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Sackville, Justice Ronald --- "Avoiding tax avoidance: the primacy of Part IVA" (FCA) [2004] FedJSchol 11

TAXATION INSTITUTE OF AUSTRALIA

VICTORIAN/TASMANIAN STATE CONVENTION

COUNTRY CLUB RESORT,
LAUNCESTON, TASMANIA

9-11 SEPTEMBER 2004

AVOIDING TAX AVOIDANCE: THE PRIMACY OF PART IVA

by

JUSTICE RONALD SACKVILLE*

*Judge, Federal Court of Australia

The Scope of Part IVA

There is something odd about general anti-avoidance rules such as those contained in Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).[1] Such rules, by hypothesis, are only invoked when the taxing authority seeks to impose tax on a transaction that otherwise is not subject to tax, or at least not as much tax.[2] Any general anti-avoidance rule is therefore aimed at tax planning measures that otherwise would be effective to achieve their intended purpose – that is, of minimising the tax payable by participants in the transaction.

It is notoriously difficult to distinguish, as a matter of principle, between tax avoidance and legitimate tax minimisation. (Tax evasion is quite different from tax avoidance, since its hallmark is illegality.[3]) In 1975, the Asprey Committee acknowledged that

‘in framing legislation sufficiently all-embracing to deter tax avoidance, there is always the danger of penalising those who have a genuine reason for entering into a bona fide transaction which, if carried out by others, has the objective that ought to be prevented. There is frequently such a very fine line to be drawn between the transaction which offends and the one which merits no condemnation.’[4]

This is particularly so when all taxpayers, assuming they act rationally, must consider carefully the tax consequences of any transactions into which they propose to enter.[5]

In Australia, after a slow start following the introduction in of Part IVA of the ITAA in 1981, it is becoming increasingly apparent that the general anti-avoidance provisions are central to the operation of the Australian taxation system. This has been made clear by recent decisions of the High Court, notably FCT v Spotless[6] and FCT v Hart.[7] Each of these decisions extended the reach of Part IVA beyond the expectations of many commentators and, perhaps, of many tax planners.

Spotless establishes, among a number of important propositions, that a person may enter into or carry out a scheme for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit, within the meaning of Part IVA, even though the transactions are designed to pursue commercial gain in the course of carrying on a business.[8] In other words, the anti-avoidance provisions can be used to attack ordinary business transactions, albeit transactions that can be characterised as tax driven. Tax avoidance and rational business conduct are not mutually exclusive concepts.

Hart makes it clear that a scheme for the purposes of Part IVA includes and may be limited to the particular mechanism used to obtain a tax benefit. The ‘split loan facility’ in that case was designed to accommodate persons wishing to finance the acquisition of both an income producing asset and a private residence. The Full Federal Court held that the dominant purpose of the scheme (which was defined to incorporate the loan of funds to the borrowers) was to permit the borrowers to acquire the two properties.[9] The High Court, by contrast, emphasised the need to assess objectively the dominant purpose of the taxpayers in entering the particular scheme they had selected. As Gleeson CJ and McHugh J observed, the ‘wealth optimiser structure’ of the loan

‘depended entirely for its efficacy upon tax benefits generated by arrangements...that had no explanation other than their fiscal consequences.’[10]

What optimised the borrowers’ wealth was the deductibility of the interest attributable to the borrowing for the private residence ‘contrived by the particular form of the borrowing transaction.’[11]

An Anterior Question: Approaches to the Construction of Tax Legislation

In both Spotless and Hart it was necessary to resolve a question of statutory construction before the anti-avoidance provisions of Part IVA arose for consideration. In Spotless, the taxpayer had deposited funds with a company incorporated in the Cook Islands. The anterior question was whether the interest paid to the taxpayer had been sourced from the Cook Islands rather than Australia. If so, since the Cook Islands imposed a small withholding tax the interest was exempt income within s 23(q) of the ITAA 1936 and the taxpayer would receive the interest almost entirely tax free. The Full Federal Court upheld findings of the primary Judge that the contract of loan had been made in the Cook Islands and that the money had been lent there and repaid from there. In a practical sense, therefore, the interest payments were sourced in the Cook Islands and the taxpayer, subject to the operation of Part IVA, was entitled to treat the interest as exempt income.[12] These conclusions were not challenged in the High Court.

In Hart, the first issue was whether the whole of the interest payable under the wealth optimiser loan was an allowable deduction under s 51(1) of the ITAA 1936 and s 8-1 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’). The loan was split between two accounts, one for the home acquisition, the other to repay moneys owed in respect of an investment property. All payments of interest and capital by the borrowers were applied in reduction of the home loan, while unpaid interest in respect of the investment loan was capitalised. The Commissioner argued that the additional interest in respect of the investment loan and the compound interest incurred on the capitalised sums were not ‘incidental and relevant’ to the gaining of assessable income by way of rental from the investment property.[13]

The trial Judge, Gyles J, held that all interest, simple and compound, was deductible under the general deduction provisions, since the payment of interest secured the use of the borrowed money during the term of the loan. The funds were used to maintain an income earning asset and the capitalisation of interest was a feature which could not be severed.[14] The Full Federal Court upheld Gyles J’s decision on the deductibility of compound interest (the only point, other than the Part IVA issues, taken on appeal).[15] This holding was not in issue before the High Court.

The United States
In some countries, problems analogous to those presented by Spotless and Hart would not be resolved by the application of a general anti-avoidance rule. The United States, for example, has not enacted any such general rule, although the Internal Revenue Code has many specific provisions that are expressed to apply where the purpose of a particular transaction is the avoidance of federal income tax.[16] Similarly, the United Kingdom has refrained from enacting a general anti-avoidance rule, although it has adopted anti-avoidance provisions limited to specific aspects of the tax code.[17]

Perhaps the principal reason for the different legislative responses to tax avoidance lies in the different judicial approaches in each country to the interpretation of taxation statutes as applied to tax avoidance arrangements. In the United States, the Supreme Court has developed the so-called business purpose doctrine, the locus classicus of which is Gregory v Helvering.[18] In that case, the owner of stock in a corporation sought to bring about a ‘reorganisation’ of the corporation’s business under the Revenue Act of 1928, the result of which, if effective, was to avoid tax on the subsequent sale of the stock. The taxpayer complied with every element of the statutory requirements for a reorganisation. She contended that her tax avoidance motive for the reorganisation was irrelevant and that she was entitled to take advantage of the concession offered by the legislation. The argument, of course, bears more than a passing resemblance to the ‘choice principle’ which played such an important part in rendering s 260 of the ITAA, the predecessor to Part IVA, so ineffective.[19]

A unanimous Supreme Court acknowledged the

‘legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits.’[20]

But the Court identified the question for determination as whether what was done, apart from the tax motive, was the thing the statute intended. In a brief judgment, the Supreme Court held that the Revenue Act, when it spoke of a transfer of assets by one corporation to another, contemplated a transfer of a corporate business, not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either.

The Supreme Court has also invoked the concept of a ‘sham’ to deny participants taxation benefits from transactions constructed in order to create those benefits. The leading case is Knetsch v United States.[21] The question was whether the taxpayer was entitled to a deduction for ‘interest paid...on indebtedness’ within the meaning of the Internal Revenue Code.[22] The transactions involved loans and annuity arrangements that were designed to generate substantial deductions without the taxpayer actually paying out any significant amounts (except as a fee to the insurance company which facilitated the transactions). The Court characterised the transactions as a sham since it was

‘patent that there was nothing of substance to be realized by Knetsch from this transaction beyond a tax deduction.’[23]

The Court was not prepared to attribute an intention to Congress to allow a deduction without regard to whether the transactions created a true obligation on the taxpayer to pay interest. Brennan J cited the observation in Gregory v Helvering[24] that

‘[t]o hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.’

It is striking that the only occasions on which either of these two Supreme Court decisions has been cited by the High Court are in two dissenting judgments of Murphy J. In the well-known case of FCT v Westraders Pty Ltd,[25] Murphy J invoked Gregory v Helvering and a similar decision[26] to support his view that the taxpayer could not manufacture a loss by what Barwick CJ (one of the majority) described as an ‘ingenious use’ of ss 36 and 36A of the ITAA 1936. Murphy J rejected strict literalism as a method of interpretation, pointing out that the Supreme Court decisions had given no encouragement to ‘transparent [tax avoidance] schemes’.[27] In his view, the circumstances envisaged by Parliament for the operation of s 36A did not include the implementation of a major tax avoidance scheme. In FCT v South Australian Battery Makers Pty Ltd,[28] Murphy J again cited Gregory v Helvering to protest against what he regarded as an excessively literal interpretation of s 51(1) of the ITAA 1936 which allowed a deduction for what the parties had designated as rental payments, but which Murphy J saw as having all the economic hallmarks of capital outgoings.

The United Kingdom
The absence of a general anti-avoidance rule in the United Kingdom, as in the United States, owes something to the judicial approach in that country to the construction of tax legislation. However, the judicial repudiation of the literalism so deplored by Murphy J came later in the United Kingdom than in the United States. Exactly four months after Helvering v Gregory was decided, the House of Lords, in the Duke Westminster’s Case,[29] upheld the Duke’s rather blatant tax avoidance arrangements, entered into with the assistance of his obliging employees. The Duke of Westminster’s Case provided the occasion for Lord Tomlin to reject firmly the suggestion that a court could look at the substance of the transaction rather than its legal form, so as to treat an annuity granted by the Duke to his employees as in truth salary or wages. Lord Tomlin laid the foundations for the approach that for so long influenced the High Court in taxation matters. He said that the ‘supposed doctrine’ involved:[30]

‘substituting “the incertain and crooked cord of discretion” for “the golden and streight metwand of the law” [4 Inst. 41]. Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Act is less than it otherwise would be’.

It is sometimes forgotten that Lord Atkin, no mean jurist,[31] dissented in the Duke of Westminster’s Case. He had no difficulty in interpreting the course of dealings between the Duke and his employees as consistent with the latter retaining their contractual entitlements to wages, part of which was to be satisfied by payments by the Duke pursuant to various deeds of covenant.[32] In his view, the substance of the transaction was that what was being paid was remuneration.[33]

The 1982 House of Lords decision in WT Ramsay Ltd v Inland Revenue Commissioners[34] has been described as the ‘fountainhead’[35] of a new approach to the interpretation of taxation legislation in the United Kingdom. The case involved a scheme to manufacture a capital loss to set off against a capital gain, even though the only loss in fact suffered was a fee payable to the promoter of the scheme. Lord Wilberforce was careful to acknowledge the ‘cardinal principle’ of the Duke of Westminster’s Case, which he took to be that if a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance.[36] However, he also said that the principle should not be pushed too far. While it obliged a court to accept documents or transactions found to be genuine:

‘it does not compel the court to look at a document or transaction in blinkers, isolated from any context to which it properly belongs’.[37]

Lord Wilberforce took the view that the particular transactions in question were never intended to produce a gain or a loss; they were self-cancelling.

Subsequent cases in the United Kingdom took a broad view of Ramsay.[38] In one of these cases, Inland Revenue Commissioners v Burmah Oil, Lord Diplock explained the change wrought by Ramsay in this way:[39]

‘It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax-avoidance schemes to assume, that Ramsay’s case did not mark a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transactions (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence eof those particular steps would have been payable... [T]he approach to tax avoidance schemes of this character sanctioned by Ramsay entitles your Lordships to ignore the intermediate circular book entries and to look at the end result...’

In the recent Westmoreland Case,[40] the House of Lords retreated from the broad interpretation of Ramsay. Lord Hoffmann, who delivered the leading judgment, denied that Ramsay had articulated an overriding principle of construction that could be superimposed upon the whole of revenue law, without regard to the language or purpose of a particular provision. In Lord Hoffman’s view, the innovation in Ramsay was to give the statutory concepts of ‘disposal’ and ‘loss’ a commercial meaning.[41] It was not a form of judicial legislation. The Ramsay principle meant simply that if the statutory language is construed as referring to a commercial concept, rather than a purely legal one, steps that had no commercial purpose, but had been artificially inserted into a composite transaction, were to be disregarded for the purposes of applying the relevant fiscal concept.[42]

The retreat in Westmoreland from the Ramsay principle has not been universally applauded.[43] Yet even the modified Ramsay principle, had it formed part of Australian jurisprudence in the halcyon days of the tax avoidance industry,[44] would have produced different outcomes in a number of important High Court cases.[45]

Australia
The introduction of fresh general anti-avoidance rules in Australia in 1981 was justified at the time by the ineffectiveness of s 260 of the ITAA and by the need to combat ‘blatant, artificial or contrived’ tax avoidance schemes.[46] That such schemes were allowed to flourish has generally been attributed to a literal approach to the construction of taxing statutes, particularly by the Barwick Court during the 1970s. It was, after all, literalism in the interpretation of tax legislation against which Murphy J protested so vehemently in Westraders.

It is, however, an oversimplification to attribute the apparent judicial encouragement of tax avoidance arrangements to a literal construction of the ITAA. A neutral form of literalism (if there is such a thing) might be expected to benefit or disadvantage the taxpayer and the revenue in more or less equal measure.[47] But Barwick CJ’s approach to taxation legislation was not neutral. This is seen most clearly in his famous pronouncement in Westraders[48] that it:

‘is for the Parliament to specify, and to do so ... as far as language will permit, with unambiguous clarity, the circumstances which will attract an obligation on the part of the citizen to pay tax. The function of the court is to interpret and apply the language in which the Parliament has specified those circumstances. The court is to do so by determining the meaning of the words employed by the Parliament according to the intention of the Parliament which is discoverable from the language used by the Parliament. It is not for the court to mould or to attempt to mould the language of the statute so as to produce some result which it might be thought the Parliament may have intended to achieve, though not expressed in the actual language employed.’ (Emphasis added.)

An approach to the construction of tax legislation that requires Parliament to specify with ‘unambiguous clarity’ the circumstances which attract a tax liability is an invitation to taxpayers to identify and take advantage of any available ambiguity. It is also an invitation to tax avoidance, on any reasonable understanding of that expression.

No Parliament, of whatever political complexion, can be expected to tolerate indefinitely the drain on revenue and the inequities that flow from the widespread and successful use of blatant tax avoidance schemes. The spread of such schemes simply invites strong legislative counter-measures. As it happens, the enactment of Part IVA of the ITAA 1936 coincided with the High Court’s repudiation (after the retirement of Barwick CJ) of literalism as a technique of statutory construction.[49] Part IVA, therefore, came into force at about the time judicial attitudes to the construction of tax legislation in Australia were beginning to change. Perhaps, then, it is not surprising that nearly a quarter of a century later Part IVA has assumed such a central role in the Australian taxation system.

The contextual and purposive construction of tax legislation, exemplified by Cooper Brookes v FCT, has brought the interpretative techniques used by Australian courts closer to those adopted in the United Kingdom, particularly when the decision in Westmoreland is taken into account. This is nicely illustrated by the High Court’s overruling of Curran’s Case in John v FCT.[50] In that case, which involved a manufactured paper loss, the Mason Court took a ‘commercial’ view of what constitutes a loss or outgoing for the purposes of s 51(1) of the ITAA 1936. The Court therefore had no need to rely on s 260 to disallow the claimed ‘loss’ as a deduction. In other words, the anterior question of construction in John was resolved in favour of the Commissioner.

Similarly, the decision in Fletcher v FCT[51] went behind the formal structure of a scheme that generated neutral cash flows but high ‘outgoings’ in its early years, to focus on whether a scheme would run for its full term. If it would not (thereby eliminating the possibility that assessable income would exceed deductions), the outgoings could not be characterised as incurred in gaining or producing assessable income for the purposes of s 51(1) of the ITAA 1936. In that case, the High Court also had no need to rely either on Part IVA or on a specific anti-avoidance provision invoked by the Commissioner.[52]

John and Fletcher show that judicial attitudes in Australia to tax avoidance schemes have changed even without express reliance being placed on the redrafted general anti-avoidance rules. But John also decides that the so-called ‘fiscal nullity principle’ derived from Ramsay and its progeny in the United Kingdom does not form part of Australian law.[53] The reason given by the Court for the refusal to follow Ramsay was that the existence of a general statutory anti-avoidance rule leaves no room for the more specific provisions of the legislation to be qualified by implied limitations designed to inhibit tax avoidance.[54]

The Primacy of Part IVA: Does it Matter?
The approach taken in John to the construction of the ITAA ensures that Part IVA will play a critical role in the administration of the Australian tax regime. In particular, it means that Australian courts are constrained in the extent to which they can interpret specific provisions of the ITAA in a manner that renders artificially contrived tax schemes ineffective, independently of the operation of Part IVA.

Views will differ as to whether Part IVA of the ITAA , as interpreted by the High Court, draws an appropriate dividing line between impermissible tax avoidance and legitimate tax minimisation. My present concern is not with that question, but a different one. On the assumption that the construction of Part IVA achieves a reasonably satisfactory accommodation of the competing interests of the revenue and of taxpayers, does it matter that the Australian tax system rests so heavily on a general anti-avoidance provision? Is the Australian taxation system any worse off because the courts apparently have less scope than those in the United States or the United Kingdom to construe specific provisions of the ITAA in a manner that curtails the opportunity for ‘blatant, artificial or contrived’ tax avoidance schemes?

Taxation is imposed by Parliament and the tax system is administered in order to achieve a variety of social and economic objectives, not all of which are necessarily compatible. The Asprey Committee in 1975 identified, however, three ‘dominant’ tests of merit for the tax system as a whole: equity, simplicity and efficiency.[55] The Committee acknowledged that each of these criteria admits of different interpretations and is difficult to measure. It has also been pointed out that there are difficulties in assessing the simplicity of the taxation system in isolation from government policies as a whole, including income maintenance programs.[56] Even so, the criteria identified by the Asprey Committee provide useful starting points for evaluation of the tax system and of particular tax policies.

‘Equity’ embraces the notions of horizontal and vertical equity: that is, people in the same position should be treated equally and those in materially different position should be treated differently.[57] Vertical equity in the tax system is usually taken to imply that differential treatment of taxpayers should be based on their ability to pay.

Simplicity may refer to ‘legal simplicity’, in the sense of ease of comprehension of the tax laws. It also may refer to ‘effective simplicity’, in the sense of the ease with which the correct tax liability can be determined.[58] The two are not the same, since legal simplification does not necessarily mean a reduction in tax operating costs.[59] Effective simplicity is particularly important, as it tends to reduce both administrative costs incurred by the revenue and compliance costs incurred by taxpayers. Effective simplicity is usually enhanced by certainty in taxation laws. As the Asprey Committee observed:[60]

‘costs will be the less if assessor and assessed can each establish with certainty what is due: uncertainty entails the costs of consultation with experts and sometimes the yet greater costs of litigation. Both kinds of cost are increased, and certainty is endangered, when a tax ... requires the drawing of fine distinctions between what is and what is not liable, and when these distinctions involve such uncertain ideas as “purpose” or “value to the recipient.”’

Efficiency is closely related to effective simplicity, since high administrative and compliance costs are associated with complexity and uncertainty in the taxation system.[61] In addition, efficiency implies that the taxation system ideally should be neutral, in the sense that the imposition and collection of tax do not alter the relative attractiveness of different forms of business organisation, the returns on different modes of investments or the relative prices of productive resources.[62]

Although not mentioned by the Asprey Committee, another criterion for assessing the performance of the tax system is its adherence to the principles underlying the rule of law. The term ‘rule of law’ like ‘equity’ and ‘efficiency’, is much used and much misused. Recognising its ambiguities, the concept nonetheless embodies the idea that that, to the maximum extent feasible, the rights and duties of the individual towards the state should be determined by the application of specific rules, rather than by the exercise of administrative discretion.[63] It is, of course, neither possible nor desirable to eliminate discretion in the enforcement of laws, including those imposing taxation. But, generally speaking, the greater the reliance on administrative discretion, the greater the risk of inconsistency and therefore of horizontal inequity in the taxation system.

Part IVA of the ITAA operates by conferring a discretionary power on the Commissioner, albeit a discretionary power of a particular kind. Section 177F(1), one of the two provisions around which Part IVA ‘pivots’,[64] authorises the Commissioner to make a determination where:

• a tax benefit has been obtained (or would, but for s 177F, be obtained)
• in connection with a scheme to which Part IVA applies.

In these circumstances, the Commissioner may determine that an amount that has not been included in the taxpayer’s assessable income should be included, or that a deduction otherwise allowable should not be allowed.

The discretion conferred on the Commissioner is far from untrammelled. A determination is only valid if the two preconditions identified in s 177F(1) are satisfied. Further, Part IVA applies to a ‘scheme’ in respect of which it can be concluded, having regard to the eight criteria set out in s 177D(b), that a person entering into or carrying out the scheme did so for the purposes of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme. This is an objective inquiry,[65] in the sense that it does not depend on the motivation of the relevant persons. Consequently, even though the statutory criteria are stated at a high level of generality, the outcome of the inquiry, as determined by the Commissioner, can be reviewed by a Court. Certainly, Part IVA is not a law that delegates to the Commissioner a discretionary power exercisable by reference to purely subjective considerations.

It is also true that any taxation system that incorporates the principle of self assessment, as is the case with the Australian taxation regime, must rely to a considerable extent on individual audits and the reassessment of returns to detect tax evasion or tax avoidance. Even so, Part IVA of the ITAA can be applied to increase assessable income or negate claimed deductions only if the Commissioner chooses to exercise his or her discretionary powers in relation to particular schemes. There is therefore an important element of discretion in the selection of taxpayers and tax avoidance arrangements to investigate. The Commissioner must not only decide which forms of apparent tax avoidance activity to investigate, but which specific schemes warrant the making of individual determinations. It is not merely a question of applying settled rules to the taxpayer’s individual circumstances, but of exercising the discretion conferred by s 177F(1) of the ITAA. In short, the application of the general anti-avoidance rules of the ITAA depends for its efficacy upon the exercise of an administrative discretion. To this extent, the heavy reliance of the Australian taxation system on Part IVA tends to detract from the ideals of the rule of law.

A heavy reliance on anti-avoidance rules, such as those embodied in Part IVA of the ITAA, creates the additional danger that essentially similar tax avoidance schemes will be treated differently because the Commissioner’s resources are necessarily limited. Of course, the resources available for enforcement will always be insufficient to ensure perfect compliance with the taxation regime. Moreover, taxation regimes which lack general anti-avoidance rules also must devote scarce resources to detecting and challenging what are considered to be impermissible tax avoidance schemes. Nonetheless, if specific provisions of the ITAA were interpreted in the manner exemplified by the United States and the United Kingdom cases, there are likely to be fewer apparent opportunities for taxpayers to take advantage of tax-avoidance schemes and less occasion for the Commissioner to invoke general anti-avoidance rules. To this extent the system would be more certain and less prone to horizontal inequity.

Moreover, the process required by Part IVA of the ITAA is both labour intensive and fraught with difficulties. It is necessary for the Commissioner to identify the relevant scheme precisely, a task that is often complex and uncertain. As Gleeson CJ and McHugh J observed in Hart, the definition of the scheme in any given case is important because the tax benefit identified must be related to the scheme, as must any conclusion of dominant purpose.[66] While the Commissioner is entitled to put his case in alternative ways, subject to the requirements of procedural fairness,[67] a failure to identify the scheme ‘correctly’ may prove fatal to an attempt to apply Part IVA to a particular arrangement.[68] The onus is therefore on the Commissioner to identify the scheme in a manner that ensures that the determination can survive a challenge in the courts.

Once the scheme is identified and it is established that the relevant taxpayer has obtained a tax benefit,[69] it is necessary to determine whether it would be concluded, having regard to the eight criteria specified in s 177D(b) that:

‘the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme ...’.
This is an ‘objective’ inquiry in the sense I have explained, but as the differences in opinion between the Full Federal Court and the High Court in Hart illustrate, the result will often be difficult to predict. Consequently a determination by the Commissioner under Part IVA will frequently generate a challenge to the validity of the determination which will require litigation, with all its attendant uncertainty and expense, to resolve. Thus the reliance on Part IVA of the ITAA to combat tax avoidance is conducive neither to effective simplicity nor efficiency in the tax system.

Conclusion

General anti-avoidance rules are not the ideal antidote to tax avoidance. As the experience in Australia shows, reliance on such rules to tackle tax avoidance generates both uncertainty and transaction costs that affect the simplicity and efficiency of the taxation system. Reliance on provisions such as Part IVA of the ITAA also carries with it the risk of horizontal inequity and a departure from the ideals of the rule of law.

A tax system cannot, however, be evaluated in isolation from its history. The enactment of Part IVA of the ITAA was made necessary by the interpretative excesses of the Barwick High Court in tax litigation. Even without the enactment of Part IVA, the integrity of the taxation system would have been restored, at least to a significant extent, by the High Court’s abandonment of the so-called literal approach to the construction of taxation legislation which prevailed in the 1970s. But the judicial about-face came too late to prevent Part IVA becoming the principal mechanism for tackling blatant or artificial tax avoidance schemes.

There is room for debate as to whether the current interpretation of Part IVA strikes an appropriate balance in its attempt to strike down tax avoidance schemes, yet leave undisturbed legitimate tax minimisation arrangements. But if the correct balance has been struck, it has been achieved at a significant cost to the goals of the taxation system.

There are two particular lessons to be learnt from the primacy of Part IVA as the mechanism for checking tax avoidance. The first is that if a completely new taxation system could be created, it is unlikely to start from the point that has now been reached. Ideally, the taxation system would not place such heavy reliance on a general anti avoidance provision. Rather, it would look to more specific statutory rules, reinforced by an approach to the construction of tax legislation that draws on the experience of jurisdictions that lack an equivalent to Part IVA.

Secondly, there is a strong case for reconsidering the holding in John that the existence of Part IVA of the ITAA leaves no room for more specific provisions of the legislation to be qualified by implied limitations designed to inhibit tax avoidance. Ultimately, the shape of taxation legislation is a matter for Parliament. The practicalities, however, are that unless and until the John principle of statutory construction is reconsidered, Part IVA will continue to play a central part in the administration of the Australian taxation system.

[1] Sometimes abbreviated to ‘GAARs’: see GS Cooper, Tax Avoidance and the Rule of Law (BDF Publications, 1997) (hereinafter ‘Tax Avoidance’), 13.
[2] GT Pagone, ‘Tax Planning or Tax Avoidance’ (2000) 29 ATR 96, 96.

[3] J Waincymer, ‘The Australian Tax Avoidance Experience and Responses: A Critical Review’ in Tax Avoidance, 249.

[4] Taxation Review Committee, Full Report (Parl Pap No 136, 1975), par 11.6.

[5] FCT v Hart [2004] HCA 26; (2004) 206 ALR 207, 209 [3] per Gleeson CJ and McHugh J.
[6] FCT v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404.
[7] FCT v Hart [2004] HCA 26; (2004) 206 ALR 207.
[8] FCT v Spotless, 415 (joint judgment).
[9] Hart v FCT [2002] FCAFC 222; (2002) 121 FCR 206, 213, per Hill J.
[10] FCT v Hart [2004] HCA 26; (2004) 206 ALR 207, 213.
[11] Ibid.

[12] FCT v Spotless Services Ltd (1995) 62 FCR 244, 260-262, per Beaumont J; 275-276, per Cooper J.
[13] See, for example, Ronpibon Tin NL v FCT [1949] HCA 15; (1949) 78 CLR 47.
[14] Hart v FCT [2001] FCA 1547; (2001) 189 ALR 584, 592.
[15] Hart v FCT [2002] FCAFC 222; (2002) 121 FCR 206, 220, per Hill J.

[16] C H Gustafson, ‘The Politics and Practicalities of Checking Tax Avoidance in the United States’, in Tax Avoidance, 356-358.

[17] M Gammie, ‘Tax Avoidance and the Rule of Law: A Perspective from the United Kingdom’, in Tax Avoidance, 192-193.
[18] [1935] USSC 5; 293 US 465 (1935).

[19] See, for example, WP Keighery Pty Ltd v FCT [1957] HCA 2; (1957) 100 CLR 66; Cridland v FCT [1977] HCA 61; (1977) 140 CLR 330.
[20] [1935] USSC 5; 293 US 465, 469 (1935), per Sutherland J.

[21] [1960] USSC 152; 364 US 361 (1960). Brennan J delivered the lead opinion. Douglas, Whittaker and Stewart JJ dissented.
[22] Ibid, 363.
[23] Ibid, 366, per Brennan J.
[24] [1935] USSC 5; 293 US 465, 470 (1935).
[25] [1980] HCA 24; (1980) 144 CLR 55, 79.
[26] Commissioner of Internal Revenue v Court Holding Co [1945] USSC 56; 324 US 331, 334 (1945).
[27] [1980] HCA 24; (1980) 144 CLR 55, 79.
[28] [1978] HCA 32; (1978) 140 CLR 645, 672-673
[29] [1936] AC 1.
[30] Ibid, 19.

[31] Three years earlier he had delivered one of the most famous judgments in the common law world, Donoghue v Stevenson [1932] AC 562.
[32] [1936] AC 1, 14.
[33] Ibid, 15.
[34] [1981] UKHL 1; [1982] AC 300.
[35] Macniven v Westmoreland Investments Ltd [2003] 1 AC 311, 326, per Lord Hoffmann.
[36] [1981] UKHL 1; [1982] AC 300, 323.
[37] Ibid.

[38] See Inland Revenue Commissioners v Burmah Oil Co Ltd [1982] SLT 348; Furniss v Dawson [1983] UKHL 4; [1984] AC 474; Inland Revenue Commissioners v McGuckian [1997] UKHL 22; [1997] 1 WLR 991; GT Pagone, note 2 above, 97-100.
[39] [1982] SLT 348, 352-353
[40] Macniven v Westmoreland Investments Ltd [2003] 1 AC 311.
[41] Ibid, 326.
[42] Ibid, 332.
[43] See Lord Templeman, ‘Tax and the Taxpayer’ (2001) 117 LQR 575.

[44] See generally G Lehmann, ‘The Income Tax Judgments of Sir Garfield Barwick: A Study in the Failure of the New Legalism’ [1983] MonashULawRw 1; (1983) 9 Monash ULR 115.

[45] Such as Curran v FCT [1974] HCA 46; (1974) 131 CLR 409. See Lehmann, note 42 above, 117–119. Curran itself was overruled by John v FCT (1989) 166 CLR 417.

[46] See the Explanatory Memorandum to the Income Tax Laws Amendment Bill (No. 2) 1981 (Cth), conveniently reproduced in the judgment of Callinan J in FCT v Hart [2004] HCA 26; (2004) 206 ALR 207, 234-238.

[47] Interestingly enough, one commentator has described the joint judgment in Spotless, which expanded the reach of Part IVA, as ‘literalist’: NJ Watts, ‘Part IVA of the Income Tax Assessment Act after Spotless – A Brave New World?’ (1988) 72 ALJ 303, 304.
[48] FCT v Westraders Pty Ltd [1980] HCA 24; (1980) 144 CLR 55, 59-60.
[49] In Cooper Brookes (Wollongong) Pty Ltd v FCT [1981] HCA 26; (1981) 147 CLR 297.
[50] (1989) 166 CLR 417.
[51] [1991] HCA 42; (1991) 173 CLR 1
[52] ITAA 1936, s 82KL.
[53] (1989) 166 CLR 417, 434.
[54] Ibid, 434–435.
[55] Taxation Review Committee, note 3 above, par 3.27.

[56] D A Weisbach and J Nussim, ‘The Integration of Tax Spending Programs’ [2004] YaleLawJl 14; (2004) 113 Yale LJ 955, 981-982.
[57] Taxation Review Committee, note 3 above, par 3.7.

[58] B Tran-Nam, ‘Tax Reform and Tax Simplification: Some Conceptual Issues and a Preliminary Assessment’ [1999] SydLawRw 20; (1999) 21 Syd LR 500, 505-508.
[59] Ibid, 502.
[60] Taxation Review Committee, note 3 above, par 3.20.
[61] Ibid, par 3.24.
[62] Ibid.
[63] GS Cooper, note 1 above, 15–17.

[64] FCT v Hart [2004] HCA 26; (2003) 206 ALR 207, 217, per Gummow and Hayne JJ. The other ‘pivot’ is s 177D.
[65] Ibid; see, too, FCT v Consolidated Press Holdings [2001] HCA 32; (2001) 207 CLR 235, 263.
[66] FCT v Hart [2004] HCA 26; (2004) 206 ALR 207, 210.

[67] FCT v Peabody (1994) 181 CLR 359, 382, per curiam; FCT V Hart [2004] HCA 26; (2004) 206 ALR 207, 219-220, per Gummow and Hayne JJ.

[68] See, for example, FCT v Mochkin [2003] FCAFC 15; (2003) 127 FCR 185, 197-198, per Sackville J.
[69] See ss 177C, 177D(a), 177F(1).