IN THE next week or so the boardrooms of corporate Australia will be hit between the eyes with draft legislation designed to beef up the ATO’s core arsenal – its anti-avoidance law – after suffering some big courtroom defeats that cost it more than $1 billion in lost revenue.
The draft legislation, which is designed to amend Part IVA of the Tax Act, will be tough, retrospective and controversial, and it will be released as the ATO searches for a new boss after last month’s shock announcement that Michael D’Ascenzo would leave at the end of the year.
D’Ascenzo’s replacement is expected to be announced within weeks, with speculation running hot that the government will break with tradition and make an external appointment.
A few names rumoured to be in the mix include chairman of the Board of Taxation Chris Jordan, former head of Treasury Ken Henry and Inspector-General of taxation Ali Noroozi. It is also believed that Rona Mellor is being considered for what is one of the most important and high-pressured jobs in the country.
Mellor, a senior official at the Department of Agriculture Forestry and Fisheries with responsibility for the Biosecurity
Services Group after serving as deputy CEO of Medicare Australia, would be well placed to run the ATO as she worked there for 20 years before leaving in 2006.
The reality is the ATO has a strong culture and it would be hard for an outsider with no ATO experience to hit the ground running at a time when the federal government needs to raise money, particularly as its mining tax is shaping as a revenue-raising flop.
To put it into perspective, the latest financial results for the government’s chief revenue raiser, the ATO, reveal that it collected $301 billion in net tax, up 10.3 per cent from $273 billion in 2010-11, but 3.4 per cent below its 2011-12 budget forecast.
When the tax budget is below forecast it puts everything else out of kilter, which explains the flurry of announcements by the government designed to lift revenue. These include assigning the ATO another $390 million to help boost its revenue raising abilities; forcing big companies to bring forward their tax payments from quarterly to monthly to raise an estimated $8.3 billion over the next three years, and the introduction of a series of pieces of retrospective legislation to crack down on tax avoidance and plug loopholes.
The crackdown on big business is part of a global trend by governments to raise tax revenue, as the United States and eurozone debt crises squeeze government budgets.
Cranking up the scrutiny on big companies is a vote winner, particularly when it is aimed at companies that pay minimal tax, or whinge about the tax they are paying, such as multinationals engaging in elaborate transfer pricing rackets.
The decision to amend anti- avoidance law under Part IVA will have a profound impact on the ATO’s powers, and that of business. Part IVA is the ATO’s key weapon for fighting tax avoidance. However, after a string of losses in the courts, the ATO and the government decided that the 31-year-old law needed to be spruced up – fast.
The way Part IVA currently operates is there must be a transaction or scheme, such as a corporate restructure, that results in a tax benefit and the restructure was designed for the ”sole or dominant purpose” of getting a tax benefit. If these conditions are satisfied, then the ATO can make a determination to cancel the tax benefit.
In recent cases, including the James Hardie case, the argument was used that the company did not get a tax benefit, because without the transaction it would not have entered into an arrangement that attracted tax. In other words, it applied the ”do nothing” argument, which was accepted by the courts.
It followed a string of other defeats for the ATO in court cases over the past couple of years, including: Foster’s, which cost it $390 million; BHP Billiton, which cost $550 million in lost revenue; AXA Asia Pacific Holdings, which cost it $383 million; and Macquarie, which cost it $95 million.
To this end, the federal government put corporate Australia on notice in March that it planned to make changes that could impact any transaction with a tax consequence.
This means that anything from mergers and acquisitions, divestments, corporate restructures, capital raisings, private equity or expansion offshore, could be impacted by changes to the law.
Clayton Utz partner Dr Niv Tadmore said: ”Part IVA is the ATO’s chief anti-avoidance provision. It gives the ATO extensive powers … it was originally designed with two important safeguards: the tax benefit and dominant purpose tests. The reform is expected to neutralise the former … if you compare Part IVA to a video game, until 1 March you got to play with two lives and now you get only one.”
Tadmore said the ATO has lost many Part IV cases that it strongly believed it should have won. ”Once we have an upgraded Part IVA, the ATO will seek to identify and test the new boundaries,” he said.
With an extra $390 million in funding – which it will need to turn into $2.5 billion in extra revenue – more honed powers and a federal election looming next year, the Gillard government looks set to increasingly use the ATO, big business and billionaires to claw back its ratings in the polls.
This story Administrator ready to work first appeared on Nanjing Night Net.