court of the Supreme Court of Victoria discussed the question of the applicability of fiscal nullity to stamp duty, and left the question open. [1082] In that case, the Commissioner argued that the particular structure involving redeemable preference shares had no commercial or business purpose other than to avoid a liability to stamp duty, and that the structure was part of a preordained scheme for that purpose. [1083] In declining to apply fiscal nullity to the transaction, the court did not specifically exclude the possibility of the application of fiscal nullity to stamp duty. [1084] On appeal, the High Court similarly did not provide a definitive answer to the question of whether fiscal nullity applies to Australian stamp duty legislation. [1085] Further, following the later decision of Peko-Wallsend Operations Ltd v. Cmr of State Taxation (WA), [1086] it is still unclear whether fiscal nullity apples to Australian stamp duty legislation. [1087] On the other hand, it is argued that the existence of a GAAR precludes the operation of the doctrine of fiscal nullity. [1088] This is because in John v. FCT, [1089], the High Court was of the view that the doctrine of fiscal nullity does not apply to the ITAA36 because the Act already contained a GAAR. 5.5.2. Queensland The statutory GAAR in the Duties Act 2001 (Qld) is contained in Chapter 11 Avoidance schemes, and is reproduced at Appendix G. Also reproduced in Appendix G is the predecessor to Chapter 11 of the Duties Act 2001 (Qld), which was section 81 of the Stamp Act 1894 (Qld). Broadly, section 81 of the Stamp Act 1894 (Qld) was loosely modelled on section 260 of the ITAA36. [1090] The consultation draft of Chapter 11 of the Duties Act 2001 (Qld) appears to have been modelled on Division 165 of the GST Act, however, the GAAR eventually enacted is perhaps more similar to Part IVA of the ITAA36 than Division 165 of the GST Act with the removal of references to the effect of a scheme, as well as the removal of other relevant circumstances from the list of issues to which regard may be had when deciding the purpose of a scheme. [1091]

Section 81 of the Stamp Act 1894 (Qld), while very similar to section 260 of the ITAA36 did not experience an emasculation paralleling that of section 260 of the ITAA36. Rather, the Commissioner successfully applied section 81 in an avoidance context in Quetels case. *1092+ In that 1992 case, the Court appeared to rely upon the ordinary business or family dealing test in Newtons *1093+ case, together with the section 260 revival cases, including Mullens *1094+ and Gulland. [1095] The case was decided in favour of the Commissioner, as the transaction did not appear to be the choice of a beneficial course, nor was it capable of being explained by reference to ordinary business or family dealings without necessarily being labelled as a means to avoid tax. However, given the section 260 decisions following Newton but prior to Mullens and Gulland, it is perhaps not surprising that the legislature would enact a new GAAR similar to Part IVA of the ITAA36 or Division 165 of the GST Act with the commencement of the Duties Act 2001 rather than simply adopting section 81 of the Stamp Act 1894 into the new duties legislation. There is, however, an interesting difference between Chapter 11 of the Duties Act 2001 (Qld) and Part IVA of the ITAA36 and Division 165 of the GST Act. Chapter 11 commences with section 432, headed Purpose and operation of chapter 11. Section 432(1) provides The purpose of this chapter is to deter artificial, blatant or contrived schemes to reduce liability to duty. The limiting effect of this provision is perhaps re-enforced by section 432(2), which provides Subject to subsection (1), nothing in this Act limits the operation of this chapter. Artificial, blatant or contrived is not defined in the Duties Act 2001 (Qld). The addition of section 432 appears to have been a concession by the legislature in response to criticisms of the consultation draft legislation. Critics of Chapter 11 explain that, whereas the extrinsic material to Part IVA of the ITAA36 noted that the provisions of Part IVA were directed to blatant, artificial or contrived arrangements the legislation contained no such references. [1096] Interestingly though, the legislature preferred to adopt section 432 rather than adopting a provision similar to section 165-1 of the GST Act. While section 165-1 of the GST Act, an explanation provision rather than an operative provision, provides that This Division is aimed at artificial or contrived schemes it then continues to provide four examples of situations where the GAAR will not apply. No examples are provided in the Queensland stamp duties legislation. It is submitted that this was a positive initiative the examples in the GST legislation of where the GAAR will not apply may limit the application of the GAAR to include all circumstances other than those provided in the four examples prescribed. Also notable in the context of the debate that occurred in NSW with respect to the appropriateness of GAARs applying to stamp duty legislation, the Queensland stamp duty legislation provides that Chapter 11 applies if the duty benefit is not attributable to an exemption or concession under the Act. [1097] This is perhaps a narrower provision than that in section 165-5(1)(b) of the GST Act and section 177C(2)(a)(i) of the ITAA36, where *the GAAR operates if] the tax benefit is not attributable to the making, by an entity, of a choice, election, application or agreement that is expressly provided *by the Act+. In the case of Chapter 11, the GAAR will not apply where a specific concession or exemption provided in the legislation applies. However, the provision in the GST and Income Tax legislation may mean that the

GAAR will not apply in circumstances where a transaction is structured in a particular way rather than being limited to not applying where a specific concession or exemption exists. Arguably, the combination of section 432 of the Duties Act 2001 (Qld) with the provision that Chapter 11 applies if the duty benefit is not attributable to an exemption or concession under the Act, is effective. While limiting the GAAR so that it does not apply in circumstances where a specific exemption or concession exists section 432 ensures that tax planning involving a structure that is blatant, artificial or contrived is within the parameters of the GAAR. As noted, when a GAAR was being contemplated for the NSW Taxation Administration legislation, critics argued that a decision not to document a transaction, even though dictated by commercial imperatives, could result in application of the GAAR where no duty would have otherwise been payable. However, under the Queensland model, if a transaction were not documented for commercial reasons, then arguably the transaction is not blatant, artificial or contrived. There has not yet been a decision with respect to Chapter 11 of the Duties Act 2001 (Qld). Further, the Queensland Office of State Revenue has not issued a practice statement similar to the ATO PS LA 2005/24, applying to the GAARs in the income tax, GST and FBT legislation. There appears to be no Queensland equivalent to the ATOs GAAR Panel. The Queensland legislation does not impose an administrative or civil penalty on promoters of schemes liability for tax properly payable with interest and/or penalties is payable by the taxpayer. 5.5.3. Victoria Like NSW, the 1995 First Exposure Draft of the re-written Victorian Duties legislation contained a GAAR similar to that enacted in Chapter 11 of the Duties Act 2001 (Qld). [1098] However, following public consultation, it was determined that the GAAR was unnecessary, as the SAARs contained within the legislation were sufficient. No GAAR was therefore enacted. However, unlike NSW, the Victorian Parliament has recently enacted GAARs applying to the transfer duty and land-rich duty chapters of the Duties Act 2000 (Vic). The transfer duty GAAR is contained in Chapter 2, Part 6, and is reproduced at Appendix H. The land-rich duty GAAR is contained in Chapter 3, Part 2, Division 6 and is also reproduced at Appendix H. [1099] The Law Institute of Victoria questioned the need for the enactment of the GAARs, particularly as the amount of conveyance duties received by the government had increased in recent years suggesting that the use of artificial and contrived schemes was not widespread. [1100] The Victorian Duties GAARs commenced in 2004. [1101] The Victorian legislature did not undertake any public consultation on the new GAARs prior to their enactment. Rather, the Bill introducing the GAARs [1102] provided that the land-rich duty GAAR commenced the day following the introduction of the Bill into Parliament effectively removing the possibility of any public comment on the provision. [1103] The land-rich duty GAAR and the transfer duty GAAR are very similar, and both are quite different from the Queensland stamp duty GAAR, the GST GAAR and Part IVA of the ITAA36. The preamble to each of the Victorian GAARs provides that the intention of the GAAR is to impose duty on a transaction [1104] /acquisition [1105] in respect of which duty would have been payable but for a tax avoidance scheme. Unlike the Queensland GAAR, the preamble

does not prescribe that the GAARs are intended to apply only to artificial, blatant or contrived schemes. The Explanatory Memorandum to the transfer duty GAAR did state, however, that the GAAR was intended to deter artificial and contrived schemes aimed at avoiding duty on a transfer, or a dutiable transaction involving dutiable property to which Chapter Two applies. [1106] Unlike the GST GAAR, the Victorian GAARs do not provide specific examples to which the GAAR is not intended to apply. A tax avoidance scheme is defined in each GAAR to mean a scheme that, directly or indirectly, has tax avoidance as its purpose or effect, or, has tax avoidance as one of its purposes or effects, if the purpose or effect of tax avoidance is not merely incidental to another purpose or effect of the scheme. Scheme *1107+ and tax avoidance *1108+ are each defined very broadly. However, unlike Part IVA of the ITAA36, Division 165 of the GST Act, and the GAAR in the Queensland Duties legislation there is no list of prescribed factors to which regard is to be had in determining the purpose or effect of a scheme. Accordingly, the threshold for the operation of the GAARs is very low: it is not necessary to have a dominant purpose, and any factor may be considered in determining the purpose. [1109] Where the Commissioner considers that a person has participated in a tax avoidance scheme, each of the GAARs enables the Commissioner to disregard the scheme and determine what duty would have been payable but for the scheme, and make an assessment of the tax liability. [1110] This provision is not dissimilar to that applying in Queensland. However, the Victorian GAARs additionally impose 10 penalty units upon persons employed or concerned in the preparation of an instrument effecting or evidencing a dutiable transaction, or the provision of any advice regarding the form of a dutiable transaction in circumstances where the person omits from, or fails to include in the instrument or any material data presented to the Commissioner, any fact or circumstance affecting the liability of any person for duty. [1111] It is unclear whether the Victorian State Revenue Office will be in a position to provide advance rulings to taxpayers or the advisers about the application of the GAARs to particular transactions as this is not prescribed in the legislation or in any rulings or practice statements issued by the Victorian State Revenue Office. Perhaps not surprisingly, the penalty applying to advisers of taxpayers was not well received by the tax profession. [1112] The tax profession has been particularly critical of the Explanatory Memorandum stating that the legislation only applies to persons knowingly omitting facts from an instrument or from material presented to the Commissioner whereas the legislation does not require an intention to mislead. [1113] Similar arguments to those made with the enactment of Division 290 of the TAA53 where there were pre-existing criminal sanctions, were also made in the context of the Victorian Duties legislation. The Law Institute of Victoria argued that the penalty applying to advisers was unnecessary, as the Victorian taxation administration legislation already provided that it was an offence to give information to a tax officer that is false or misleading in a material particular, or to omit from a statement to a tax officer, information without which the statement is false or misleading in a material particular. [1114] Existing taxation administration provisions did not, however, apply to advisers providing advice to taxpayers on the structuring of a transaction. Further, it is submitted that while there are some shortcomings to the provisions, there are also some advantages over the Federal promoter penalty provisions contained in Division 290 of the TAA53.

Some shortcomings of the penalty applying to Victorian Duties advisers when compared to the promoter penalties applying under Division 290 of the TAA53 include the nature of the penalty itself. The Victorian penalty is 10 penalty units. By comparison, the possible penalties for a breach of Division 290 of the TAA53 include injunctions and undertakings, as well as a monetary penalty. While the ATO has not yet indicated the types of undertakings that it expects to enter into, or the types of conditions that it will seek to attach to injunctions it appears that there is scope for the penalty to serve an educative purpose, rather than being purely pecuniary. Professor Tiley has argued that an effective method for countering tax avoidance may be a social pressure campaign. [1115] Tiley notes that, just as drink driving has become socially unacceptable, a campaign ought to be levelled at making tax avoidance socially unacceptable. This approach appears to have been adoptedo, to some extent, in the context of Australian corporate regulation, particularly in the area of continuous disclosure where the corporate regulator may seek public orders and undertakings. [1116] The Corporations Act enables a court to make a public order requiring the publication of advertisements by an individual or entity involved in a contravention of the Act stating the cause of the breach and the remedial action that follows. [1117] Further, the Australian Securities and Investment Commission (ASIC) may seek undertakings where there has been a breach of the continuous disclosure requirements requiring a remedial course of action to be taken. [1118] An example of an undertaking in the continuous disclosure context is that reached by ASIC and Uecomm Limited. *1119+ ASIC investigated Uecomms compliance with its disclosure obligations, and found that Uecomm may have breached its continuous disclosure obligations by failing to announce its poor trading results for January 2001, February 2001 and the March quarter of 2001. ASIC and Uecomm negotiated an enforceable undertaking by which Uecomm was required to engage an external consultant approved by ASIC to review its practices, policies and procedures for dealing with continuous disclosure obligations, and adopt a continuous disclosure compliance program. The external consultant was required to review and make recommendations on the effectiveness of Uecomms internal compliance procedures, and Uecomm was required to implement any recommendations arising from the review by the independent consultant. While Division 290 of the TAA53 does not enable the Commissioner to seek public orders against a promoter, it is submitted that undertakings may be used effectively as an educative tool. Undertakings may require a promoter to advertise the scheme that was promoted, including an explanation of why the promotion was in breach of the law, and the possible penalties that may apply to a promoter of the scheme. It is submitted that this would not only shame the promoter, it would also serve as a warning to other promoters. An undertaking may also mandate a procedure to be followed by the promoter to establish a framework to ensure that the promoter does not fall foul of Division 290 in the future. For example, it may require the promoter to employ a consultant, as was required of Uecomm in the context of a breach of the requirements of continuous disclosure. Some advantages of the Victorian penalty applying to advisers when compared to the Federal promoter penalty provisions include their seeming ability to have reduced the possibility of tension between tax advisers and taxpayers. As already noted in Chapter Four, under Division

290 of the TAA53, possible conflicts between taxpayers and their advisers may arise with respect to: the exercise of legal professional privilege against the broad investigative powers of the ATO; the ability of the tax adviser to reduce a civil penalty by cooperating with the ATO; and the discretion of the ATO to seek to impose civil penalties upon tax advisers.

Arguably, the Victorian misleading information provisions overcome some of the shortcomings of Division 290 of the TAA53. Firstly, the Victorian provisions, unlike Division 290 of the TAA53, do not provide for a reduction of tax adviser penalties where the adviser cooperates with the tax authority. Secondly, the Victorian misleading information provisions may be advantageous in that they are expressed in absolute terms rather than operating as a discretion. However, it is submitted that the Victorian misleading information provisions, like Division 290 of the TAA53, would be improved if they were to operate only as a consequence of a finding of tax avoidance by the taxpayer. Such an amendment may provide a disincentive for tax advisers to break client privilege to demonstrate their own innocence, against the wishes of the taxpayer client. This argument is further strengthened by the fact that the Victorian tax administration legislation already provides offences for giving information to a tax officer that is false or misleading in a material particular, or for omitting information from a statement to a tax officer. [1120] 5.5.4. South Australia The South Australian GAAR is much shorter than the Victorian and Queensland equivalents. It provides as follows: 70(1) Subject to subsection (2), an instrument executed in order, either directly or indirectly, to avoid or evade the payment of the duty payable upon a conveyance on sale is void. 70(2) Where a third party relying in good faith on an instrument that is void by virtue of subsection (1) purports to acquire an interest in property subject to the instrument, the instrument shall, for the purposes of that transaction, be treated as valid, provided that it is duly stamped as a conveyance on sale. [1121] The South Australian stamp duty GAAR could perhaps be described as being more similar to section 260 of the ITAA36 than to Part IVA of the ITAA36. This then begs the question of whether the judiciary has tended to interpret the South Australian provision narrowly, as section 260 was interpreted. The South Australian stamp duty GAAR was examined in JWW Nominees Pty Ltd and Ors v. The Treasurer and Anor. [1122] This is the first reported case on the South Australian stamp duty GAAR. JWW Nominees involved an appeal by the vendors and purchasers of units in a unit trust against the Commissioner. The Commissioner had assessed the duty on the transfer of units

based on the value of the trust being $15 million, the value of the assets of the trust. The appellants argued that, prior to the sale of the units in the trust, the trustee entered into a transaction which left it owing a debt of $15 million, being the value of the assets of the trust and the appellants claimed that as a consequence the value of the units at the date of sale was only a nominal value. A single judge of the Supreme Court, Gray J, upheld the Commissioners assessment. Gray J applied a SAAR in section 60A(4a) of the Stamp Duties Act 1923 (SA) [1123] to prevent the financing transaction from reducing the dutiable value of the shares. While finding that it was unnecessary to answer the question of whether section 70 applied to the transaction, Gray J noted, with respect to section 70: The capital distribution was a precondition to the agreement proceeding. The distribution cannot be viewed as something divorced from the agreement. It was an integral part of the agreement. It is reasonable to infer that the restructure and capital distribution were completed in an attempt to avoid the payment of a considerable sum of stamp duty. It would appear that even if the Commissioner could not rely on the provisions of section 60A(4a), it may have been possible to have treated the instruments giving effect to the restructure and capital distribution as being void pursuant to the terms of section 70. [1124] However, the Full Supreme Court allowed the appeal from the decision of Gray J, using language which resembled that used in Newtons case with respect to section 260 of the ITAA36. The Full Court found that the purpose of the financing was family planning, and reducing the value of the units was merely an incidental effect. [1125] Accordingly, the Full Court determined that the reduction in the value of the units could not be regarded as the purpose of the financing within the meaning of section 60A(4a)(a). Further, the financing was not granted or made in favour of the trustee, as required by section 60A(4a)(b). The court then applied this reasoning to find that section 70 of the Stamp Duties Act 1923 (SA) did not apply: ...for the reasons given with respect to the application of section 60A(4a), it could not be said that the instruments in question were executed in order to avoid or evade the payment of the duty payable. *1126+ As the reason for section 60A(4a) not applying was that the purpose of the financing was family planning, it follows that the Full Court allowed section 70 to be interpreted so as not to apply where the purpose of a transaction may be demonstrated to be family planning. The court did not refer to section 260 case law but it is interesting that family planning precluded the operation of the South Australian GAAR, given that the GAAR applies to transactions that directly or indirectly avoid stamp duty. 5.5.5. Western Australia A GAAR was recently introduced into Division 5 of Part IIIBA of the Stamp Act 1921 (WA) applying to land-rich duty. [1127] It is reproduced at Appendix I. The GAAR applies to listed land-holders from 1 July 2004, [1128] and to other land-holders under an unlimited time period. While the land-rich provisions were themselves originally introduced as a SAAR it is arguable that land-rich duty has since evolved to become a head of duty in its own right particularly in WA, where the duty may now apply to the transfer of an interest in a listed entity. [1129] Under the WA legislation, SAARs only applied to conveyance duty to prevent schemes involving an artificial reduction in the value of property conveyed. It would appear that the

land-rich rules were, prior to the introduction of Division 5 of Part IIIBA of the Stamp Act 1921 (WA), the most susceptible provisions in the Stamp Act 1921 (WA) to avoidance. Under the GAAR, the Commissioner may make a determination if the Commissioner is of the opinion that the scheme is or was one having as its purpose, or one of its purposes, the defeat of the object of the land-rich provisions. The question arises as to whether the GAAR is drafted too broadly, in that it is only necessary that the scheme have one of its purposes as the defeat of the land-rich rules, rather than requiring a dominant purpose. While there has not yet been a decision with respect to Division 5 of Part IIIBA of the Stamp Act 1921 (WA), the language appears to be as broad as the direct or indirect purpose test which applied under section 260 of the ITAA36. A list of factors is provided by the legislation, to which regard must be had in determining whether a scheme is one to which the GAAR applies: the way the scheme was entered into or carried out; the form and substance of the scheme; when the scheme was entered into; any change in the persons financial position as a result of the scheme; the circumstances surrounding the scheme; and any other matter that the Commissioner considers relevant. As is argued above with respect to the GST GAAR, the inclusion of any other matter that the Commissioner considers relevant as a factor to which regard is to be had, may introduce a subjective element into the purpose test. Certainly this factor combined with the lower threshold of a purpose rather than dominant purpose suggest that Division 5 of Part IIIBA of the Stamp Act 1921 (WA) is very broad, and likely to be limited by the judiciary in due time. [1130] 5.5.6. Australian Capital Territory Section 8 of the Taxation Administration Act 1999 (ACT) contains a statutory GAAR, which is reproduced at Appendix J. Unlike the Queensland GAAR, the ACT GAAR does not provide an objects clause. [1131] However, the second reading speech to the Bill introducing the ACT GAAR provided as follows: Mr Speaker, the Bill contains an important general anti-avoidance provision. The Bill provides that where a person uses a tax avoidance scheme, as defined in the provision, the commissioner for ACT Revenue may determine the amount of tax that would have been payable had the scheme not been in place and may make such assessments as are necessary. Any such assessment would be subject to objection and appeal to the Administrative Appeals Tribunal. [1132] The ACT GAAR is perhaps more similar to Part IVA of the ITAA36 and the Queensland and Victorian GAARs, than the Western Australian and South Australian GAARs. It broadly addresses a scheme with a principle purpose of avoiding duty, which is determined by reference to a list of prescribed factors. However, differences exist with respect to the operation of the ACT provision. For example, a tax benefit in the ACT exists where there is a reduction in or exemption from tax that would otherwise be payable but it does not contain a reference to the postponement of liability to duty as the Victorian GAARs do. [1133] Further, the ACT GAAR does not specifically prevent the GAAR from applying to exemptions that are provided by the legislation, that is, there is no equivalent to section 177C(2)(a)(i) in

Part IVA of the ITAA36. [1134] Fortunately however, the factors to be referred to in determining the purpose of a scheme are more limited than the equivalent Western Australian list it does not include any other relevant circumstances or words to a similar effect, which may have allowed a subjective rather than an objective purpose test. [1135] 5.5.7. Northern Territory The Taxation (Administration) Act (NT) provides a definition of tax avoidance in section 4B, which is reproduced at Appendix K. Section 4B of the Taxation (Administration) Act (NT) differs from other statutory GAARs, in that it does not allow the Commissioner to make a determination that the GAAR applies. Rather, exemption and concession provisions throughout the Taxation (Administration) Act (NT) include a subsection stating that the exemption or concession does not apply if the transaction is a tax avoidance scheme or part of a tax avoidance scheme. [1136] While scheme is defined broadly in section 4B of the Taxation (Administration) Act (NT), a tax avoidance scheme is perhaps more limited than in other states and territories. As noted, it only applies to certain exemptions or concessions in the legislation which state that a tax avoidance purpose prevents the granting of the exemption of concession. Further, a tax avoidance scheme does not appear to include a deferral of tax. While a collateral purpose is required in the Northern Territory, rather than a purpose, the legislation does not provide a list of factors to which regards may be had in determining the purpose. Rather, it is possible that the test may be subjective rather than objective, with the legislation simply providing that in determining the purpose: the Commissioner may have regard to any matter whatever that the Commissioner thinks is relevant. *1137+ 5.6. Conclusions The judicial interpretation of income tax GAARs in Canada, New Zealand and South Africa has often moved in different directions, and produced different results to the Australian judiciarys interpretation of Part IVA of the ITAA36. While this may in part reflect different legal traditions between the countries, it is submitted that differences are largely explained by the different form of the GAARs. This Chapter has identified strengths and weaknesses of particular GAARs relevant to others. For example, an objective purpose test may be preferable to a subjective purpose test, and this may be achieved through a list of factors used to determine the purpose of the scheme. Further, a Ruling System and a Test Case Program may be expected to improve taxpayer certainty with respect to GAARs. The various forms of Australian state/territory stamp duty GAARs are also diverse. Accordingly, case law in one jurisdiction may have limited application to other jurisdictions. None of the state/territory Commissioners have yet issued any public rulings or practice statements for the interpretation of the GAARs, similar to those issued by the Federal Commissioner. Further, none of the states/territories appear to have established procedures for the exercise of the GAARs, such as that prescribed in the ATOs PS LA 2005/24, applying to the Federal income tax, GST and FBT GAARs. It is submitted that a state/territory GAAR Panel may not only improve taxpayer certainty it would also facilitate intelligence sharing between the states and

territories. If the GAAR Panel were comprised of revenue officers representing each of the state/territory revenue authorities, then each office could see the type of avoidance occurring in other states, and take steps to counter similar avoidance in their own jurisdiction. There is also no state/territory equivalent to the ATO PS LA 2005/25, which prescribes the processes to be followed by ATO officers in intelligence gathering related to promoters of tax avoidance schemes. Further, the Victorian stamp duty GAARs are the only GAARs at state/territory level to impose penalties upon promoters of tax schemes.

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875. Sir Anthony Mason AC KBE, Atax 7th International Taxation Administration Conference, Opening Address, 20 April 2006, paragraph 24: http://www.atax.unsw.edu.au/news/tadminconfApril06/7thTaxAdmConf_Opening_address.p df (viewed 17 March 2007). 876. South African Revenue Service, above note 705, paragraph 7.3.1. 877. Id. For further details on the history of the New Zealand statutory GAAR, see: Dunbar D, Judicial Techniques for Controlling the New Zealand General Anti-Avoidance Rule: a case of old wine in new bottles, from Challenge Corporation to Peterson 18th Australasian Tax Teachers Association Conference, Melbourne University, 31 January 2006. 878. The New ZealandGoods and Services Tax Act 1985 has its own GAAR in section 76. The section is similar to sections BG1 and GB1. 879. NZITA 2004, section OB 1. 880. Id. 881. Id. 882. Id. 883. CCH, The New Zealand Master Tax Guide 2005, (CCH, Auckland, 2005), paragraph 33-050. 884. Re Securitibank Ltd (No 2) [1978] 2 NZLR 136. 885. In BNZ Investments Ltd v. C of IR (2000) 19 NZTC 15,732 at 15-784-15-785, Justice McGechan did not agree with submissions by the Commissioner that fiscal nullity could be applied in the context of section 99, the forerunner to section BG1. 886. CCH, above note 884, paragraph 33-090. 887. Case W33 (2004) 21 NZTC 11,321. 888. Peterson v. Commissioner of Inland Revenue (2005) 22 NZTC 19, 098 PC.

889. Prebble J, The Peterson Case and its impact on the Rules in BNZ Investments Ltd and Cecil Bros 18th Australasian Tax Teachers Association Conference, Melbourne University, 30 January 2006. 890. (2000) 19 NZTC 15, 732. 891. Prebble, above note 890, 4. 892. Id., 5. 893. Dunbar D, The Privy Council Approach to Film Investments, Limited Recourse Loans and the New Zealand Anti-Avoidance Legislation Asia Pacific Tax Bulletin September/October 2005, 379396, 381. 894. (1986) 8 NZTC 5,001 (CA). 895. Dunbar, above note 894, 388. 896. Id. 897. ONeil v. CIR (2001) 20 NZTC 17,051, paragraph 9, 17,057. 898. Dunbar, above note 894, 388. 899. The recent draft policy statement is currently being revised by Inland Revenue. It was prepared and released for comment prior to the Peterson decision being handed down by the Privy Council. 900. CCH, above note 884, paragraph 33-100. 901. Id. 902. The Inland Revenue Department will normally follow a ruling unless the taxpayer has failed to comply with one of the conditions: CCH, above note 907, at paragraph 33100. 903. CCH, above note 884, paragraph 33-100. 904. Id. 905. The Inland Revenue Division has advised that, in line with its usual policy on exposure draft statements released for consultation, INA 0009 is not to be regarded as the concluded view of the Commissioner. 906. Dunbar, above note 894, 391. 907. In its submissions to the Inland Revenue Department on the draft policy statement INA0009, dated 13 April 2005, the National Tax Committee of the ICANZ notes: We see the interpretation statement as providing two things: a detailed analysis and relevant conclusions on points of interpretation of the sections and a framework for the application of the sections. 908. (2001) 20 NZTC 17,051.

909. It remains to be seen what the Inland Revenue Department will conclude on the issue of a tax mitigation/tax avoidance test, as the draft policy statement was issued prior to the Peterson decision being handed down. It is understood that the Inland Revenue is currently revising the draft policy statement to include analysis of the Peterson decision. 910. In its submissions to the Inland Revenue Department on the draft policy statement INA0009, dated 13 April 2005, the National Tax Committee of the ICANZ notes, in providing that the draft policy statement is useful for taxpayers: Increasingly Inland Revenue seeks to use the provision while taxpayer resources are devoted to understanding the Revenues position. This is because the Revenues approach often does not appear to follow the 1990 policy statement or appears to take novel interpretations. 911. In its submissions to the Inland Revenue Department on the draft policy statement INA0009, dated 13 April 2005, the National Tax Committee of the ICANZ notes: Some Inland Revenue Officers appear not to have heard of the 1990 policy statement, and others seem to simply ignore it or view it as an irrelevant piece of history. We expect that this situation will be remedied once the interpretation statement is finalised ... The interpretation statement will set out a framework for Inland Revenue staff to follow. We are aware that such an interpretation statement cannot bind the Commissioner. Nevertheless, we consider that having an analytical framework which the Commissioner expects the whole of Inland Revenue to follow consistently will be a significant step forward for both Inland Revenue and the business community ... It needs to be clear to Inland Revenue officers that they are expected to follow the framework. 912. For further information, see: Tooma R, New Tax Laws to Deter Promoters of Tax Exploitation Schemes Journal of the Australasian Tax Teachers Association, Vol 2, Issue 1, 2006, 158177. 913. Inland Revenue Department, Taxpayer Compliance, Standards and Penalties: A Review A Government Discussion Document, August 2001. 914. New Zealand Inland Revenue, Mass-marketed Tax Schemes: An Officials Issues Paper on Suggested Legislative Amendments, paragraph 4.3. 915. Taxation Administration Act 1994, section 141EB(1). 916. Taxation Administration Act 1994, section 141EC. 917. Taxation Administration Act 1994, section 141EB(2). 918. Tooma, above note 913. 919. On 18 June 1987, the Minister of Finance issued a white paper on tax reform, which included a proposal to introduce a new GAAR. The existing GAAR was considered ineffective in countering avoidance. After various redrafts, the new section 245 of the CITA became effective on 13 September 1988, when Bill C-139 received the royal assent. For further discussion on the drafting of the existing section 245 of the CITA, see: Arnold BJ and Wilson JR, The General

Anti-Avoidance Rule Part 1 (1988) 36(4) Can Tax J 829; and, Dodge DA, A New and More Coherent Approach to Tax Avoidance (1988) 36(1) Can Tax J 1. 920. [1984] CTC 294. The Stubart decision reaffirmed the approach in CIR v. Duke of Westminster [1936] AC 1 (HL). 921. BDO Seidman, LLP Accountants and Consultants, Canada: GAAR to Apply to Canadas Tax Treaties International Tax July 2004, No 14, 1. Amendments are retrospective to 1988. 922. South African Revenue Service, above note 705, paragraph 7.2.2. 923. Tax benefit is defined to be any reduction, avoidance or deferral of tax or other amount payable under the CITA, including any increase in any refund of tax or other amount payable under the CITA. 924. Transaction is defined to be any arrangement or event. 925. Arnold BJ, The Long, Slow Steady Demise of the General Anti-Avoidance Rule (2004) 52(2) Can Tax J, 488, 488. 926. The Supreme Court of Canada issued its first decisions on section 245 of the CITA on 19 October 2005: The Queen v. Canada Trustco Mortgage Co., 2005 SCC 54 and Mathew v. The Queen, 2005 SCC 55. 927. See for example: Arnold, above note 926; Cassidy J, `To GAAR or not to GAAR That is The Question: Canadian and Australian Attempts to Combat Tax Avoidance Ottowa Law Review, Vol 36, Issue 2, 259-313; Duff DG, The Supreme Court of Canada and the General Anti-Avoidance Rule: Canada Trustco and Mathew Bulletin for International Taxation, Vol 60, No 2, 2006, 54-71; and Freedman J, Converging Tracks? Recent Developments in Canadian and UK Approaches to Tax Avoidance (2005) 53(4) Can Tax J 1038. 928. 2005 SCC 54. 929. Duff, above note 928, 59. 930. Canada Trustco, 2005 SCC 54 paragraph 19: *w+hether a tax benefit exists is a factual determination, initially by the Minister and on review by the courts, usually the Tax Court. 931. Duff, above note 928, 63. 932. Id. 933. [2001] 4 CTC 82. 934. Duff, above note 928, 60. 935. Dodge, above note 920, 15. 936. Duff, above note 928, 64.

937. Kellough HJ, A Review and Analysis of the Redrafted General Anti-Avoidance Rule (1988) 36(1) Can Tax J 23, 64. 938. Arnold and Wilson, above note 920, 873874: in some countries, an abuse of right will be found only if the taxpayer has the purpose of avoiding tax and the transaction is artificial or abnormal (e.g., Switzerland and the Netherlands). The abuse of rights doctrine is a general principle of law that is not limited to tax matters. In some countries, the doctrine has been expressly incorporated into the tax legislation (e.g., the Netherlands, France and Germany), and in other countries the doctrine exists primarily as a judicial doctrine (e.g., Japan and Switzerland). 939. Kellough, above note 938, 64. 940. Id., 63. 941. See for example, Van Der Hout S, Good News for Taxpayers on Canadian GAAR Journal of International Taxation, Vol 15, Issue 11, November 2004, 4450. 942. Id., 45: What the decision in Imperial *HMQ v. Imperial Oil Limited 2004 FCA 36+ reflects is that while the Canadian courts may have shown some willingness to find misuse and abuse in circumstances where the transactions involve tax maneuvers long recognized as abusive, such as non-capital loss transfers between unrelated parties, GAAR will not be so liberally applied when the policy of the specific provision under review is either unexpressed, or not clearly contravened by the transaction. 943. McMillan Binch Mendelsohn LLP, Canada: Supreme Court of Canada Considers the General Anti-Avoidance Rule Tax Bulletin, November 2005. 944. 2005 SCC 55. 945. As discussed in Chapter Four. 946. Arnold, above note 926, 488. 947. Id., 499. 948. Canada Trustco Mortgages Company v. The Queen [2003] 4 C.T.C. 2009, paragraph 90. 949. Cassidy, above note 928. 950. Id., at 298299. 951. Id., at 309310. 952. [2006] AATA 821. 953. See, for example, Ambry Legal, New Developments in GST: Anti-Avoidance and Determining Residential Premises 41(6) TIA 358. 954. The provision is reproduced at Appendix E.

955. The scheme in the VCE case was described as a tax avoidance scheme by the Commissioner in Taxpayer Alert 2004/1 Non-arms length arrangements using GST cash/noncash accounting methods to obtain a GST benefit, issued 8 January 2004. 956. http://www.cra-arc.gc.ca/E/pub/tp/ic88-2/ic88-2-e.html (viewed 17 March 2007). 957. Information Circular, paragraph 1. 958. For a critical examination of the examples used in the Information Circular, see: Arnold and Wilson, The General Anti-Avoidance Rule Part 3 (1988) 36(6) Can Tax J 1369. 959. Information Circular, paragraph 2. 960. Id. 961. Arnold, above note 926, 490: The CRA has applied the GAAR in a very restrained, responsible fashion ... . [At] March 31, 2004, the GAAR Committee has approved the application of the GAAR as either the primary or an alternative basis of assessment in only 374 cases out of a total of 570 cases considered since 1988. Moreover, the application of the GAAR in 374 cases over 15 years must be considered in the context of over 12,000 corporate audits performed annually by the CRA. These statistics indicate that the CRA is not imposing the GAAR lightly or indiscriminately, and certainly not whenever taxpayers structure their affairs in a tax-effective manner. 962. Arnold BJ and Wilson JR, The General Anti-Avoidance Rule Rule 2 (1988) 36(5) Can Tax J 1123, 1134: In the hands of an irresponsible, incompetent or overly aggressive assessor, a general anti-avoidance rule is a powerful weapon. This is true, however, of many general statutory provisions. The appropriate response to this potential abuse of the rule by tax officials is not to withdraw the rule, but for the taxing authority to discipline itself with respect to the application of the rule. 963. Tooma, above note 913. 964. Bill C-25 became law on 29 June 2000. It added section 163.2 to the Income Tax Act (Canada) which contains the new third party civil penalties legislation. 965. Canadian Customs and Revenue Authority, IC 01-1 Third Party Civil Penalties 18 September 2001, forward. 966. Carr BR, and Pereira G, The Defence Against Civil Penalties (2000) 48(6) Can Tax J 1 737, 1742. 967. CITA, section 163.2(3). 968. Ewens, Rinfret, and Dunn, above note 530, 1207. 969. Tooma, above note 913. 970. However, Australian investors may seek a GAAR ruling from the ATO with respect to an arrangement in circumstances where all the facts are disclosed to the ATO.

971. Mazansky E, A New GAR for South Africa The Duke of Westminster is Struck a Blow Bulletin for International Taxation, Vol 60, No 3, 2006, 124132, 124. 972. 1947 (2) SA 196 (A); 14 SATC 184. 973. Mazansky, above note 972, 124. 974. Id. 975. Id. 976. Id., 125. 977. Id. 978. Smith v. CIR 1964 (1) SA 324 (A); 26 SATC 1, was decided shortly after the amendments took effect. The fact scenario was similar to that in the King case. In Smith, it was found that section 90 applied having regard to the revised wording and the abnormality requirement. It was particularly noted that the transactions meant that a dividend did not accrue to Mr Smith; however, Smith retained effective control of the company, enabling him to obtain payment of an equivalent amount to himself in a form or manner that would allow it to be tax free or subject to a lower amount of tax. See Mazansky, above note 972, 125. 979. South African Revenue Service, above note 705, paragraph 8.1. 980. Mazansky, above note 972, 125 and 126 notes that other legislation was included to prevent the argument that, if the sole or main purpose was the avoidance of Estate Duty under the Estate Duty Act (No 45 of 1955) there could be no application of the GAAR SIR v. Gallagher 1978 (2) SA 463 (A); 40 SATC 39. 981. *1936+ AC 1. In that case, Lord Tomlin noted that every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. 982. Mazansky E, The Duke of Westminster Still Lives in South Africa (But is Very Careful When He Crosses the Road) 59 Bulletin for International Fiscal Documentation 3 (2005), 116. 983. 1999 (4) SA 1149 (SCA); 61 SATC 391. The case involved a sale and lease-back of equipment. The judgment began by noting that, if the same commercial result can be achieved in different ways, the taxpayer may enter into the type of transaction which does not attract tax, or attracts less tax. It concluded: But even if the particular type of transaction was chosen solely for the tax benefits, it would be wrong to ignore the fact that, had [the taxpayer] not needed capital, there would not have been any transaction at all. [The taxpayer] did not approach [the bank] in order to alleviate its tax burden: it did so because it was in need of capital and this plainly remained the main purpose of the transactions. See Mazansky, above note 983, 127.

984. South African Revenue Service, above note 705, paragraph 8.3.1. 985. Id., paragraph 8.2. 986. Id. 987. The Katz Commission recommended that: where a transaction occurs in the context of trade, a business purpose test should be substituted for the normality test. 988. The abnormality requirement applies as follows: (a) if the scheme was a business scheme: the test is whether it was entered into or carried out in a manner which would not normally be employed for bona fide business purposes other than the obtaining of a tax benefit. If the scheme was not in the context of business, the test is whether it was entered into or carried out by a means or in a manner which would not normally be employed in entering into or carrying out such a scheme; and (b) if the scheme is not a business scheme: the test is f the scheme has created rights or obligations which would not normally be created between persons dealing at arms length under a scheme of this nature. See: Mazansky, above note 983, 125

989. South African Revenue Service, above note 705, paragraph 8.2. 990. Id. 991. Id. 992. Id., paragraph 8.3.2. 993. SARS illustrate this point with reference to the following examples: ... in the film industry, cash strapped independent film makers developed deferred payment arrangements, pursuant to which service providers would agree to postpone payment for some or all of their services until the films generated revenue, as a way to help finance their productions. Scheme promoters then abused this concept to inflate the costs of films in order to maximize any applicable film allowance. Similarly, finance leases and the discounting of promissory notes are both accepted types of bona fide business arrangements. The problem arises when these components are put together in various schemes to create situations in which the borrower/lessee seeks to claim a deduction for its full rental payments while the lender/lessor seek to include only the interest component of those same payments in its income. South African Revenue Service, above note 705, paragraph 8.3.2. 994. SARS illustrate this point with reference to the following example: ... in various lease-in/lease-out and sale and buy-back schemes, taxpayers have sought to achieve significant tax deferrals by accelerating payments in one leg of the transaction and deferring them in the other (the recipient of the accelerated payment typically being a tax

indifferent party). Promoters would typically contend that these payment terms are normal, with accelerated payments, for example, reflecting concerns about a borrowers creditworthiness and deferred payments reflecting perhaps a partys projected future cash flows. In most cases, however, there is little or no evidence that the creditworthiness of the borrower was ever a serious consideration or that the payment terms ever varied due to a partys projected cash flow profile (by contrast, pricing and payment terms in these arrangements do often vary depending upon the projected taxable income of the participants). South African Revenue Service, above note 705, paragraph 8.3.2. 995. South African Revenue Service, above note 705, paragraph 8.3.3. 996. 1999 (4) SA 1149 (SCA), 61 SATC 391. 997. SIR v. Gallagher 1978 (2) SA 463 (A); 40 SATC 39. 998. South African Revenue Service, above note 705, paragraph 8.3.3. 999. Id., paragraph 8.3.4. 1000. Id. 1001. Id., paragraph 9. 1002. Id. Paragraph 9 provides as follows: Any attempt to strengthen the GAAR brings with it legitimate countervailing concerns. One is that such a move would result in increased uncertainty for taxpayers. A second, and closely related, concern is that a stronger section 103 would inhibit innovative financial arrangements and/or interfere with legitimate business transactions. 1003. South African Revenue Service, above note 705, paragraph 9. 1004. Id. 1005. Id., paragraph 10.7. Paragraph 10.7 provides as follows: ... it is anticipated that the Advance Tax Ruling System would be modified as it is phased in so as to permit taxpayers to obtain greater guidance and certainty in respect of the application of the new provisions. It is also anticipated that the Commissioner will develop and implement procedures to ensure their consistent and appropriate application. 1006. The Interim Response invited comments from the public on or before 13 April 2006. The Interim Response takes account of comments received on the Discussion Paper up to the extended deadline of 28 February 2006. The Interim Response states that it is intended to enhance further dialogue and the debate that will take place at the Portfolio Committee on Finance hearings on tax avoidance that are currently scheduled to begin on 16 March 2006 (paragraph 1 of the Interim Report). 1007. Interim Response, paragraph 8.

1008. Id. 1009. Id. 1010. Interim Response, paragraph 8, notes: This commitment would be similar to the pretransaction clearances that United Kingdom Inland Revenue had considered in conjunction with its 1998 proposals for a GAAR (United Kingdom A General Anti-Avoidance Rule for Direct Taxes: Consultative Document (Crown Copyright: 1998) section 5.2). However, the Interim Report goes on to note at paragraph 8 that any changes to the ruling system would need to balance the ruling system being misused to plot out new roadmaps for impermissible tax avoidance. 1011. Interim Response, paragraph 7. 1012. Id. 1013. Id. 1014. Id. 1015. South African Revenue Service, above note 705, paragraph 10. 1016. Interim Response, paragraph 4.1. 1017. The Interim Response notes at paragraph 4.1: Thus, for example, BUSA/ SACOB has suggested the publication, by the Minister of Finance, of a list of those arrangements that would fall outside the abnormal category ... similar to the reportable arrangements legislation. 1018. Interim Response, paragraph 4.2. 1019. Id. The SARS reinforce this point by noting that the same sort of presumption has existed under the purpose requirement of section 103 since its introduction in 1941. It is further noted that such presumptions operate in other countries, including Australia and Canada. 1020. Interim Response, paragraph 4.2. 1021. South African Revenue Service, above note 705, paragraph 10. 1022. Interim Response, paragraph 5.1. 1023. Id., paragraph 5.2. 1024. Id. As a point of comparison, the New Zealand GAAR applies to an arrangement ... that directly or indirectly ... has tax avoidance as 1 of its purposes or effects ... if the purpose or effect is not merely incidental. 1025. South African Revenue Service, above note 705, paragraph 10. Paragraph 6 of the Interim Response provides an example of how the new provision is intended to work:

For example, if a circular flow of cash and a tax indifferent party were used to create inflated deductions for the borrower without an offset receipt or accrual of gross income by the lender, the new section 103 might be used to strip the transaction of the incremental benefit to the borrower and to ensure that the lender properly included the interest from the underlying loan in its gross income. 1026. South African Revenue Service, above note 705, paragraph 10. 1027. Interim Response, paragraph 7. The SARS consider that, permitting the specific provision with section 103 in the alternative is a matter of administrative and judicial economy. The only alternative, moreover, would be to extend the prescription period in respect of section 103 until the initial dispute under the specific provision is resolved. This alternative, however, would require multiple dispute resolution proceedings and would clearly increase the burden and uncertainty for taxpayers. 1028. South African Revenue Service, above note 705, paragraph 10. 1029. Interim Response, paragraph 12. 1030. The second note to the proposed section 103 states that provisions in respect of penalties are to be dealt with elsewhere in the Act. 1031. Interim Response, paragraph 12. 1032. Id. 1033. Letter from the Institute of Certified Public Accountants of South Africa to Law Administration South African Revenue Service, dated 31 January 2006, headed Response in terms of call for comment Discussion Paper on Tax Avoidance and Section 103 of the Income Tax Act 1962 (Act No 58 of 1962) (Institute of Certified Public Accountants of South Africa letter). 1034. Institute of Certified Public Accountants of South Africa letter, paragraph 11. 1035. South African Revenue Service, above note 705. 1036. Revenue Laws Amendment Act 2006 (Act No 20, 2006). 1037. Revenue Laws Second Amendment Act 2006 (Act No 21 of 2006). 1038. Annexure F to: South African Revenue Service, above note 705, provided a nonexhaustive list of factors for determining whether an arrangement was normal. The list required regard to be had to the following: the form and economic substance of the arrangement, or any step therein or part thereof; the time at which the arrangement, or any step therein or part thereof, was entered into and the length of the period during which the arrangement, step or part was carried out; the result in relation to the operation of this Act which would, but for the application of this section, have been achieved by the arrangement;

 any circular flow of cash or assets between or among parties to that arrangement; the participation of any tax indifferent party in that arrangement; the inclusion of steps or transactions that offset or cancel each other, without a substantial effect upon the economic position of the parties; the inconsistent treatment of any items or amounts for tax purposes by parties to the arrangement (such as the treatment of a payment as a deductible interest expense by the payer and as an exempt dividend by the recipient); a failure by any parties to the arrangement to deal at arms length (without having regard to whether the parties are connected persons in relation to each other), including paying more than market value for any assets or service involved in that arrangement; the lack of any change in the financial position of any person resulting from that arrangement; the absence of a reasonable expectation of pre-tax profit in connection with the arrangement after taking into account all costs and expenditure incurred in connection with the arrangement; or the value of the tax benefit that would have resulted from the arrangement, but for the application of this section, exceeds the amount of pre-tax profit reasonably expected in connection with that arrangement.

1039. Income Tax Act 1962, section 80C(2) provides that the characteristics of an avoidance arrangement that are indicative of a lack of commercial substance, include, but are not limited to: (a) the legal substance of the avoidance arrangement as a whole is inconsistent with, or differs significantly from, the legal form of its individual steps; or (b) the inclusion or presence of (i) round trip financing as described in section 80D; or (ii) an accommodating or tax indifferent party as described in section 80E; or (iii) elements that have the effect of offsetting or cancelling each other.

1040. South African Revenue Service, above note 705. 1041. Annexure F to: South African Revenue Service, above note 705, provided a proposed section 103(3).

1042. Penalties are prescribed in section 80S of the Income Tax Act 1962, and are a monetary penalty. 1043. South African Revenue Service, Tax Avoidance and section 103 of the Income Tax Act 1962: Revised Proposals, September 2006, 23. 1044. Section 165-5(1)(d) states that Division 165 can only apply to a scheme that has been or is entered into on or after 2 December 1998. This commencement date is aligned to the date that the main GST Bills were introduced into Federal Parliament. For further information on the background to Division 165, and amendments to the Division during its passage through Parliament, see: Hill P, The application of the GST anti-avoidance rule to timing differences Pt 1 Australian GST Journal, Vol 3, Issue 9, October 2003, 169178. 1045. [2006] AATA 821. 1046. VCE v. Commissioner of Taxation [2006] AATA 821, see for example, paragraph 40. 1047. Ambry Legal, above note 954, 359. 1048. or principal effect in the case of Division 165. 1049. GST Act, section 182-1. 1050. Most Divisions in the GST legislation have an explanatory statement (where the first section is headed What this Division is about). However, most of the explanatory statements in the GST legislation do not include examples. Indeed, the inclusion of the four examples of where Division 165 does not apply appears inconsistent with the approach of other explanatory statements in the GST Act. For example, the explanatory statement to Division 110, which relates to transactions outside the GST system, does not provide examples in circumstances where examples of the operation of the provision would be straightforward. Further, Division 72 is a SAR imposing requirements with respect to transactions between associates. The explanatory statement to Division 72 does not contain examples of where Division 72 does not apply. Where relevant, most of the explanatory statements throughout the GST legislation refer to any applicable references in the TAA53 (or other relevant legislation). This is particularly interesting with respect to section 165-1 where you would expect the explanatory statement to refer to the penalty provisions applying in connection with Division 165, which are provided in Division 284 of the TAA53. 1051. Orow, above note 1, 263. 1052. Section 177C of the ITAA36. 1053. Explanatory Memorandum to A New Tax System (Goods and Services Tax) Bill 1999, paragraphs 6.336 and 6.337. 1054. (1994) 94 ATC 4663, 4670. 1055. Cassidy, above note 677. 1056. GST Act, section 165-15 see Appendix E.

1057. ITAA36, section 177D see Appendix A. 1058. Taxability, above note 609, paragraph 2-20: ... in considering a particular situation, the correct analysis is to: first determine how the provisions of the income tax law other than Part IVA apply (including how any potentially applicable specific anti-avoidance provisions apply); and then, if the operation of the other provisions would give rise to an allowable deduction or other tax benefit, determine whether the circumstances are such that Part IVA ITAA36 may apply.

1059. GST Act, section 51-30(2). 1060. GSTR 2004/3, paragraphs 5356. 1061. Taxpayer Alerts are intended to be an early warning of significant new and emerging tax planning issues or arrangements that the ATO has under risk assessment. 1062. The preamble to TA2004/1 provides as follows: This Taxpayer Alert describes non-arms length arrangements where an entity makes acquisitions from another entity at commercially unrealistic prices to obtain an inflated input tax credit. The arrangements seek to manipulate a timing advantage between a vendor using a cash basis of accounting and a purchaser using a non-cash basis of accounting. 1063. Once it is established that Division 165 of the GST Act applies, the Commissioner can make declarations negating the GST benefit and making compensatory adjustments. Penalties may also be imposed under Schedule 1, Division 284 of the TAA53. Generally, the base penalty is 50% of the benefit otherwise received however if it is reasonably arguable that Division 165 did not apply, the base is 25%. Division 284 enables the Commissioner to increase or reduce penalties based on the level of cooperation by the taxpayer. 1064. Schedule 1, Division 290 of the TAA53 applies to promoters of tax exploitation schemes. 1065. PS LA 2005/24, paragraphs 145152. 1066. Section 67 of the FBTAA was derived from Part IVA Walstern v. Commissioner of Taxation [2003] FCA 1428. 1067. Taxation Ruling No IT 2509. 1068. Id., paragraph 22. 1069. Essenbourne Pty Ltd v. Commissioner of Taxation [2002] FCA 1577 and Walstern v. Commissioner of Taxation [2003] FCA 1428. 1070. In Essenbourne Pty Ltd, the Commissioner has imposed penalties under section 67, but before the Court did not contend that there was a scheme and did not seek to uphold the

penalties imposed. In Walstern, the Commissioner applied section 67, but before the Federal Court submitted that fringe benefits tax was payable whether or not section 67 had application. 1071. It was only from 2005, pursuant to PS LA 2005/24, that the involvement of the GAAR Panel has been extended to section 67 of the FBTAA. 1072. Queensland, Victoria, South Australia, Western Australia, ACT and NT. 1073. For example, each state/territory imposes transfer/conveyance duty and land-rich duty. While each state imposed share transfer duty, some states/territories have recently abolished this duty while others have retained it. 1074. Daly and Petterson, above note 25. 1075. The purpose of the standardization was to attempt to overcome the difficulties that businesses and foreign investigators were experiencing with differences between the taxing regimes of the states and territories. 1076. The interpretation of legislative provisions stating a preference for a purposive legislative approach is as follows in each of the Australian states/territories: Interpretation Act 1987 (NSW), section 33 (section 34 provides for reference to extrinsic materials in certain circumstances); Legislation Act 2001 (ACT), section 139; Interpretation Act (NT), section 62A (section 62B provides for reference to extrinsic materials in certain circumstances); Acts Interpretation Act 1954 (Qld), section 14A (section 14B provides for reference to extrinsic materials in certain circumstances); Acts Interpretation Act 1915 (SA), section 22; Acts Interpretation Act 1931 (Tas), section 8A (section 8B provides for reference to extrinsic materials in certain circumstances); Interpretation of Legislation Act 1984 (Vic), section 35(a) (section 35(b) provides for reference to extrinsic materials in certain circumstances); Interpretation Act 1984 (WA), section 18 (section 19 provides for reference to extrinsic materials in certain circumstances)

1077. Some form of GAAR exists in the following Pay-roll Tax legislation: Pay-roll Tax Act 1971 (NSW) section 3B; Pay-roll Tax Act 1971 (Qld), Part 2, Division 7;

 Pay-roll Tax Act 1971 (SA), section 4C; Pay-roll Tax Assessment Act 1941 (WA), section 45; Pay-roll Tax Assessment Act 1987 (ACT), section 5; and Pay-roll Tax Act (NT), sections 11A and 11B.

Each of the GAARs, with the exception of WA, are very similar. They provide that where a person enters into any agreement, transaction or arrangement the effect of which is to reduce or avoid the liability of any person to the assessment, imposition or payment of pay-roll tax the Chief Commissioner may: disregard the agreement, transaction or arrangement; and determine that any party to the agreement, transaction or arrangement shall be deemed to be an employer for the purposes of the Act; and, determine that any payment made in respect of the agreement, transaction or arrangement shall be deemed to be wages for the purposes of the Act. The WA Pay-roll Tax GAAR instead provides that any person who avoids or attempts to avoid tax chargeable under the Act is guilty of an offence (the penalty may be between $100 with the amount of tax avoided, and, $1,000 and treble the amount of tax avoided). Anti-avoidance provisions also exist in the Pay-roll Tax Act 1971 (Vic), for example, section 5A (SAAR for employment agents) and in the Pay-roll Tax Act 1971 (Tas) section 11K (SAAR for Grouping Provisions). Some form of GAAR exists in the following Land Tax Legislation (Note that Land Tax is not imposed in the Northern Territory): Land Tax Act 1915 (Qld), section 44; and Land Tax Act 1936 (SA), section 18.

The Queensland and South Australian land tax GAARs are very similar. Each of the provisions makes void a contract, agreement or arrangement with the purpose of, directly or indirectly defeating, evading or avoiding any obligation or liability imposed by the Act. 1078. Daly and Petterson, above note 25. The GAAR that was proposed in the draft consultation version of the Taxation Administration Act 1996 (NSW) (clause 83) provided a definition of scheme that was similar to that in Part IVA of the ITAA36. It also provided a list of matters to which regard must be had in determining the purpose of a person entering into a scheme. Further, under the provision, where a person obtained or contrived to obtain a tax benefit, the Commissioner could determine the tax that would have been payable but for the scheme. 1079. Daly and Petterson, above note 25.

1080. Id. 1081. Id. 1082. Ashwick (Vic) No 4 Pty Ltd v. CS (Vic) (1987) 18 ATR 757. 1083. LexisNexis, Australian Stamp Duties Law, paragraph [1.0480]. 1084. per Tadgell J, 773: I do not think the present case raises the necessity or provides the occasion to decide whether or to what extent the so-called new approach by the House of Lords in its judicial role to some tax avoidance schemes is applicable in Australia, or whether it is possible to apply it in the field of stamp duty legislation. It is sufficient to say that, in my view, the approach is inappropriate in this case. 1085. Comptroller of Stamps (Vic) v. Ashwick (Vic) No 4 Pty Ltd (1987) 163 CLR 640. The High Court cited Oakey Abattoir Pty Ltd v. FCT (1984) 15 ATR 1059 to find that the fiscal nullity principle was no more than a rule governing the statutory interpretation of the UK capital gains tax legislation. Surprisingly, the case of Ingram v. IRC [1986] Ch 585, where the fiscal nullity principle was applied to UK stamp duty, was only mentioned in passing. 1086. (1989) 20 ATR 823. 1087. Kennedy J found that it was not necessary to determine this question in the particular case. Brisden J held that, if the doctrine of fiscal nullity were adopted in Australia, it would not apply on the facts. And Rowland J appeared to assume that the doctrine of fiscal nullity was applicable in principle. See: LexisNexis, Australian Stamp Duties Law, at paragraph [1.0480]. 1088. Orow B and Teo E, Negotiating Victorian Duties General Anti-Avoidance Rules Commercial Law Special Issue November 2004, 3134, 34. 1089. (1989) 166 CLR 417. 1090. Daly and Petterson, above note 25. 1091. Id. 1092. Quetel Pty Ltd v. CSD (Qld) (1991) 22 ATR 551. Section 81 was exercised by parties not including the Commissioner in making arguments that a contract was illegal see Smyth v. Kelly (unreported, Supreme Court of Queensland, Master Weld, No 48 of 1982, 19 April 1982) and Boulevarde Developments Pty Ltd v. Toorumba Pty Ltd [1984] 2 Qd R 371. 1093. Newton v. FCT (1958) 98 CLR 1. 1094. Mullens v. FCT (1976) 135 CLR 290. 1095. (1983) 83 ATC 4352; (1984) 84 ATC 4606. 1096. Daly and Petterson, above note 25. 1097. Duties Act 2001 (Qld) section 433(1)(b).

1098. State Taxes Committee of the Commercial Law Section of the Law Institute of Victoria, Submission on the State Taxation Acts (Tax Reform) Bill 2004, 24 May 2004. 1099. Each of the provisions is sufficiently broad to be regarded as a GAAR rather than a SAAR. Each refers to an arrangement in violation of the underlying purpose of the taxing statute rather than being directed to an identified tax scheme. Further, with the abolition of various heads of duty, as required by the intergovernmental agreement between the state/territory governments and the federal government, transfer duty and land-rich duty will be the most significant heads of duty imposed by the Victorian duties legislation. 1100. State Taxes Committee of the Commercial Law Section of the Law Institute of Victoria, Submission on the State Taxation Acts (Tax Reform) Bill 2004, 24 May 2004. 1101. The State Taxation Acts (Tax Reform) Act 2004 (Vic) received assent on 16 June 2004. 1102. Both of the GAARs were introduced by the State Taxation Acts (Tax Reform) Act 2004 (Vic). 1103. Daly and Petterson, above note 25. This point is similarly made by the State Taxes Committee of the Commercial Law Section of the Law Institute of Victoria, above note 1125. 1104. Duties Act 2000 (Vic), section 69A. 1105. Duties Act 2000 (Vic), section 89G. 1106. Explanatory Memorandum, State Taxation Acts (Tax Reform) Bill 2004 (Vic), at 1. 1107. See Appendix H. 1108. Id. 1109. Orow N, Comparative analysis of duties general anti-avoidance rules (2004) 33 Australian Tax Review 204, 209. 1110. Duties Act 2000 (Vic), sections 69C and 89I. Each provision states that a tax default occurs, for the purposes of interest and penalties imposed under the Taxation Administration Act 1997 (Vic) if the duty assessed is not paid to the Commissioner within 3 months of the liability date. 1111. Duties Act 2000 (Vic), sections 69D and 89J. 1112. Berglund, R, Anti-Avoidance Provisions in State Taxation Legislation unpublished paper; State Taxes Committee of the Commercial Law Section of the Law Institute of Victoria, Submission on the State Taxation Acts (Tax Reform) Bill 2004, 24 May 2004. 1113. State Taxes Committee of the Commercial Law Section of the Law Institute of Victoria, above note 1101. 1114. Taxation Administration Act 1997 (Vic), section 10. 1115. Tiley J, Revenue Law Oxford, Hart, 4th ed. 2000, 87-89.

1116. Tooma R, Deterring promoters of tax exploitation schemes: Lessons from continuous disclosure (2006) 34 ABLR 58. 1117. Corporations Act, section 674(2). 1118. ASIC Enforceable Undertakings: An ASIC Guide March 2007: www.asic.gov.au. (Previously, ASIC, Practice Note 69 Enforceable Undertakings) (viewed 17 March 2007). 1119. ASIC Media and Information Release: 02/379 Uecomm to undertake Disclosure Audit Thursday 17 October 2002. 1120. Taxation Administration Act 1997 (Vic), section 10. 1121. Stamp Duties Act 1923, section 70 Evasion of duty. 1122. [2004] SASC 163. 1123. Section 60A(4a) provides as follows: Where an interest, agreement or arrangement (granted or made on or after 7 January 1997) in respect of property has the effect of reducing the value of the property, the Commissioner may, for the purposes of assessing the duty payable on a conveyance of property, disregard the existence of the interest, agreement or arrangement, unless a person liable to pay the duty satisfied the Commissioner that the interest, agreement or arrangement (a) was granted or made for a purpose other than reducing the value of the property; and (b) was not granted or made in favour of the transferee or a person related to the transferee.

1124. [2003] SASC 2001 (4 July 2003), paragraph 34. 1125. [2004] SASC 163, paragraph 130. 1126. [2004] SASC 163, paragraph 140. 1127. The GAAR was inserted by the Revenue Laws Amendment Act 2004 (Act No 11 of 2004), section 31. 1128. When land-rich duty was first applied to listed land-holders. 1129. The land-rich provisions were originally introduced to overcome the scheme of owning land via a company so that shares in the land-holding company may be transferred at the lower share transfer duty rates, rather than there being a transfer of land at higher conveyance duty rates. It is difficult to foresee a scheme where land would be held by a listed public company for the purposes of avoiding stamp duty on a direct transfer of the land. Accordingly, land-rich duty may be regarded as a separate head of duty.

1130. The Explanatory Memorandum to the Revenue Laws Amendment Bill 2004 does not attempt to limit the legislation. However, section 76AX does require the Comissioner to provide reasons for making a determination to apply the GAAR. 1131. Daly and Petterson, above note 25. 1132. Hansard, 10 December 1998, 3433. 1133. Orow, above note 1110, 207. 1134. ITAA36, section 177C(2)(a)(i) provides: A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as not including a reference to the assessable income of the taxpayer of a year of income not including an amount that would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out where, the non-inclusion of the amount in the assessable income of the taxpayer is attributable to the making of an agreement, choice, declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option (expressly provided for by this Act other than section 160ZP or 160ZZO or the Income Tax Assessment Act 1997) by any person, except one under Subdivision 126-B, 170-B or 960-D of the Income Tax Assessment Act 1997. A similar provision exists in the GST legislation (see section 165-5(1)(b)). 1135. See Appendix J. 1136. See, for example, Taxation (Administration) Act (NT), section 19(4). Section 19 provides an exemption for interposing a new corporation between an existing corporation and its shareholders. Section 19(4) states that the exemption does not apply if the conveyance is a tax avoidance scheme or part of a tax avoidance scheme. 1137. Taxation (Administration) Act (NT), section 4B(3). Citation: R.A. Tooma, Legislating Against Tax Avoidance, Online Books IBFD (accessed 22 Oct. 2012).

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Copyright 2008 Rachel Anne Tooma All rights reserved Copyright 2012 IBFD All rights reserved Disclaimer

Hits Anti-Abuse: VAT/GST v. Direct Taxation [*] Author Mark Keating

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The paper examines the measures adopted in Australasia [1] to combat abusive tax practices. Both countries have enacted a range of specific provisions to counter particular instances of tax avoidance for both Income Tax and Goods and Services Tax. These specific rules are narrowly targeted provisions to prevent foreseeable instances where taxpayers may otherwise attempt to defeat the intent and application of the relevant statute. [2] More importantly, New Zealand and Australia have enacted broad-ranging general antiavoidance provisions (GAARs) for both Income Tax and GST. *3+ Unlike the specific rules, these GAARs are widely-worded with open-ended application. They are designed to apply to the unanticipated and unforeseen behaviour by taxpayers that, although not contrary either to the substantive provisions of the Act or any applicable specific anti-avoidance provisions, nevertheless breach the scheme and purpose of the relevant statute. Tax avoidance is as much a part of the landscape of GST as it is for income tax. But while there have been many income tax avoidance cases litigated in Australasia, there have been comparatively few GST tax avoidance cases. Following the enactment of a GST regime in 1986, it took 15 years for the first tax avoidance case to be considered by New Zealand courts. The Australian courts heard the first GST avoidance case under Div 165 of the Australian A New Tax System (Goods and Services Tax Act) 1999 (AGSTA) in 2006. Those initial cases, involving fairly blatant schemes to obtain unwarranted tax benefits, were all decided in favour of the Commissioners. It was not until 2007 that New Zealands Court of Appeal heard two GST avoidance cases, upholding the Commissioners assessment of tax avoidance in both instances. One of those cases was subsequently appealed to New Zealands newly formed supreme court, *4] which in December 2008 also upheld the assessment of tax avoidance. These New Zealand cases, involving very different schemes, are the first consideration of GST avoidance by higher courts in either jurisdiction. [5] Accordingly, the reasoning of those decisions provides a useful guide to the application of the GST GAAR in both countries. Those cases demonstrate that courts in both New Zealand and Australia have repeatedly demonstrated a ready willingness to apply GAARs wherever they believe taxpayer conduct abuses requirements of either the Income Tax or GST Acts. In doing so, they have given these

sections teeth and provided the Commissioner with a strong weapon against abusive conduct by taxpayers. This paper examines these cases and contrasts them with other recent cases under the income tax GAAR. Finally, it contrasts the Australasian approach with the European rules governing the application of VAT tax abuse, as expressed in Halifax plc v. Commissioners of Custom and Excise. [6] I. Role of GAARs in Australasia GAARs attempt to render void against the Commissioner any arrangement that has the purpose or effect of tax avoidance. The role of this type of provision was explained in the ground-breaking Australian case FCT v. Newton: [7] *The GAAR+ is not aimed at fraudulent conduct or at pretended as distinct from real transactions. Such cases need no statutory provision. It is aimed at transactions that are in themselves real and lawful but which the Legislature desires to nullify so far, and only so far, as they may operate to avoid tax. Likewise in the leading New Zealand case Challenge Corp Ltd v. CIR [8] the Court of Appeal examined the role of GAAR: Tax avoidance schemes largely depend on the exploitation of one or more exemptions or reliefs or provisions or principles of tax legislation. [The GAAR] would be useless if a mechanical and meticulous compliance with some other section of the Act were sufficient to oust it. Obviously, a GAAR is designed to protect government revenue from tax avoidance arrangements that would otherwise comply with the Act. In this way, arrangements that have in all other respects fully complied with the relevant law are nevertheless declared to be void for tax purposes. The New Zealand Supreme Court explained this reasoning in the following terms: [9] Parliament must have envisaged that the way a specific provision was deployed would, in some circumstances, cross the line and turn what might otherwise be a permissible arrangement into a tax avoidance arrangement. ... Thus tax avoidance can be found in individual steps or, more often, in a combination of steps. Indeed, even if all the steps of an arrangement are unobjectionable in themselves, their combination may give rise to a tax avoidance arrangement. ... *The GAARs] function is to prevent uses of the specific provisions which fall outside their intended scope in the overall scheme of the Act. Such uses give rise to an impermissible tax advantage which the Commissioner may counteract. Not surprisingly, the operation of the GAAR is both controversial and uncertain. By definition, the general nature of the provision makes is scope and application less certain. This has led some commentators [10] to draw comparison between the operation of a GAAR and Art. 58 of the Soviet-era Russian SFSR Penal Code enacted under Stalin. [11] This infamous Article made illegal all counter-revolutionary or anti-Soviet activities, and formally introduced the

notion of enemy of the workers. It was under this Article that Stalins show trials were conducted and many victims of the Great Purge were convicted. The breadth of Art. 58, with its deliberately wide and imprecise meaning, obviously undermines the rule of law. Article 58 was carte blanche for the secret police to arrest and imprison anyone deemed suspicious, making for its use as a political weapon. *12+ Most odiously, its lack of clarity made it impossible for defendants to reasonably establish whether any particular conduct was in breach. While obviously hyperbole, [13] it is conceded that a similar criticism can be made against a GAAR. Taxpayers who have carefully complied with all other provisions of the Revenue Acts, including existing specific anti-avoidance provisions, may nevertheless find themselves in breach of a deliberately ill-defined GAAR. As was explained by the New Zealand High Court in Millar v. CIR: [14] It is the very nature of tax avoiders to manoeuvre skilfully around the express rules of the general law and the tax legislation and end with the innocent submission as I have not infringed them I have succeeded. That is the very reason for generally expressed antiavoidance provisions which being their operation when other provisions have had their effect. Criticism of the vagueness of a GAAR is common. One commentator summarized the problem is an obvious one; how do you know when you have crossed an imaginary line? *15+ Nevertheless, New Zealand and Australian courts have refused to narrowly interpret the scope of the GAAR. As the Court of Appeal noted in one instance: *16+ certainty and predictability are important but not absolute values and therefore a GAAR must be left as flexible as possible. This criticism was finally addressed in the two most recent [17] New Zealand Supreme Court decisions. [18], [19] In those cases the taxpayers contended the GAAR should be read-down so narrowly as to make it virtually inoperative. In rejecting such a narrow interpretation, the Court of Appeal noted: *20+ this approach does not leave much scope for a general avoidance provision and criticized the taxpayers arguments as sometimes coming close to maintaining that general anti-avoidance provisions have no role at all. In the Trinity case, the taxpayers argued they were entitled to make commercial choices deliberately to take advantage of the tax benefits available, and GAAR should be interpreted as narrowly as possible to give taxpayers reasonable certainty in tax planning. In Glenharrow the taxpayer argued the GAAR ought not be permitted to interfere with a bargain honestly reached by arms-length parties, as to do so would create unwelcome uncertainty for taxpayers. The New Zealand Supreme Court dismissed both arguments. The court noted the wording used in the GAAR is deliberately imprecise and the judiciary should not create greater certainty than Parliament has chosen to provide. It reasoned a GAAR necessarily must remain vague because, no matter how carefully such a provision is drafted, the ingenuity of taxpayers cannot be predicted, making it impossible for Parliament to enact a more specifically-worded

provision with the flexibility to anticipate future arrangements. Therefore, the use of wide and imprecise language is required for a GAAR to regain the flexibility to be applied to novel arrangements. In Glenharrow the court explained: Uncertainty is inherent where transactions have artificial features combined with advantageous tax consequences not contemplated by the scheme and purpose of the Act. There will also inevitably be uncertainty whenever a taxing statute contains a general antiavoidance provision intended to deal with and counteract such artificial arrangements. It is simply not possible to meet the objectives of a general anti-avoidance provision by the use, for example, of precise definitions. With a notable lack of sympathy for the taxpayers, the court acknowledged that, while there may be difficult cases on the margins, generally an examination of the facts and the economic substance of each arrangement will make it possible to decide on which side of the line a particular arrangement falls. Finally, for taxpayers seeking certainty, the supreme court recommended that they utilize the statutory Binding Ruling process *21+ to test the Commissioners view as to the tax effectiveness of their arrangements prior to entering into them. That may be unwelcome advice to taxpayers who have experienced the increasing cost and extended delays typical of the Binding Ruling regimes in both Australia and New Zealand. [22] This somewhat harsh attitude was justified by a leading commentator: [23] Despite their claims to the contrary, people caught by such provisions generally do intend to minimise tax. What they are relying on in such situations is ... a hope or expectation that their arrangements will pass as effective for tax. When an assessment catches such transactions a sense of moral outrage seems inappropriate. The result of this liberal interpretation of the GAAR may almost be described as deliberately creating uncertainty for taxpayers so as to give them pause before embarking on possibly abusive tax arrangements. The uncertainty over the precise scope of the GAAR in Australasia may therefore serve a second purpose of discouraging such abusive behaviour. This approach contrasts with the requirements stipulated by the ECJ in Halifax *24+ that the requirement of legal certainty must be observed strictly in cases of rules liable to entail financial consequence, in order that those concerned may know precisely the extent of the obligations which they imposed on them. *25+ As such, it appears the wide Australasian application of GAARs would be contrary to the Sixth Directive. II. Statutory tests for GAARs in Australasia The Australian and New Zealand GAARs adopt similar tests for what constitutes tax avoidance in breach of the statute: - In Australia both for GST and Income Tax the GAAR applies to any scheme with the sole or dominant purpose of providing a tax benefit.

- In New Zealand both GAARs apply where obtaining a tax benefit is more than merely incidental.

When originally enacted the GST GAAR in New Zealand was differently worded, so that it applied to arrangements that defeat the intent and application of the NZ GST Act. The GST GAAR was rewritten in 2000 to now apply to arrangements that have a purpose or effect of tax avoidance, thus bringing it into line with the wording of the GAAR in the Income Tax Act 2007. Despite this amendment, the supreme court has indicated that the original wording did not have any different scope or application than its revised form, stating the current version of the section merely states expressly what was implicit in the former version. It is apparent from their wording the Australasian GAARs catch arrangements with a principal purpose or effect of tax avoidance (albeit that the threshold in Australia is slightly higher), regardless of any underlying commercial result achieved. A tax-driven transaction may therefore constitute tax avoidance under the GAARs in both jurisdictions even if it also has a genuine business purpose. This result clearly conflicts with the ECJ stipulation that only arrangements with the sole purpose of obtaining tax advantages, and which have no normal commercial operation, may be struck down. [26] III. New Zealand cases applying GST GAAR In 2007 and 2008 the New Zealand Court of Appeal and finally the supreme court considered the vexed question of when proper GST tax planning crosses the line into impermissible tax avoidance. Although the courts found the taxpayers correctly applied the black letter GST law in each case, their arrangements nevertheless constituted tax avoidance. In each instance the court issued strong judgments against arrangements it considered were artificial and lacking commerciality, finding that such arrangements breached the intent and application of the GST Act and were therefore void for tax purposes. 1. Chelle The impugned arrangement in Chelle Properties (NZ) Ltd v. CIR *27] involved 114 companies that each had the same individual shareholder/director. None of the companies had any assets or even bank accounts. Each company registered for GST on a payments basis as permitted if it would had annual turnover below $1million. [28] Next, a friend incorporated Chelle Properties (NZ) Ltd, another shell company without assets or bank account. Although the friend had no experience in the property market, Chelle registered for GST on an invoice-basis, claiming to conduct the taxable activity of property trading. In late 1998 each of the 114 companies entered into conditional sale and purchase agreements with a third-party developer for the purchase of vacant subdivided lots. Each property was purchased for $70,000. In early 1999 each company then on-sold the land to Chelle for an average of $700,000 a ten-fold increase in the cost of the property or $80 million in total. Settlement of the sale to Chelle was deferred for between 10 and 20 years but Chelle

immediately paid a $10 cash deposit, thereby triggering the time of supply for GST purposes. [29] As an invoice-basis taxpayer Chelle claimed an input tax credit of $80 million. Because the 114 companies were registered on a payments-basis, they would not be required to return output on the transactions until they settled in 10 to 20 years time. While the arrangements technically complied with the relevant GST provisions, the Commissioner disallowed the input tax claim on the ground that the arrangement was contrary to the intent and application of the GST Act, in breach of the GAAR. The TRA [30] ruled the total lack of commerciality to the various transactions meant that the arrangement constituted tax avoidance. [31] The High Court subsequently rejected the taxpayers appeal, *32+ finding that the arrangement offended the intent and application of the Act in two ways: - the underlying legislative intention is that an overall balance should be maintained between the outputs and inputs of a registered person; and - there should be some reasonable correspondence between the time at which outputs and inputs in relation to a particular supply are accounted for.

The arrangement was therefore void for tax purposes under the GAAR and the taxpayers were not entitled to the input tax credits claimed. The taxpayers again appealed to the New Zealand Court of Appeal. 1.1. Court of Appeal decision in Chelle The Court of Appeal unanimously rejected the taxpayers appeal, *33+ on the basis that, while small mismatches in timing are an inherent feature of the GST regime, input tax claims will ultimately be balanced by the payment of output tax ... and in the circumstances of this case the balance between outputs and inputs is grossly distorted. ... [Therefore] the 10 to 20 year delay in all circumstances defeats the intent of the Act and accordingly triggers *the GAAR+. Likewise, while the choice of different accounting basis for GST may result in mismatches between some taxpayers, that does not mean that a gross mismatch in timing is irrelevant ... The Act seeks to limit the nature and degree of such mismatching. By using 114 different companies so that each had a turnover below the $1 million statutory threshold for taxpayers to remain on a payments-basis, the arrangement effectively circumvented the sections prescribing registration and accounting basis. As a result, the degree of mismatch contemplated and tolerated by the Act escalated to a level which could never have been intended. On this point the court concluded: The wider the temporal gap between the taxpayers eligibility for an input tax credit and its liability for output tax, the less likely the arrangement conforms to the intent of the Act. We do

not suggest that the Act intends that there be no delay, but that significant delay can indicate a crossing of the line into tax avoidance. Of particular importance was the unanimous endorsement of the High Courts finding that the GAAR involved an objective test. The Court of Appeal held: Mr Hayes, for the appellant, contended that *GAAR+ required a subjective intent. This cannot be the case. This would lead to the anomalous situation where an identical transaction might in one case be sustainable, but in another struck down as tax avoidance because in the first instance the operator mistakenly, naively, unrealistically or opportunistically was of the view that what was being done was unassailable. The second, however, which involved a more confident person who thought it was worth having a go would be struck down. It is the objective assessment of the arrangement which will provide the answer as to whether it defeats the intention and application of the Act and is therefore void. This finding has particular relevance to the subsequent Glenharrow decision (discussed below). Although the Chelle taxpayers applied for leave to appeal the case to the New Zealand Supreme Court, their application was rejected. Accordingly, that decision stands as the leading decision on this type of arrangement, which seeks to exploit the mismatch between taxpayers who use a payments and invoice-basis. The Court of Appeals reasoning in Chelle has been applied in subsequent decisions on this type of arrangement in both New Zealand [34] and Australia. [35] 2. Glenharrow The Glenharrow case dealt with a much more contentious arrangement. It involved the claim for a second-hand goods input tax credit on the purchase of a ten-year mining license. [36] The mining license was issued in 1990 but had not been operated by its original holder. In 1994 the license was sold to local prospectors for $100. In 1996 it was on-sold for $10,000. In 1997 Glenharrow Holdings Ltd, a $100 shelf company, purchased the license for $45 million. The purchase price was satisfied in two ways: - $80,000 was paid in cash by Glenharrow; and - the remaining $44,920,000 was provided as vendor finance, which was secured by a mortgage over the shares in Glenharrow and the mining license.

The parties agreed that interest and principal repayments would be funded out of profits derived from the successful exploitation of the license. Glenharrow began to exploit the license but, due to both legal and practical difficulties, conducted only minimal mining. From that limited operation Glenharrow made further payments of $210,000. The vendor was not registered for GST while Glenharrow was registered. Glenharrow therefore claimed a second-hand input tax credit of $45 million on the purchase of the mining license. [37] The Commissioner disallowed the input tax claim on the ground the arrangement breached the GAAR. The taxpayers challenged the assessment in the High Court. [38]

Although the Commissioner contested the taxpayers entitlement to an input tax credit under the black letter law, the High Court found that the arrangement was (putting aside the GAAR) effective for GST. The agreement to purchase the license was genuine and the parties intended to implement it according to its terms. Although the purchase price of $45 million was grossly inflated, it was a genuinely agreed price based on the parties extremely optimistic valuation. On the question of whether the arrangement had any real business purpose, the court found Glenharrow had acquired the license for the principal purpose of making taxable supplies and therefore met the criteria for an input tax credit. Based on those factual findings that the arrangement had a proper business purpose, the Commissioners technical arguments failed. Nevertheless, the court ruled the arrangement defeated the intent and application of the NZGSTA and was therefore void. While acknowledging the honesty of the taxpayers, the court held: I have difficulty in accepting that the legislature intended *GAAR+ to be governed by the personal motives of the taxpayer when entering into the arrangement. Apart from producing an erratic application of the section ..., such an interpretation would almost certainly render the section virtually useless and destroy its anti-avoidance purpose. 2.1. Court of Appeal decision in Glenharrow From the wording of the Court of Appeal judgment, it is apparent that the members of the Court of Appeal were somewhat uneasy with the High Courts findings regarding the taxpayers credibility, especially as the license had previously been sold for only $100 and $10,000. The court found that the price of $45 million was artificial and totally unrealistic. The Court of Appeal applied the same reasoning as it would have for the income tax GAAR and adopted an objective test of whether the arrangement defeated the Act, therefore ignoring the taxpayers honest purpose. We are satisfied that *GAAR+ does not incorporate a subjective test. To give such an interpretation would render the section, which is intended to operate as a backstop provision, virtually inoperative. Glenharrow had argued that, once the parties agreed the license was worth $45 million, it should preclude the application of the GAAR, regardless of whether that price was mistakenly excessive. This argument relied upon the venerable decisions of Europa Oil [39]and Cecil Bros [40] that neither the Commissioner nor the court may tell taxpayers how to run their business or how much to pay for their assets. The requirement that transactions be undertaken at market value for GST purposes applies only between persons who are associated for tax purposes under the NZGSTA and therefore prices set at arms-length should not be disturbed by the GAAR. The Court of Appeal rejected this argument on the grounds the scheme of the GST regime required transactions to be undertaken at (approximately) market value and that a grossly inflated transaction therefore defeated the intent and application of the Act. While only associated persons are explicitly required to transact at market value, [41] that specific rule

reflects the general policy of GST that transactions be conducted at realistic prices, which is normally self-policing between non-associated parties. Thus, transactions at non-market value were likely to frustrate the scheme of the NZGSTA. The court also found the scheme of the NZGSTA generally requires neutrality between supplier and recipient. While mismatches between the timing of input and output tax will occasionally arise, particularly between taxpayers who account for GST on different basis, those mismatches may not be exaggerated. In fact, the very existence of significant temporal mismatches can indicate a crossing of the line into tax avoidance. Likewise, transactions by taxpayers with unregistered persons must always bare closer scrutiny because they have obvious potential to disturb GST neutrality. Most importantly, the Court of Appeal found that the vendor-finance of $44,920,000 in this instance was so totally unrealistic that it did not amount to payment for GST purposes. Accordingly, the assessments of tax avoidance were confirmed. Given the express findings the taxpayers had acted honestly, if over-optimistically, in reaching their bargain that the mining license was worth $45 million, the supreme court granted leave for Glenharrow to appeal. This case was therefore the first time the supreme court considered the scope and application of the GST GAAR. 2.2. Supreme Court decision in Glenharrow First, the supreme court reiterated that the GST GAAR involved an objective test of the purpose of the arrangement and not a subjective review of the state of mind of the participants: Whether or not a particular arrangement constitutes tax avoidance should not depend on difficult judgments about what the taxpayer had in mind. If it did, a scheme which was void if devised and implemented by one taxpayer could be immune from s 76 if developed another ... It requires the Commissioner and the court to ask what objectively was the purpose of the arrangement, which in turn requires an examination of the effect of the arrangement. The court therefore found a taxpayer can honestly but mistakenly commit tax avoidance. If two persons who knowingly inflate the purchase price of second-hand goods are guilty of tax avoidance (because their arrangement when viewed objectively gives rise to a tax advantage never intended by the Act), so too must two innocent persons who have mistakenly agreed on an inflate price for the same goods. This conclusion follows an unbroken line of cases, starting with the Australian case Newman v. FCT, [42] stipulating that the purpose or effect of the arrangement must be determined objectively and not by reference to the motives of the taxpayers, which are irrelevant. [43] The GAAR was concerned not with the purpose of the parties but with the purpose of the arrangement. This is a crucial distinction. *44+ In this regard the Australasian GAARs are consistent with the reasoning of the ECJ [45] that the test of tax abuse is objective in character. Nevertheless, the finding of tax avoidance against an apparently honest taxpayer is the most contentious aspect of the Glenharrow decision. Many commentators expressed concern the

result was too harsh and if taxpayers have a genuine business purpose, the GAAR should not be applied. [46] Applying that reasoning to the facts, the supreme court asked whether the intention of the Act will be defeated if the arrangement has been structured to enable the avoidance of output tax or the obtaining of an input deduction in circumstances where that consequence is outside of the purpose and contemplation of the relevant statutory provisions. After reviewing the history and role of GST in New Zealand, the court concluded: - there will usually be, over time, some balancing of inputs and outputs by a supplier; - taxpayers should not obtain unacceptable windfalls in their dealings with unregistered persons; - parties should generally be dealing with each other at approximately market value; and - timing differences between input and output tax ought not to be exploited.

The court held: GST was intended to be broad-based, efficient and neutral. Nevertheless ... tax avoidance opportunities notably remain at the boundaries between taxable and non-taxable transactions and between registered and unregistered persons. Accordingly, the general anti-avoidance provision was considered necessary. Considering the facts in Glenharrow, there is potential for registered taxpayers knowingly or otherwise to create distortions at the boundary between themselves and unregistered persons. The same can occur where transactions are between those registered on a payments basis and those registered on an invoice basis (as in Chelle and Nicholls). The general antiavoidance provision is available to stop or counteract both these distortions. Given the clearly inflated purchase price and the unusual method of payment by way of vendor-finance, the court confirmed the arrangement constituted tax avoidance in breach of the GAAR. IV. Should GAAR override other provisions of the act? A common complaint and regular difficulty with the application of a GAAR is how it should operate beside the Revenue Acts other provisions. Tension arises as to whether the GAAR should apply in such a way as to potentially make all tax advantages vulnerable to attack as tax avoidance, even if the provisions have been complied with, and even when no specific antiavoidance rule embedded in the relevant tax concessions has been contravened. This problem is most commonly found in relation to income tax, which includes a range of incentives and concessionary provisions that Parliament intended be available to taxpayers. [47] Many commentators question the extent to which GAAR should be used to prevent taxpayers accessing those legitimate tax benefits. [48]

The Australian courts have struggled most with this question. In a series of judgments the Australian High Court established what became known as the doctrine of choice that effectively granted taxpayers the right to structure their affairs specifically in order to take advantage of incentives or omissions in the Act. One of the leading cases on this point was Keighery [49] where the Australian High Court held: Whatever difficulties there may be in interpreting *GAAR+, one thing at least is clear: the section intends only to protect the general provisions of the Act from frustration, and not to deny to taxpayers any right of choice between alternatives which the Act itself lays open to them. This reasoning led to a restrictively narrow application of the GAAR in Australia for many years. It was the courts adherence to this doctrine that ultimately led the Australian Parliament to effectively legislate it away by the complete over-haul of the Australian GAAR into the more toothsome current version. [50] While New Zealand courts never succumbed to such a narrow interpretation, they have examined the conflict between the specific provisions and GAAR in a number of cases. First in Challenge Corp *51+ the Court of Appeal had to consider whether a taxpayers meticulous compliance with the specific anti-avoidance provision contained in the corporate group tax rules meant that the GAAR could not apply i.e., the specific provision had supplanted and took precedence over the GAAR. The court acknowledged the GAAR lives in an uneasy compromise with other specific provisions ... it is not the function of GAAR to defeat other provisions of the Act or to achieve a result which is inconsistent with them. *52+ This reasoning was followed by a subsequent Court of Appeal judgment BNZI. [53] That case concerned the extent to which a New Zealand bank could take advantage of transactions directed through tax haven jurisdictions. Again the court determined that it was appropriate to balance the role of GAAR against benefits provided under other provisions of the Act: [54] Commerce is legitimately carried out through a range of entities and in a variety of ways; that tax is an important and proper factor in business decision making and family property planning; and something more than a tax benefit in one hypothetical situation compared with another is required to justify attributing a greater tax liability. Next, in Accent Management the Court of Appeal recognized that: Tax legislation necessarily creates both incentives and disincentives and it would be perverse to hold that rational and intended taxpayer responses to such incentives (or disincentives) are caught by general anti-avoidance provisions despite being within the letter *of the law+. The supreme court in the recent Trinity case finally determined that two competing interests must be balanced in the application of GAAR: - the operation of specific provisions, many of which provide a legitimate incentive taxpayers are properly entitled to avail themselves; and

- the principle that even strict compliance with specific provisions will not abrogate the application of GAAR.

The court held: [55] We consider Parliaments overall purpose is best served by construing specific provisions and the GAAR so as to give appropriate effect to each. They are meant to work in tandem ... Neither should be regarded as overriding. Rather they work together. The presence in New Zealand legislation of a GAAR suggests that our Parliament meant it to be the principal vehicle by means of which tax avoidance is addressed. On that reasoning it is apparent not everything that comes within the literal wording of a GAAR will properly be found to be tax avoidance. So when will a taxpayers conduct cross the line *56+ between legitimate tax planning (based on the use of specific provisions) and become tax avoidance in breach of GAAR? V. Factors indicating tax avoidance In an attempt to reconcile the breadth of the GAAR with specific incentive provisions available to taxpayers, the New Zealand courts have identified a number of factors or indicia that, if present, would be indicative of tax avoidance. The court in BNZI explained what should reasonably be struck down are artifices and other arrangements which have tax induced features outside the range of acceptable practice. ... Most tax avoidance involves a pretence. *57+ Likewise, the Court in Trinity examined the factors that would warrant imposition of the general anti-avoidance provision: - transactions that are technically correct but contrived; - elements of pretence (which does not equate to falsehood); and - considerations of economic equivalence whereby a taxpayer reduces its liability to tax without incurring the economic costs that Parliament intended.

The court then summarized its own reasoning over when and how the general anti-avoidance provision should apply: *I+t will usually be safe to infer that specific tax rules as to deductibility are premised on the assumption that they should only be invoked in relation to the incurring of real economic consequences of the type contemplated by the legislature when the rules were enacted. Further, it also seems reasonable to assume that deductibility rules are premised on a legislative assumption that they will only be invoked by those who engage in business activities for the purpose of making a profit. Further, schemes which come within the letter of specific tax deductibility rules by means of contrivance or pretence are candidates for avoidance.

Perhaps more than any other area, tax avoidance will depend upon the facts determined in each case. The supreme court in Trinity noted whether an arrangement is an artifice or involves a pretence will often be highly relevant to whether there is an arrangement that has a purpose or effect of tax avoidance. *58+ Facts which, objectively viewed, appear to demonstrate a lack of commerciality, circularity, or pretence will therefore be just as relevant as the actual arrangement entered into by taxpayers. The court therefore considered all relevant factors regarding the structure and implementation of the arrangement by the taxpayers: [59] The general anti-avoidance provision does not confine the Court as to the matters which may be taken into account when considering whether a tax avoidance arrangement exists. Hence the Commissioner and the courts may address a number of relevant factors. These include: - the manner in which the arrangement is carried out; - the role of the relevant parties and any association they may have; - the economic and commercial effects of the various steps; - the duration of the arrangement; and - the nature and extent of the fiscal consequences.

In Trinity the court advised a classic indicator of a use that is outside Parliaments contemplation is the structuring of an arrangement so that the taxpayer gains the benefit of the specific provision in an artificial or contrived way. It is not within Parliaments purpose for specific provisions to be used in that manner. Likewise, in Glenharrow the court warned against transactions that have artificial features combined with advantageous tax consequences not contemplated by the scheme and purpose of the Act. Specifically with regard to GST, the New Zealand courts have identified a range of factors that will be relevant to whether the GAAR should apply. [60] These factors are: - the relationship between the parties, whether arms-length or associated; - the amount of GST at issue and the degree to which any supposed commercial transaction to which it relates is dependent upon that GST treatment; - the normal commerciality of the arrangement; - the perceived purpose of the particular section being exploited (i.e. the scheme and application of that provision of the Act); and - the experience and substance of the parties in fulfilling the transactions.

These factors are similar to those identified by the ECJ in cases such as Ermsland Starke. [61] 1. New Zealand Emphasis on Economic Reality of Transaction In its two recent decisions the New Zealand Supreme Court ruled that the single most important indicia of tax avoidance is whether the tax consequences of the transaction are at odds with its economic effect. Although the Trinity and Glenharrow cases involved very different factual scenarios under different Acts, [62] the decisions apply consistent principles and clear sign-posts regarding the GAAR. [63] The court stressed taxpayers must bear the true economic cost of any tax benefit they claim. In doing so, the court freely permitted itself to analyse the economic substance of the arrangement to determine whether it fell properly within the black letter law or was caught as tax avoidance. The starting point of this economic analysis was the Privy Councils decision in Challenge Corp *64+. There Lord Templeman found a tax avoidance arrangement was one where a taxpayer derived a tax advantage from a transaction without suffering the reduction in income, loss or expenditure which Parliament intended those qualifying for a reduction in tax liability to suffer. *65+ The supreme court expressly adopted the reasoning in the Challenge case that the appropriate test of tax avoidance is whether the commercial reality of a transaction is consistent with its legal form. The Courts are not limited to purely legal considerations. They should also consider the use made of specific provisions in light of commercial reality and economic effect of that use. The ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliaments purpose. In Trinity the court considered the use of promissory notes payable in 50 years to purchase intangible property (which the taxpayers immediately depreciated for income tax) meant the purchase price had not really been paid by the taxpayers, on the basis that, while technically correct in law, in substance, the debt remains unpaid. It therefore concluded the purported payment did not give rise to any economic consequences on either side. ... The payment by means of the promissory note was, in commercial terms, no payment at all. The device of the 50-year promissory note meant the investors in the scheme could achieve substantial tax advantages by deduction of the premium without suffering any corresponding economic outlay. The court elaborated: It is a fact that under the arrangement the appellants will receive the benefits of tax deductions but probably never incur the real expenditure. ... The Court is permitted, when considering the question of tax avoidance, to examine the commercial nature of the incurred cost and any factors that might indicate that the expenditure will never be truly incurred.

In Glenharrow the court considered the use of vendor finance did not amount to actual payment for the mining license. In reality the only part of the price which in economic terms would ever be paid was the $80,000 deposit and the further $210,000. The vendor finance amounted to a pay as you go transaction so as to produce an artificial effect with consequent tax advantage, contrary to all economic reality. In economic terms there was no consideration in money given by Glenharrow because of the commercial impossibility of payment by it in the circumstances where it was virtually uncapitalised and not supported by its shareholders. The terms of the arrangement ... had no reality as a cash transaction, despite being structured as if it were. In reaching this conclusion, the court made it clear the normal use of vendor finance will not generally constitute tax avoidance. Rather, it was only the particular facts in Glenharrow (a $100 self company with no guarantee from its owners and no realistic possibility of repaying the loan from exploiting the mining license) that meant in economic reality payment could never have been made. It is important to note that the New Zealand Supreme Court did not focus upon the inflated amounts the taxpayers agreed to pay as being crucial to the tax avoidance analysis rather it was the lack of actual payment of the agreed amount that was decisive. In Glenharrow the court expressly stated it is not the price but the payment that created the distorting effect. Accordingly, these cases expressly did not over-turn the long-standing rule in Cecil Bros Pty Ltd v. FCT and Europa Oil (NZ) Ltd v. CIR that it is not for the Commissioner or the court to tell a taxpayer how much to spend in obtaining its income. Those cases remain good law. Rather, the new test appears to be whether the taxpayer has actually paid the amount it has agreed to spend. The taxpayer must have truly suffered the economic cost of the tax benefit that it has claimed. Anything less may not be sufficient. VI. Should GAAR be applied differently for income tax and GST? Until the supreme court delivered the Glenharrow decision there was some debate as to whether the GAAR should be applied differently for GST and Income Tax. A leading Australian jurist speculated that differences between the underlying principles and operation of direct and indirect taxation could require a different approach. [66] For instance, the New Zealand Inland Revenue Departments own Policy Advice Division noted: There are conceptual differences between GST and income tax, and differences in the avoidance tests in the GST Act and the Income Tax Act (which will continue to exist in the reworded section 76). For example, as the Court of Appeal stated in CIR v New Zealand Refining Co Ltd: It is fundamental to the GST Act that the tax is levied on or in respect of supplies. It is not a tax on receipts or on turnover; it is a tax on transactions... In Chelle the court acknowledged the clear difference between the operation of the Income Tax and GST:

It points to a significant difference in the way in which the GST avoidance provision is intended to operate. Uniquely, any GST avoidance provision must deal both with escaping from a liability to pay output tax and the right to claim an input deduction. The amended s 76 attempts to meet this requirement. Because of the fundamentally different philosophy of the GST legislation compared with that of the Income Tax Acts arrangements which immediately and lawfully trigger the input tax deduction mechanisms of s 20 cannot be said on one view to defeat the intent and application of this Act. Nevertheless, the courts have subsequently given little thought to whether there are unique features of the GST regime that would impact upon the application of the GAAR. As a result, New Zealand Inland Revenue has now recommended that the two GAARs be interpreted consistently in order to allow a similar analysis and application of case law when determining avoidance has occurred. *67+ Despite that view there are a number of different features between GST and Income Tax that ought to impact how and when the GAAR may apply. First, while the Income Tax Act contains its own Purpose Provisions, [68] the GST Act does not expressly spell out its intent and application. The long title to the GST Act describes it as An Act to make provision for the imposition and collection of goods and services tax but this helps little. Instead, the intent and application of the Act must be gleaned from the scheme and purpose of the legislative provisions. There are many cases concerned with how tax legislation should be interpreted and what it is intended to achieve. [69] The basis of statutory interpretation is determining what Parliament intends in relation to the specific provision. In effect, the courts must determine whether Parliament intended particular sections it to be used by the taxpayers in that way. This analysis is always a difficult one. For GST, a number of cases have examined the scheme of the Act in a few specific situations but there are many provisions for which no guidance has been provided. [70] For instance, there were no cases assisting with the interpretation of the registration threshold (Chelle) or second-hand goods rules (Glenharrow) prior to either of those cases being decided. In any event, mere compliance with the specific provisions does not mean the GAAR will not apply. In Chelle the taxpayer attempted to argue that: as the Act had been complied with, neither its intent nor its application had been defeated. ... that, if the arrangement complies with the legislation, it should not be found to have defeated its intent and application. But, as in all cases dealing with the GAAR, this argument was rejected. In fact, unless there has been complete compliance with all those other sections, the arrangement will fail on technical grounds and the Commissioner need not resort to the GAAR to counteract the tax benefits obtained. This was made clear by the High Court in Chelle: Like other tax avoidance provisions, it exists to capture schemes which do not breach other provisions of the legislature. ... I agree [the GAAR] goes beyond the technical legality of the

constituent parts of the arrangement. It requires the arrangement to be assessed by reference to the principles which underly the Act The court at all levels found the arrangement in Chelle abused the Act in two ways: - first, that the length of time between the claiming of the input tax credit and the eventual making of taxable supplies breached the underlying intention that an overall balance will be achieved between the outputs and inputs of a registered person; and - second, the deliberate mismatch between payments-basis vendors and invoice basis purchasers breached the requirement that there should be some reasonable correspondence between the time at which outputs and inputs in relation to a particular supply are accounted for.

As with all tax avoidance cases, whether the scheme and purpose of the Act has been defeated may come down to what is colloquially referred to as a sniff test. Is the transaction carried out in the same way as other similar transactions? Is there an understandable commercial aspect to the transaction? If the transaction differs from ordinary commercial practices, how does it differ? Is it this particular difference that generates the tax advantage? VII. A auggested method for applying GAAR to GST One way of determining whether the GAAR should apply is to consider the nature of GST as a comprehensive Value Added Tax. In New Zealand, GST is a broad-based consumption tax applying to virtually all transactions. Unlike most other countries, New Zealand applies GST at a single rate of 12.5%. *71+ The definition of supply includes all forms of supply. *72+ Only goods or services supplied outside New Zealand may be zero-rated. *73+ Only limited financial services, domestic housing and precious metals are exempted from GST. [74] In that regard New Zealand has the most broad-based GST in the OECD, which is free of the complexity often found in GST/VAT regimes in other jurisdictions. When examining the all-encompassing nature of the New Zealand GST regime, the Court of Appeal has noted it breathes comprehensiveness and one of the outstanding feature of the legislation compared with direct tax regimes elsewhere is the breadth of the cover and the limited number of exceptions. *75+ The philosophy behind the GST regime was explained by New Zealand Inland Revenue thus: [76] GST is a broad based consumption tax. The objective is to levy a tax on total consumption expenditure in New Zealand. To keep the administration of the tax as simple as possible it will be charged at a single rate and will apply, with very few exceptions, to all goods and services supplied in New Zealand. The broad nature of GST was also explained in the leading text, GST A Practical Guide. [77] In the Introduction, McKenzie writes:

The comprehensiveness of the tax complements its underlying simplicity virtually all commodities and transactions are subject to GST principles. Also, GST is generally charged at a single standard rate of 12.5%. The author then goes on to describe how the entire framework of the Act is intended to support this broad application. Despite the underlying simplicity of the tax and its comprehensiveness, the implementation and maintenance of the GST regime has necessitated detailed legislation. The GST Act embodies the basic principles discussed above. It also provides both for supporting concepts, which are required to ensure that the tax works in practice, and for an administrative framework for the tax. This view was confirmed by the supreme court in Glenharrow: GST was intended to be broad-based, efficient and neutral. Nevertheless, compliance and administration costs preclude perfect neutrality ever being achieved. Tax avoidance opportunities notably remain at the boundaries between taxable and non-taxable transactions and between registered and unregistered persons. Accordingly, a general anti-avoidance provision was considered necessary. In short, the entire GST Act is intended to establish the framework and give effect to a broadbased consumption tax. Applying this reasoning, any interpretation of specific provisions that narrows their scope would seem to conflict with the intent and application of the Act. So New Zealands GST is as close to absolute neutrality as is possible to achieve, in that it neither favours nor adversely affects any particular type of supply. It is virtually nondistortionary to individual taxpayers and the economy as a whole. In theory then, the Act should not have any impact on the spending or investment decisions of taxpayers. If a taxpayer receives any supply, it will pay GST based on the value of that consumption, and taxpayers should generally not take GST into account when making business or consumption decisions. Thus, any time GST does become a motive for action, the taxpayer may have breached the principle of tax neutrality underlying the Act. Unfortunately, taxpayers are ingenious in their methods of seeking to exploit or misapply the GST Act in order to obtain tax benefits. In the cases that have come before the courts, the taxpayers have arranged their affairs so as to ensure they qualify for some benefit provided by the GST Act. But by taking those steps the taxpayers obviously gave GST too great a consideration in their decision-making. In light of the broad scope of GST, taking those steps in order to obtain a tax advantage defied the theoretically neutral nature of the tax. As such, any arrangement that requires additional or unusual steps be taken to fall under within the relevant NZGSTA or AGSTA provisions may defeat the intent and application of the Act. Any tax benefit achieved under such an arrangement would then be void against the Commissioner. An additional feature is the nature of GST as a transaction tax. Income tax incorporates a number of different treatments for income, deductions and timing. It creates a range of

different regimes for various entities or transactions. In doing so, there are many provisions that either seek to encourage or discourage particular behaviour. These are the incentive regimes courts are careful not to permit the GAAR to negate. By contrast, the New Zealand GST Act is almost entirely homogenous in its application. The Act imposes tax on the supply of goods and services by all registered persons in virtually all circumstances at a flat rate. The effect of this broad based and flat rate is that GST is intended to neither favour nor adversely affect any particular type of supply. The GST Act does not contain the type of incentive provisions that make the Income Tax GAAR so difficult to apply. Thus, taxpayers cannot claim to have structured their affairs so as take advantage of legitimate concessions. VIII. Conclusion Both the Chelle and Glenharrow decisions are strong and unanimous decisions in favour of the broad interpretation and application of the GST GAAR. They stipulate that artificial arrangements involving inflated valuations devised in order to take advantage of a mismatch between different categories of taxpayer will not be permitted. Furthermore, the GST Act is premised on actual payments made at (approximately) market value in a timely manner. So arrangements that involve deferred settlements (as in Chelle) or are funded by money-gorounds (as in Glenharrow) will not be allowed for GST purposes. These unanimous decisions clearly put New Zealand and Australian taxpayers on notice that, if their arrangement lacks commerciality or they do not suffer the true economic cost, they will not be permitted to take advantage of the resulting GST benefit. In its newsletter to clients in December 2008 PWC explained the supreme courts decisions raise the bar for all taxpayers. In Australasia, the pendulum of tax avoidance has swung strongly against tax abuse.

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* The author gratefully acknowledges the advice provided by Prof. Craig Elliffe and the encouragement and assistance given by Kirsty Maclaren. 1. Australasia is the collective term for the Commonwealth of Australia and New Zealand. 2. Commonly specific anti-avoidance provisions stipulate taxpayers must act at market value on normal commercial terms in a timely manner. Examples are found in Part G NZ Income Tax Act 2007 and throughout the GST Act 1985, such as s. 9(2) (timing), s. 10(3) (value) and s. 20(3) (purchases from unregistered persons). 3. In New Zealand, see s. BG1 Income Tax Act 2007 and s. 76 Goods & Services Tax Act 1985. In Australia see Part IVA Income Tax & Assessment Act 1937 and Division 165 A New Tax System (GST) Act 1999.

4. As a reflection of its British colonial history, from 18402005 New Zealands highest court of appeal was the Privy Council in London. The right of appeal to the Privy Council was finally abandoned in 2005, to be replaced by the New Zealand Supreme Court, whose members are all from New Zealands own judiciary. 5. The sole Australian case to date is Case 14/2006 2006 ATC 187, involving almost identical facts to those in New Zealands Chelle case. 6. [2006] BTC5308. 7. (1957) 96 CLR. 8. [1986] 2 NZLR p. 513. 9. Ben Nevis Forestry Ventures Ltd & Ors v. CIR [2008] NZSC 115, at para [104], known as the Trinity scheme. 10. Prebble et al., Legislation with Retrospective Effect, with Particular Reference to Tax Loopholes and Avoidance (2006) 22 NZULR p. 17. 11. Art. 58 Russian SFSR Penal Code, operative from 25 February 1927. 12. See http://en.wikipedia.org/wiki/Article_58_(RSFSR_Penal_Code), as at 12 Jan 2009. 13. See footnote 48 where Prebble et al. expressly disavow any moral equivalent between tax avoidance and the crimes against humanity committed by dictatorial regimes in reliance on such criminal codes. 14. (1996) 17 NZTC. 15. Trombitas, Role of a General Anti-Avoidance Rule in GST, NZJTLP 2007, p. 463. 16. CIR v. BNZ Investments Ltd [2002] 1 NZLR 450 at [40]. 17. Both judgments were delivered simultaneously on 19 December 2008. The Supreme Court is New Zealands highest court, following the abolition of the right to appeal to the UK Privy Counsel in 2004. 18. Ben Nevis Forestry Ventures Ltd & Ors v. CIR [2008] NZSC 115, Elias CJ, Tipping, McGrath, Gault and Anderson JJ dealing with income tax. It is referred to as the Trinity case because of the name of the charitable trust used at the centre of the scheme. 19. Glenharrow Holdings Ltd v. CIR [2008] NZSC 116, Elias CJ, Blanchard, Tipping, McGrath and Anderson JJ dealing with GST. 20. Accent Management and Ors v. CIR [2007] NZCA 230. 21. A procedure contained in New Zealands Tax Administration Act whereby taxpayers may apply to have a proposed transaction approved by the Commissioner. Once issued, the Ruling is binding upon the Commissioner. However, the process has been widely criticized for its delay and expense.

22. See Div 359 Australian Taxation Administration Act 1953 and Part V New Zealand Tax Administration Act 1994. 23. Retrospective Legislation: Reliance, the Public Interest, Principles of Interpretation and the Special Case of Anti-Avoidance Legislation, Prebble et al., NZULR 2006, p. 281. 24. [2006] BTC5308. 25. Terra, As summarized in European Court of Justice and the Principle of Prohibiting Abusive Practices in VAT, NZJTLP 2007, p. 384. 26. See Halifax and Cadbury Schweppes plc v. IRC [2007] STC 980. 27. (2007) NZCA 256. 28. S 19 GST Act 1985. 29. S 9 GST Act 1985. 30. Taxation Review Authority, New Zealands specialist tax disputes authority established under the Taxation Review Authority Act 1994. It is the initial forum for most tax cases, with appeals from the TRA to the High Court, then onwards to the Court of Appeal and finally (if granted leave) to the Supreme Court. 31. Case W22 (2003) 21 NZTC 11,211. 32. Chelle Properties (NZ) Limited v. CIR (2004) NZLR 274. 33. (2007) 23 NZTC 21,442. 34. Case X23 (2006) 22 NZTC 12,290 and Case X25 (2006) 22 NZTC 12,303. 35. Case 14/2006 2006 ATC 187. 36. Secs. 3A and 20(3) NZGSTA permit taxpayers to claim input tax credits (and potentially cash GST refunds) on the purchase for taxable purposes of second-hand goods (i.e., those owned by persons not registered for GST) to the extent of payment for those goods. 37. NZ GST is charged at a standard rate of 12.5%, so input tax of 1/9th of the purchase price of second-hand goods purchased for the principal purpose of making taxable supplies may be claimed as an input tax credit, under s 3A. 38. Glenharrow Holdings Ltd v. CIR (2005) 22 NZTC 19,319. 39. Europa Oil (NZ) Ltd v. CIR (No 2) (1976) 2 NZTC 61,066. 40. Cecil Bros Pty Ltd v. FCT (1964) 11 CLR 430. 41. S. 10 GST Act 1985. 42. [958] AC 450.

43. See also the New Zealand case of Ashton v. CIR [1975] 2 NZLR 717. 44. Glenharrow at [38]. 45. In cases such as BLP Group plc v. Commissioner of Customs & Excise [1995] STC 424. 46. Trombitas, Role of a General Anti-Avoidance Rule in GST, NZJTLP 2007. 47. Known to economists as tax expenditure. 48. See Judicial Techniques for Controlling the NZ General Ant- Avoidance Rule; the Scheme and Purpose Approach, from Challenge Corporation (1986) to Peterson (2005), Paper resented at the Tax Administrators Conference held in Sydney 2021 April 2006, D Dunbar. 49. WP Keighery Pty Ltd v. FCT (1957) 100 CLR 66. 50. See the recent decisions under Part IVA, such as FCT v. Spotless Services Ltd 96 ATC 5201 and FCT v. Hart (2004) 217 CLR 216. 51. Challenge Corporation Ltd v. CIR [1986] 2 NZLR 513. 52. Challenge Corp, per Richardson J, at 549. 53. CIR v. BNZ Investments Ltd [2002] 1 NZLR 450 (referred to as the BNZI case). 54. BNZI at [40]. 55. Ben Nevis at [103]. 56. Crossing the line is an metaphor used repeatedly by New Zealand courts: see BNZI at *40+ which talks of line drawing and setting of limits, and Accent Management at *146+ which refers to an exercise in line-drawing and the Trinity scheme as well and truly across the line into tax avoidance. 57. BNZI at [40]. 58. Ben Nevis at [97]. 59. Ben Nevis at [108]. 60. These factors were first identified by the TRA in Case W22 (2003) 21 NZTC 11,211 and were endorsed by the High Court on appeal in Chelle Property (NZ) Ltd v. CIR (2004) 21 NZTC 18,618. 61. ECJ Ermsland-Starke GmbH v. Hauptzollamt Hamburg-Jonas [2000] ECR I-11569. 62. Trinity dealt with depreciation of intangible property under the Income Tax Act 2007 while Glenharrow dealt with second-hand goods input tax under the GST Act 1985. 63. Indeed, the Glenharrow judgment repeatedly cross-refers to the reasoning in the Trinity decision to support its conclusions.

64. Challenge Corp Ltd v. CIR [1986] 2 NZLR 513. 65. Challenge Corp at 561. 66. Hill, GST An Income Tax to be Interpreted by Reference to Income Tax Principles or Just Another Consumption Tax, Australian Tax Forum (2002) Vol 17:3, p. 229. 67. TIB Vol 12:12 December 2000. 68. Part A of the Income Tax Act 2007. 69. See CIR v. Alcan New Zealand Ltd (1994) 16 NZTC 11,175 which requires a purposive interpretation of tax legislation s 5 Interpretation Act 1999. 70. Examples include Databank Systems Ltd v. CIR (1989) 11 NZTC 6,093 regarding exempt supplies, CIR v. New Zealand Refining Co Ltd (1997) 18 NZTC 13,187 regarding what supplies fall within the Act, and Wilson & Horton v. CIR (1995) 17 NZTC 12,325 regarding zero-rating. 71. S. 8(1). 72. S. 5(1) GST Act 1985. 73. Ss. 11 and 11A. 74. S. 14 GST Act. 75. CIR v. Databank Systems Ltd [1989] 1 NZLR 422, at 431. 76. PIB No 143, Broad Principles of GST, October 1986. 77. McKenzie, GST A Practical Guide (2007). Citation: J. Englisch et al., Value Added Tax and Direct Taxation: Similarities and Differences (M. Lang, P. Melz & E. Kristoffersson eds., IBFD 2009), Online Books IBFD (accessed 22 Oct. 2012).

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