Part IVA: the general anti-avoidance rule in ATO disputes

Part IVA is the general anti-avoidance rule for Australian income tax. It lets the Commissioner cancel a tax benefit obtained under a scheme if, judged objectively against eight listed factors, it would be concluded that someone entered into or carried out the scheme for the dominant purpose of getting that benefit (Income Tax Assessment Act 1936 (ITAA 1936), Pt IVA).

When the ATO raises Part IVA, the dispute usually turns on three questions: what the scheme is, what would have happened without it, and what the objective facts say about purpose. The base penalty is generally 50% of the tax the scheme would have saved. We act in Part IVA reviews, audits and objections as part of our ATO audit and objection work.

What is Part IVA?

Part IVA is ss 177A–177R of ITAA 1936. Nothing else in ITAA 1936, the Income Tax Assessment Act 1997 (ITAA 1997) or the International Tax Agreements Act 1953 limits its operation (s 177B(1), read with the definition of "this Act" in s 6(1)), so an arrangement can comply with every specific rule and still be caught. Part IVA doesn't affect the farm management deposit rules (s 177B(2)). The general rule has four elements:

1. there is a scheme (s 177A),
2. a taxpayer has obtained, or would obtain, a tax benefit in connection with it (ss 177C, 177CB and 177D(3)),
3. having regard to eight factors, it would be concluded that a person entered into or carried out the scheme for the dominant purpose of enabling the taxpayer to get that benefit (s 177D), and
4. the Commissioner makes a determination cancelling the benefit (s 177F).

Part IVA also has targeted rules, such as those on dividend stripping (s 177E) and the diverted profits tax (ss 177H–177R).

In the 2023-24 Budget, the Government announced it would extend Part IVA to schemes that reduce Australian tax by accessing a lower withholding tax rate on income paid to foreign residents, and to schemes that obtain an Australian tax benefit even where the dominant purpose was to reduce foreign income tax. It said the change would apply to income years starting on or after 1 July 2024, including for schemes entered into earlier. That change was not law as at 1 October 2026 (ATO, Tax integrity – expanding the general anti-avoidance rule in the income tax law), so if an arrangement involves foreign residents or foreign tax, check its status.

Part IVA is not, by itself, an allegation of tax evasion. It is a civil rule that adjusts your tax, and the ATO says applying it is not a test of motives or a judgment on a taxpayer's ethics (PS LA 2005/24 para 8).

What counts as a scheme?

"Scheme" is defined widely: any agreement, arrangement, understanding, promise or undertaking, whether or not enforceable, and any scheme, plan, proposal, action, course of action or course of conduct, including a unilateral one (s 177A(1), (3)). The purpose test can be applied to any part of a scheme (s 177D(1)).

The ATO often frames the scheme more than one way, such as a whole restructure and a single step within it. Each version needs an answer, because a different scheme can mean a different tax benefit and purpose.

What is a tax benefit under Part IVA?

A tax benefit is measured against what would have happened without the scheme. Typically it is an amount left out of assessable income that would have been, or might reasonably be expected to have been, included; a deduction that otherwise wouldn't have been allowable; or a capital loss that otherwise wouldn't have been incurred. Some tax offsets and withholding tax are also covered (s 177C(1)).

The alternative postulate (s 177CB)

Section 177CB sets out two bases for this comparison, often called the counterfactual or alternative postulate:

• "Would have" (s 177CB(2)): only the events and circumstances that actually happened, with the scheme taken out.
• "Might reasonably be expected" (s 177CB(3)–(4)): a reasonable alternative to the scheme, judged with particular regard to the scheme's substance and its non-tax results for the taxpayer, and disregarding any income tax result of the alternative.

In a case decided before s 177CB was added, the High Court said a reasonable expectation needs more than a possibility: it is a prediction of what would have happened, reliable enough to be regarded as reasonable (Federal Commissioner of Taxation v Peabody [1994] HCA 43 at [31]).

This is often where Part IVA disputes are decided. If the ATO's alternative is not a reasonable alternative to the scheme, or the realistic alternatives would have had the same tax result, there may be no tax benefit. Tax results that flow from an election the law expressly provides are generally excluded, unless the scheme was carried out to create the circumstances for the election (s 177C(2)).

What is the dominant purpose test in Part IVA?

Part IVA applies if, having regard to the eight matters in s 177D(2), it would be concluded that a person who entered into or carried out the scheme or any part of it did so for the purpose of enabling the taxpayer to obtain a tax benefit (s 177D(1)). That must be the sole purpose or, if there are two or more purposes, the dominant one (s 177A(5)).

• "Dominant" means the ruling, prevailing or most influential purpose (Federal Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34).
• A commercial objective doesn't take a scheme outside Part IVA. A scheme can be caught even though it also advances a wider commercial objective, although having a tax objective doesn't by itself make tax the dominant purpose (Commissioner of Taxation v Hart [2004] HCA 26 at [16]).
• The test is objective, and the purpose need not be yours. It is drawn from the eight factors, not from what anyone says they intended. The person whose purpose counts need not be the taxpayer: it can be anyone who entered into or carried out the scheme or part of it, such as a related entity or an adviser (s 177D(1)).

The eight factors (s 177D(2))

1. the manner in which the scheme was entered into or carried out,
2. its form and substance,
3. when it was entered into and how long it was carried out,
4. the tax result it would achieve but for Part IVA,
5. any change in the taxpayer's financial position,
6. any change in the financial position of people with a business, family or other connection to the taxpayer,
7. any other consequence for the taxpayer or those people, and
8. the nature of the connection between them.

No single factor decides it. Steps that add cost without commercial change, timing tied to a tax deadline, or money that ends up back with the same people tend to point towards a tax purpose. A real non-tax result that the steps achieved tends to point the other way.

What happens if Part IVA applies?

The Commissioner may make a determination cancelling the tax benefit, for example by including an amount in assessable income or disallowing a deduction, and then gives effect to it, usually by amending your assessment (s 177F(1)).

• Compensating adjustments. The Commissioner may also make adjustments where fair and reasonable, for example so the same amount isn't taxed twice. You can ask for one in writing and object to the decision on your request (s 177F(3), (5)–(7)). The usual amendment time limits don't stop an amendment that gives effect to one (s 177G).
• A longer amendment period. The 2-year period for individuals and small and medium businesses doesn't apply if it is reasonable to conclude that someone entered into or carried out a scheme for the sole or dominant purpose of the taxpayer getting a scheme benefit. The ATO generally has 4 years after the day it gave notice of the assessment instead, or no limit if it considers there has been fraud or evasion (ITAA 1936 s 170(1) items 1–5). See how far back the ATO can audit you.
• Interest. Shortfall interest charge runs on the extra tax from the day tax under the original assessment was due until the day before the ATO gives notice of the amended assessment (Taxation Administration Act 1953 (TAA), Sch 1 s 280-100). General interest charge then applies to anything unpaid after it falls due (ITAA 1997 s 5-15). Neither charge is deductible for income years starting on or after 1 July 2025 (ITAA 1997 s 26-5(1A)). The ATO can remit shortfall interest charge where it considers it fair and reasonable (TAA Sch 1 s 280-160).

What penalties apply to Part IVA schemes?

You are liable to a scheme penalty if you would, apart from Part IVA, get a scheme benefit and it is reasonable to conclude that an entity entered into or carried out the scheme, or part of it, with the sole or dominant purpose of that entity or another entity getting a scheme benefit (TAA Sch 1 s 284-145(1)).

Situation	Base penalty amount
Part IVA applies	50% of the scheme shortfall amount (s 284-160(1)(a))
Part IVA applies, but it was reasonably arguable that it didn't	25% (s 284-160(1)(b))
For comparison: an ordinary shortfall from failing to take reasonable care	25% (s 284-90(1) item 3)

The base penalty amount is then:

• reduced to the extent you followed ATO advice, general administrative practice or an approved ATO publication (s 284-224),
• reduced by 80% for a voluntary disclosure in the approved form before the ATO tells you it will examine your affairs (or before an earlier date the ATO has publicly set for disclosures about that kind of scheme), or by 20% for one made afterwards that can reasonably be estimated to have saved it significant time or resources (s 284-225(1), (2), (4)), and
• increased by 20% if you took steps to stop the ATO finding out about the scheme shortfall, or had a scheme base penalty amount worked out for an earlier period (s 284-220(2)).

For a significant global entity, the resulting penalty is doubled if it isn't reasonably arguable that Part IVA doesn't apply (s 284-155(3)).

The Commissioner can remit all or part of a penalty (s 298-20), and ATO officers must take the GAAR Panel's advice into account in setting penalties (PS LA 2005/24 para 184). You can object to a penalty assessment (s 298-30(2)), and to a refusal to remit if more than 2 penalty units remains payable (s 298-20(3)). Because a reasonably arguable position halves the base penalty, it deserves its own submission. See ATO penalties and penalty remission.

How does the ATO raise Part IVA?

• Private rulings. ATO officers must consider Part IVA in a ruling application even if you haven't asked (PS LA 2005/24 para 9). See ATO private rulings.
• Audits. Before a determination is made, the matter must go to the ATO's Tax Counsel Network, usually before a position paper says Part IVA may apply (para 14). Your response to that paper is often the most important document in the dispute. See responding to an ATO position paper.
• Objections. Reversing a Part IVA decision on objection or in litigation needs prior referral to a Deputy Chief Tax Counsel or the Chief Tax Counsel (para 17).

What is the GAAR Panel?

The General Anti-Avoidance Rules Panel advises the ATO on applying Part IVA and the other anti-avoidance rules. Its members are business and professional people and senior ATO officers (PS LA 2005/24 paras 18, 24).

• It advises, it doesn't decide. The Panel has no statutory basis and doesn't find facts. The decision-maker isn't bound by its advice, but Part IVA generally isn't applied without it (paras 23, 25–26).
• Timing. A matter usually goes to the Panel after the position paper and your response (paras 28–29).
• Your submissions. You will usually be invited to make a written submission and address the Panel, generally with around 28 days' notice and the submission due 14 days before the meeting. Expect to deal with the tax benefit and the eight factors (paras 31, 37, 39).

The ATO has flagged PS LA 2005/24 as under review after several court decisions, so its guidance, including these procedures, may change.

How we respond when the ATO raises Part IVA

Part IVA disputes turn on evidence. We usually work through:

1. Pinning down the scheme. We ask the ATO to identify each scheme and tax benefit it relies on, and test whether the steps it lists really belong together.
2. Testing the counterfactual. We work out, with evidence, what the taxpayer would realistically have done instead. For example, suppose a family group restructures so that $500,000 of profit goes to a related entity with carried-forward losses, and the ATO says the profit would otherwise have been taxed in the operating company. The question is whether that is a reasonable alternative, given the restructure's substance and non-tax results.
3. Commercial evidence on the eight factors. Because the test is objective, statements about intention carry limited weight on their own. Documents from the time showing the non-tax reasons, and that the steps achieved them, matter more.
4. Penalties and adjustments. Whether the position was reasonably arguable, any reduction or remission, and compensating adjustments.
5. Planning for the objection. In the Administrative Review Tribunal or the Federal Court, you must prove the assessment is excessive or otherwise incorrect and what it should have been, and you are generally limited to the grounds in your objection (TAA ss 14ZZK, 14ZZO), so the objection must address each element. Time limits are strict. An objection against an amended assessment is generally due by the later of 60 days after notice of it and 2 or 4 years after notice of the original assessment (TAA s 14ZW, with a request to accept a late objection possible under s 14ZW(2)). An ART application or Federal Court appeal is generally due within 60 days after notice of the objection decision (ss 14ZZC, 14ZZN). See ATO objections.

Part IVA alongside section 100A and other integrity rules

The ATO often runs Part IVA as an alternative to a specific rule, such as section 100A in trust reviews or the personal services income rules. Each has different elements and penalty consequences, and each needs an answer.

Next step

Send us the ATO's letters, including any position paper or notice that Part IVA is being considered, the documents for the arrangement (agreements, resolutions and any advice or board papers from the time), and a short timeline of what was done and why. In a first call we'll identify the scheme and tax benefit the ATO relies on, when your response or GAAR Panel submission is due and where the evidence needs work, and we'll work alongside your accountant from there.