Lessons from BBlood

Commercial justification

It is not uncommon for advisors to justify their clients’ course of action by claiming that an arrangement was entered into for asset protection and/or succession planning purposes. However, without actually detailing the commercial justification, or where there is a lack of sufficiently compelling evidence to support that assertion, the argument that the arrangement is for asset protection or succession planning is unlikely to be a successful defence in any tax disputes. Similarly, if s.100A is relevant it may make it difficult to argue an ordinary family or commercial dealing exists. Without commercial justification the ATO is likely to conclude that the arrangement is entered into for a tax purpose, or is predominantly tax-driven.

The question that all taxpayers, and their advisors, should consider, in relation to any contemplated arrangement, is whether the arrangement (or a step of the arrangement) contributes towards delivering a commercial purpose, opportunity or requirement, and be accompanied by evidence to that effect. Nonetheless, even if an arrangement could be explained by commercial objective, if there are more straight forward alternatives to achieve the same commercial outcome, the risk that an arrangement be seen as being entered into for a tax-driven purpose may still exist.

The latest Full Federal Court appeal decision in B&F Investments Pty Ltd as trustee for the Illuka Park Trust v Commissioner of Taxation [2023] FCAFC 89 (BBlood) is a case on point in regard to commercial justification and overtly complex arrangements.

The arrangement in BBlood was found to be contrived in order to confer a tax benefit that would not otherwise be available. The steps leading up to the implementation of the share buy-back arrangement (referred as the ‘Illuka Park Steps’) had no commercial justifications. Rather, the Illuka Park Steps were found to be necessary to create a mismatch between trust law income and taxable net income. That mismatch was essential for the IP Trust being able to distribute all of its trust law income in FY2014 to a newly incorporated company BE Co (and thereby rendering BE Co liable for tax on the taxable net income of the trust, for which a significant portion was referable to the deemed dividend portion of the share buy-back proceeds). That mismatch in turn allowed IP Trust to retain the share buy-back proceeds (which were treated as corpus) without being subject to tax under s.99A Income Tax Assessment Act 1936.

In terms of similar alternatives to achieve the same outcome, the taxpayer contended that the underlying transactions were implemented with the aim of moving retained earnings of a company into a trust. At first instance, the primary judge considered that an ordinary commercial transaction to move retained earnings from IP Co to IP Trust (which owned the shares in IP Co) would be for IP Co to pay a dividend to the IP Trust, although that would obviously have a taxation impact.

Tax planning vs Aggressive tax planning

Taxpayers have the right to arrange their financial affairs within the intent of the tax law. On the other hand if the aim is to exploit loopholes in the tax system through arrangements that may be legal but are in contradiction to the intent of the law (such as in the case of BBlood), this will attract ATO attention. Aggressive tax planning schemes generally have a sought-after tax advantage which outweighs whatever economic substance which may exist.

With any strategy or course of action taken, taxpayers and advisors alike should exercise caution and be prepared to justify (with evidence) that the effect is commercially reasonable. Contemporaneous records should be kept on file outlining the basis and purpose for undertaking a certain course of action and the effect to be achieved by that arrangement. If other possibilities or alternatives ways to achieve the same outcome were considered or canvassed and then discarded, then the reasons for not adopting these alternate arrangements should also be documented and retained.

In the context of trusts and managing s.100A risk, advisors need to be aware of ATO ruling TR 2022/4 and practical compliance guidance PCG 2022/2, including the record keeping requirements outlined therein.

Whose purpose?

There are a cluster of statutory anti-avoidance provisions in the income tax legislation to stop certain arrangements that would otherwise reduce a taxpayer’s tax liability. The majority of these provisions require that the scheme or arrangement be entered into for a purpose of tax avoidance (based on an objective assessment), although the level of purpose differs between provisions. For the general anti-avoidance provisions in Part IVA, the relevant purpose must be the dominant purpose (i.e., the most influential or prevailing purpose). For integrity measures dealing with the distribution of capital benefits or imputation benefits, the required purpose need not be the dominant purpose but must be for a more than incidental purpose of obtaining a tax benefit. For s.100A there is no requirement that the prescribed purpose be the sole or dominant purpose, rather as long as it can be established that a party to the arrangement has the requisite tax reduction purpose, s.100A(8) would be enlivened.

BBlood demonstrates that the Court is willing to consider the purpose of an advisor to a greater extent where the advisor is the architect of the arrangement. For example, the advisors in BBlood were also taking the strategy to other clients. Whether an advisor’s purpose will be taken into account in disputes regarding other anti-avoidance provisions that require a ‘purpose test’ to be met remains to be seen. It is worth noting in the context of penalty remission or s.109RB discretion, a tax agent’s actions may in some instances affect or hinder the successful outcome of such a request.

Like all tax disputes it is the taxpayer that bears the burden of proving that an assessment is excessive. For anti-avoidance provisions which apply a ‘purpose test’ the burden of proof would ordinarily be discharged by showing the purpose of a party entering into the arrangement, and the steps involved in that arrangement, are not tax driven. It is therefore important for taxpayers and advisors to maintain contemporaneous records which demonstrate the objectives that an arrangement was intended to achieve and how the steps undertaken achieved the stated objectives.

The author thanks Kay Kim for her contribution to this article.


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This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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