background image
13.1.2. Specific Anti-Avoidance Rules

Apart from the GAAR, there are a number of provisions targeted at specific tax avoidance arrangements. A selection of the key provisions in this area is summarized below.

Non-Arm's Length Trading Stock Purchases

The expense incurred in the purchase or obtaining delivery of trading stock is taken to be its market value if the expense exceeds the market value of the trading stock and the purchaser and seller did not deal with each other at arm's length. The deemed amount is used for purposes of valuing the trading stock for tax deduction purposes.

Payments to Related Persons

Where a taxpayer makes a payment to a related entity, the amount is deductible only to the extent that the Commissioner considers it to be reasonable.

Fines for Promoters of Unsuccessful Schemes

Promoters of tax avoidance and evasion schemes, including schemes promoted on the basis of conformity with a product ruling by the ATO that differs materially from the content of the ruling, are subject to civil penalties. Penalties involve a fine of up to 5,000 penalty units (1 penalty unit is currently equal to AUD 110) for an individual and 25,000 penalty units for a company or, if higher, twice the consideration received or receivable by the entity or its associates in respect of the scheme.

Criminal sanctions, including imprisonment for up to 10 years, are also imposed under the Crimes (Taxation Offences) Act, 1980 on persons who participate in schemes designed to avoid the payment of tax.

Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015

The Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015, which received Royal Assent on 11 December 2015, introduced a number of measures targeting avoidance, including:

  • A standard for defining a Significant Global Entity (SGE) and Country-by-Country (CbC) reporting entity;
  • A new Multinational Anti-Avoidance Law to counter artificial arrangements that avoid attribution of profits to Australia;
  • Increased scheme penalties (doubled), unless the taxpayer adopts a reasonably arguable tax position; and
  • Transfer pricing reporting requirements in line with Action 13 of the OECD BEPS Project, including Country-by-Country report, Master file, and Local file.

An SGE is:

  • A global parent entity (an entity not controlled by another entity and includes a member of a group, single entity, a private company, partnership, trust or an individual) that has an annual global income of AUD 1 billion or more for a period; or
  • A member of a group of entities consolidated for accounting purposes as a single entity with a global parent entity that has an annual global income of AUD 1 billion or more for the same period.

For income years starting on or after 1 July 2019, an entity is also considered an SGE if:

  • It is a member of a notional listed company group (NLCG) and one other member of the group is a global parent entity with an annual global income of AUD 1 billion or more. An NLCG is a group of entities required to be consolidated as a single group under applicable accounting rules if one of the group members is a listed company; and
  • This is applicable despite exceptions to when a group of entities is required to prepare consolidated accounts (whether audited or not), including materiality rules, in the applicable accounting rules. This, in effect, would deem controlled groups headed by entities that normally would not be required to consolidate as notionally consolidated for the purpose of the SGE definition.

Further, it is affirmed that:

  • An entity can be a member of an NLCG even if it is consolidated with other entities for accounting purposes as a single group, i.e., an entity and a group can fall under two definitions of an SGE;
  • Investment entities that control other entities but are not required to consolidate with those entities under relevant accounting principles are deemed to be in an NLCG; and
  • Any rules that permit an entity not to consolidate due to materiality (size or other reasons) are disregarded and must be included as members of the NLCG.

An SGE can be a public or private company, a trust, a partnership or an individual and includes:

  • Australian-headquartered entities (with or without foreign operations); and
  • Foreign-headquartered multinationals (with or without local operations).

For income years beginning on or after 1 July 2016, SGE, including Australian resident entities and foreign residents operating an Australian permanent establishment, are required to submit General Purpose Financial Statements (GPFS) to the ATO. The GPFS must be submitted by the entity's tax return deadline, unless already required to be submitted to the Australian Securities and Investment Commission (ASIC) directly. The GPFS (stand-alone or consolidated) must be prepared in accordance with the Australian Accounting Standards or other commercially accepted accounting principles (CAAP) incorporating the entity’s financial position and performance.

Multinational Anti-Avoidance Law

Under the Multinational Anti-Avoidance Law (MAAL), significant global entities (SGE), i.e., entities with group revenue of AUD 1 billion or more, that have entered into arrangements for artificially avoiding a taxable presence in Australia will be taxed, as if the arrangement was made through a permanent establishment in Australia. Diverted Profits Tax (DPT) is introduced at a rate of 40% for income years beginning on or after 1 July 2017 on profits that have been artificially diverted from Australia by SGE. The difference from the adjustment is subject to double the standard penalties that would normally be imposed.

In general, the DPT applies if:

  • It is reasonable to conclude that a scheme (or any part of a scheme) was carried out for a principal purpose of, or for more than one principal purpose, that includes a purpose of:
    • enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit, or both to obtain a tax benefit and reduce foreign tax liability; or
    • enabling the relevant taxpayer and another taxpayer (or other taxpayers) to obtain a tax benefit, or both to obtain a tax benefit and reduce foreign tax liability;
  • The relevant taxpayer is an SGE; and
  • The scheme is entered into or carried out with a foreign associate entity, or the foreign associate is otherwise connected with the scheme.

The purpose of the MAAL is to tax the foreign entities that have entered into schemes for artificially avoiding a taxable presence in Australia. Such schemes generally have following features:

  • A foreign entity makes a supply to an Australian customer;
  • Activities are undertaken in Australia 'directly in connection with' the supply;
  • Some or all of those activities are undertaken by an Australian entity who is an associate of, or is commercially dependent on, the foreign entity; and
  • The foreign entity derives ordinary or statutory income from the supply, some or all of which is not attributable to an Australian permanent establishment of the foreign entity.

On 4 July 2018, the ATO has issued Taxation Determination (TD) 2018/12 to clarify the Commissioner's view on the meaning of the expression 'directly in connection with' in relation to the conditions for the application of the anti-avoidance rules under MAAL. The activities that might be directly connected to supply include, but are not limited to, activities that:

  • Contribute to bringing about the contract for the supply;
  • Attract new customers or maintain existing customer relationships;
  • Relate to the ability to supply the goods or service, or the manner in which it is supplied;
  • Support the ongoing execution of a supply under an existing supply arrangement; and
  • Actively procure demand for sales.

The DPT will not apply if it is reasonable to conclude that one of the following tests applies to the relevant taxpayer:

  • Income Test: This test will generally apply if the sum of the following does not exceed AUD 25 million:
    • the assessable income, exempt income and non-assessable non-exempt income of the relevant taxpayer;
    • the assessable income of another entity that is an associate of the relevant taxpayer, if both are members of same SGE group; and
    • the amount of the DPT tax benefit, if the DPT tax benefit relates to an amount not included in assessable income.
  • Sufficient Foreign Tax Test: This test will generally apply if the increase in the foreign tax liabilities of foreign entities resulting from the scheme is 80% or more of the reduction in the Australian tax liability of the relevant taxpayer.  
  • Sufficient Economic Substance Test: This test will generally apply if the profit made as a result of the scheme by the relevant taxpayer and by associate entities involved in the scheme, reasonably reflects the economic substance of the entity’s activities in connection with the scheme.

Additionally, the DPT does not apply to certain entity types, including:

  • A managed investment trust;
  • A foreign collective investment vehicle with wide membership;
  • A foreign entity owned by a foreign government;
  • A complying superannuation entity; and
  • A foreign pension fund.

If a DPT assessment is issued, the taxpayer will be required to pay the DPT amount within 21 days. However, the taxpayer may challenge the assessment by providing additional information as to why the amount should be reduced. In general, the review period for additional information is 12 months. If after 12 months the taxpayer still disagrees with the assessment or amended assessment, the taxpayer will have 60 days to make an appeal to the Federal Court of Australia.

The DPT applies for income years beginning on or after 1 July 2017, whether or not the tax benefits arise in connection with a scheme that was entered into, or was commenced to be carried out, before 1 July 2017. However, if arrangements potentially subject to the law were notified to the Australia Taxation Office by 31 March 2016, the increased penalties would not apply.

Effective 1 January 2016, MAAL is applicable to artificial or contrived arrangements involving trusts and partnerships entered into by multinational entities to avoid the taxation of business profits in Australia. Supplies made by a trust or partnership to Australian customers and income received from such supplies are treated as received by a foreign entity subject to fulfillment of certain conditions by the trust or partnership.

Scheme Penalties for Significant Global Entities

The failure to lodge penalty is increased by a factor of 100 for SGEs, which results in a maximum penalty of AUD 450,000 (AUD 525,000 with an increase in the penalty unit to AUD 210 from 1 July 2017). In addition, the administrative penalties for statements for SGEs are doubled.

This measure includes the doubling of the penalties imposed for significant global entities (group revenue of AUD 1 billion or more) that have entered into tax avoidance or profit shifting schemes. The increased penalties will not apply to taxpayers that adopt a reasonably arguable tax position. The definition of SGEs has been broadened for years starting on or after 1 July 2019. Penalties that arise due to this amendment do not apply until 1 July 2020 for entities that were not previously considered as SGEs.

The penalties, based on the relevant scheme shortfall amount, are as follows:

  • Tax avoidance schemes:
    • base penalty amount - 100%;
    • aggravating factors apply - 120%;
    • disclosure during examination - 80%; and
    • disclosure before examination - 20%.
  • Profit shifting schemes:
    • base penalty amount - 50%;
    • aggravating factors apply - 60%;
    • disclosure during examination - 40%; and
    • disclosure before examination - 10%.

The increased penalties apply for scheme benefits obtained, or that would be obtained, in relation to any income year commencing on or after 1 July 2015, regardless of when the scheme was entered into or commenced to be carried out.

Penalties imposed on SGEs that do not take reasonable care, take a tax position that is not reasonably arguable, or fail to provide documents when required and the Commissioner determines the liability without the document, are also subject to increased penalties, as below:

  • Making a false or misleading statement: 50% to 150%;
  • Making a statement which treats law as applying in a way that was not reasonably arguable: 50%; and
  • Failing to provide a document as required: 150%.

In case of false or misleading statements that don't result in a shortfall amount, the penalty is as follows:

  • Intentional Disregard: 120 penalty units (AUD 25,200);
  • Recklessness: 80 penalty units (AUD 16,800); and
  • No reasonable care: 40 penalty units (AUD 8,400).

Failure to lodge documents/ returns to the tax authorities, will also attract increased penalties ranging from AUD 105,000 to AUD 525,000 depending on the number of days of delay in lodgment.

Effective 5 December 2019, the increased penalty mentioned above applies to SGE subsidiary members of tax consolidated or Multiple Entry Consolidated (MEC) groups for:

  • Failing to lodge any form i.e. return, notice, statement, or other document by the due date in the approved form. The minimum penalty for late lodging is AUD 111,000 and the maximum is AUD 555,000; and
  • Making false or misleading statements, failing to have a reasonably arguable position and failing to provide a document to ATO where it is necessary to determine a tax-related liability accurately.

Country-by-Country Report, Master File and Local File Requirements

The new requirements apply for significant global entities (group revenue of AUD 1 billion or more) from 1 January 2016 (see Sec. 13.4.4. for details).

Other Anti-Avoidance Provisions

The Australian income tax law also includes a myriad of other anti-avoidance targeted at:

  • Foreign tax credit schemes;
  • Prepayment tax avoidance schemes;
  • Schemes designed to postpone tax liability;
  • Expenditure recoupment schemes;
  • The shifting of loan and equity values in a company or trust to other equity or loan interests in the same company or trust; and
  • The duplication of tax deductions through commercial debt forgiveness.

Scrutiny on Specific Transactions

From time-to-time, the Australian tax authorities issue tax alerts regarding certain specific arrangements/ schemes that will be subject to review by the authorities. Some of these arrangements or transactions include:

  • Re-characterization of trading income into more favorably taxed passive income, by fragmenting integrated trading business in a contrived way into separate businesses;
  • Artificially diverting taxable income into a trust where, on distribution from the trust, that income is ultimately subject to no tax or a lesser rate than the corporate rate of tax;
  • Cross-border round robin type arrangements that involve funding of an overseas entity or operations by an Australian entity, where the funds are subsequently provided back to the Australian entity or its Australian associate in a manner that purportedly generates Australian tax deductions while not generating corresponding Australian assessable income;
  • Arrangements involving tax-consolidated groups with subsidiaries using offshore permanent establishments that have entered into intra-group transactions. In particular, transactions where the amount of taxable income returned does not reflect the economic substance and significance of the operations carried on in and between Australia and the offshore jurisdiction, are being looked at for review;
  • Arrangements that involve foreign and Australian entities swapping their roles via contracts, to avoid application of the MAAL and GST; and
  • International profit shifting arrangements, arrangements that manipulate thin-capitalization rules, related party cross-country interest rate swap agreements, cross-border leasing arrangements involving mobile assets, etc.