General anti-avoidance provisions
Australia has a general anti-avoidance regime. It is a powerful provision which overrides the rules in Australia’s tax treaties. It may apply in the following circumstances:
- there must be a "scheme" – the definition of "scheme" is defined broadly to include any agreement, arrangement, understanding, promise or undertaking;
- the taxpayer must have obtained a "tax benefit" in connection with the "scheme" – whether the "scheme" gives rise to a "tax benefit" is generally determined by comparing the tax outcomes for the parties under the "scheme" with the tax outcomes for the parties under a reasonable alternative or counterfactual scenario. For these purposes, a "tax benefit" includes the exclusion of an amount of assessable income, access to additional deductions, the generation of capital losses, access to foreign income tax offsets, or an amount not being liable to withholding tax; and
- there must be a person or persons (who may or may not be the taxpayer) who entered into or carried out the identified "scheme" for the "dominant purpose" of enabling the taxpayer/s to obtain a "tax benefit" in connection with the "scheme" – this is determined by using an objective test which comprises of eight factors.
If the Commissioner of Taxation determines that the general anti-avoidance provisions apply to a "scheme", the Commissioner has the power to cancel the "tax benefit" obtained in connection with the "scheme. A taxpayer has the ability to dispute such a finding. This provision should be considered in all matters. However, in practice, this provision is rarely applied where a taxpayer has been properly advised.
Multinational anti-avoidance law (MAAL)
Further to the general anti-avoidance regime, in recent years, Australia has been proactive in introducing specific rules in response to the growing concerns regarding the tax practices of multinational corporations. These rules are consistent with the OECD Bases Erosion and Profit Shifting measures that many OECD countries ae applying. These include the MAAL and the diverted profits tax.
The MAAL is directed to arrangements where a foreign multinational that is a “significant global entity” seeks to avoid Australian tax by structuring a corporate group in a way that is designed to avoid the attribution of profits to a taxable presence in Australia.
An entity will generally be considered a "significant global entity" if it is:
- a global parent entity with A$1billion or more annual global income; or
- a member of a group of entities that are consolidated for accounting purposes and one of the members of the group is a global parent entity whose annual global income (determined on a consolidated basis) is A$1 billion or more.
One way they might do this is to have Australian customers enter into contracts with a foreign affiliate, with the Australian presence of the group being limited to a service company in Australia. If the MAAL applies, there is attribution of profit to a deemed Australian permanent establishment.
Australia has a powerful general anti-avoidance regime which overrides the rules in its tax treaties.
Diverted profits tax (DPT)
The primary objects of the DPT are to ensure that the tax paid by “significant global entities” properly reflects the economic substance of their activities in Australia, and profits are not diverted offshore through contrived arrangements. So, for example, the DPT could apply if there is an arrangement whereby profits are diverted to a jurisdiction with a corporate tax rate that is less than 80% of the Australian corporate tax rate of 30% (ie. less than 24%), even though the functions, assets and risks of the group’s business operations remain in Australia.
The rules are also designed to encourage significant global entities to provide sufficient information to the Commissioner to allow for the timely resolution of disputes.