Tax Anti-Avoidance Law in Australia and the United States

Abstract

In both Australia and the U.S., the tax anti-avoidance law has evolved to include two common doctrinal components. One component requires evidence of taxpayers’ tax avoidance purpose. The other component protects transactions clearly contemplated by the tax statute against charges of tax avoidance. The two bodies of law usually get to the same answer. Transactions involving loss generators, income assignment, and foreign tax credit generators illustrate this similarity.

But the two bodies of law sometimes arrive at different answers. This is because important but subtle doctrinal differences also exist. Australian law conceives of a tax avoidance transaction as a contrived, tax-motivated Plan B departure from the counterfactual of a more normal, Plan A course of action. Australia’s Part IVA has been applied to invalidate a planning step that is part of a larger, business-motivated merger transaction. In contrast, tax planning steps that are part of business-motivated merger and acquisition transactions generally are not vulnerable under U.S. law.

In Australia, tax anti-avoidance law is found in a self-contained portion of the national tax statute. In the U.S., tax anti-avoidance law is a judicially created group of doctrines with a minor statutory gloss. One might expect that the statutory nature of Australian tax anti-avoidance law means that it is more rule-bound, meaning that it provides more answers ex ante, relative to U.S. law. Not so. Both bodies of law are standards, even though one is found in a statute and the other in case law. Thus, both depend on future decision makers to determine whether a transaction violates the anti-avoidance standard. And in each country, the future decision makers who have the most influence over the development of anti-avoidance law are the same group: tax administrators. In both countries, tax administrators exercise their authority most directly by selecting cases for audit and litigation. This discretion poses a greater risk of under enforcement, rather than over enforcement, in both jurisdictions.

Finally, in Australia’s parliamentary system, the tool of legislative change is more accessible than in the presidential system of government in the United States. In the U.S., the tool of administrative regulation is more powerful than in Australia. But recent history suggests that Australia uses the tool of statutory amendment more than the U.S. uses regulation to shape tax anti-avoidance law.

Keywords: Australia, United States, tax anti-avoidance, GAAR, Part IVA, 7701(o)

JEL Classification: K23, K33, K34