The role of foreign tax outcomes in defending cases under Pt IVA

Part IVA, the general anti-avoidance provision of the Income Tax Assessment Act 1936 (Cth), applies only where a taxpayer has a sole or dominant purpose of achieving a tax benefit. A tax benefit is a reduction in Australian tax liability when the scheme undertaken by the taxpayer is compared to a reasonable counterfactual. Recent case law suggests that, where taxpayers obtain both foreign and Australian tax benefits under a transaction, the foreign tax advantages may provide a defence to both the tax benefit and purpose elements of Pt IVA. This article examines in detail recent cases which show that, where a tax arbitrage transaction is undertaken, it is possible to argue successfully that the purpose requirement of Pt IVA is not satisfied due to the foreign tax consequences of the transaction, and that tax arbitrage transactions that generate foreign tax benefits for a related party may be more likely to be protected from Pt IVA than tax arbitrage transactions which do not.