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The world according to GAAR


Australia’s current general anti-avoidance rule, which defines tax avoidance as a scheme entered into with the dominant purpose of obtaining a tax benefit, has been criticised for creating too much taxpayer uncertainty, with the main object of such criticism being the test to determine the taxpayer’s dominant purpose. To determine whether the taxpayer has such a dominant purpose, in principle the courts and the Commissioner of Taxation consider eight specific factors, although how much consideration is to be given to each factor is left to the court’s determination. Based on a sample of 95 cases, this paper uses logistic regression to infer the direction and impact of these factors, as well as additional issues such as whether the scheme resulted in a tax benefit, on the probability of an outcome favouring the Commissioner.

The suggestive inferences should be extremely useful to litigants within Australia’s taxation system and in those jurisdictions considering implementing a general anti-avoidance rule. The inferences also cast a spotlight on deficiencies within Australia’s current general anti-avoidance rule. These deficiencies raise various policy issues including whether Part IVA is operating as intended, whether it is helping to create a more equitable tax system, and whether the government or the judiciary controls the boundaries of tax avoidance. The inferences also raise issues with respect to the administration of tax avoidance under the cooperative compliance model. In addition, the inferences highlight issues with the use of specific anti-avoidance rules instead of, or in concert with, a general anti-avoidance rule. These policy issues are discussed.

Author profiles:

Ira Horowitz
Ian works at the Management Information Systems, College of Business Administration, San Diego State University and Informations Systems and Operations.

Dr Robert Whait CTA
Rob is a Lecturer in Taxation, Centre for Accounting, Governance and Sustainability, School of Commerce, University of South Australia. Current at 14 December 2012 Click here to expand/collapse more articles by Robert Brenton Whait.

Geralds works at the Charles W. Lambden School of Accountancy, College of Business Administration, San Diego State University, San Diego, CA.
Click here to expand/collapse more articles by Gerald E. WHITTENBURG.
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