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Episode 137 Buy Episode

Getting Down to Brass Tax: Understanding Asset Protection vs. Tax Avoidance

Law as stated: 18 November 2024 What is this? This episode was published and is accurate as at this date.
Dr. Mathew Leighton-Daly, lawyer, consultant, and academic at The University of Sydney, joins David to explore the fine line between asset protection and tax avoidance. Mathew breaks down the complexities of Australia’s general anti-avoidance rules and discusses how legal advisors can safeguard their clients' assets without triggering tax avoidance provisions.
Substantive Law Substantive Law
18 November 2024
Mathew Leighton-Daly
1 hour = 1 CPD point
How does it work?
What area(s) of law does this episode consider?Tax avoidance; tax minimisation; tax evasion; asset protection advice.
Why is this topic relevant?Working side-by-side with a client’s tax and/or financial adviser on a new deal or a new venture is remarkably common, and often, everyone’s responsibilities seem nicely partitioned – you’ll do the asset protection advice, and the tax advisor will look after the tax effectiveness and efficiency of the structure – but those lines can be blurred.

When might it be ethically incumbent on a lawyer to give advice on the tax consequences of a structure recommended for asset protection purposes? When might the tax adviser’s ‘law-heavy’ advice venture into unqualified legal practice? Our conversation today will touch on these blurred lines, and how important it is to have an effective interdisciplinary approach to advising clients when it comes to asset protection.

The introduction of the general anti-avoidance rules (GAAR) in Part IVA of the Income Tax Assessment Act 1936 (Cth) adds a layer of complexity for lawyers providing asset protection related advice. These rules were designed to prevent schemes that exploit tax loopholes, but they also create a fine line which legal advisors must navigate to ensure that their clients’ asset protection strategies do not inadvertently trigger tax avoidance provisions. This issue is especially relevant in the corporate and commercial law sectors, where asset protection is often intertwined with tax planning.

What legislation is considered in this episode?Income Tax Assessment Act 1936 (Cth) (‘1936 Act’)

Criminal Code Act 1995 (Cth)

Tax Agent Services Act 2009 (Cth) (‘TASA’)

What cases are considered in this episode?Inland Revenue Commissioners v Duke of Westminster [1936] AC 1

  • The Duke of Westminster lawfully minimised his tax burden by restructuring payments to his gardener through a covenant, making them tax-deductible. The court upheld this arrangement, affirming that taxpayers may legally structure their affairs to reduce taxes within the law’s limits. Despite objections from tax authorities, Lord Tomlin ruled that the Duke’s actions were legal, distinguishing lawful tax avoidance from tax evasion.

Newton v Federal Commissioner of Taxation [1958] UKPCHCA 1

  • The Privy Council introduced the concept of “ordinary family or commercial dealing” to differentiate lawful transactions from tax avoidance under Australia’s section 260 of the 1936 Act. Lord Denning emphasised examining a transaction’s effect to determine if it was aimed solely at tax avoidance. This principle, influencing the current anti-avoidance provisions, recognises legitimate dealings that do not trigger tax avoidance laws.

Hart v Commissioner of Taxation [2018] FCAFC 61

  • Mr. Hart’s law firm income had been distributed through a scheme to reduce tax. Justice Bromwich initially ruled that Part IVA clearly applied, with a 50% penalty under section 226 of the 1936 Act, and the Full Federal Court upheld this, finding no error in Bromwich’s reasoning. Mr. Hart’s inability to present a credible counterfactual led to the High Court denying special leave to hear the appeal.

Federal Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34

  • The High Court explored whether Part IVA of the 1936 Act could apply to a commercial scheme aimed at maximising tax benefits. For Part IVA to apply, a scheme must involve a “tax benefit” and be undertaken with a dominant purpose of securing that benefit. While legitimate commercial arrangements remain outside Part IVA’s scope, the Court clarified that tax-driven strategies – even if commercially advantageous – may fall within its anti-avoidance provisions.

Federal Commissioner of Taxation v Peabody [1994] HCA 43

  • In 1985, Terrence Peabody devised a complex financial arrangement involving his company, TEP Holdings, to buy out partner Mr. Kleinschmidt’s share in Pozzolanic, using creative financing and share restructuring to increase ownership and avoid taxes, ultimately valuing the company at $30 million, with his wife Mrs. Peabody later taxed $888,005 on trust income. The High Court found that the Commissioner’s discretion under section 177F(1) of the 1936 Act to cancel tax benefits is limited to those connected to schemes under Part IVA. The High Court upheld the Federal Court’s decision, finding that Mr. Peabody’s actions were commercially motivated, not aimed at providing Mrs. Peabody with a tax benefit, concluding she did not receive a tax benefit related to a Part IVA scheme.

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52

  • In 1999, Alphapharm imported flu vaccines via a sub-distribution agreement with Ebos, which contracted Toll for logistics without direct dealings with Alphapharm. After state health authorities rejected shipments due to improper temperature control, Alphapharm and Ebos sued Toll for negligence. The High Court ruled that Richard Thomson acted as Alphapharm’s agent, allowing Toll to enforce an exclusion clause in its contract, leading to a judgment in favour of Toll.

Australia and New Zealand Savings Bank Ltd v Commissioner of Taxation [1993] FCA 393

  • In 1986, a partnership agreement between banks led to investments in a unit trust, with funds sourced from a non-recourse loan. The partnership incurred interest charges and claimed losses, which were partially allowed by the Commissioner, leading to court proceedings over deductions and assessable income calculations for tax purposes. The court found that the nature of a transaction should be analysed based on the legal rights conferred. In the absence of claims that the transaction is a sham or the application of anti avoidance measures under Part IVA, then the court has to focus on the formal aspects of the transaction.

Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28

  • Minerva Financial Group reorganised in 2007 into a trust and corporate silo structure, distributing income to non-resident unit-holders to minimise withholding tax liabilities between 2012 and 2015. The Full Federal Court unanimously ruled that Minerva did not enter into any schemes with the dominant purpose of obtaining a tax benefit, thus rejecting the Commissioner’s claims. This case reinforces that obtaining a tax benefit alone does not equate to tax avoidance under Part IVA.

Mylan Australia Holding Pty Ltd v Commissioner of Taxation (No 2) [2024] FCA 253

  • In 2007, Mylan agreed to acquire Merck’s global generics business, establishing Mylan Australia and Alphapharm, funded by intercompany debt consistent with Australia’s thin capitalisation limits. The Federal Court ruled in favour of the taxpayer, concluding that Part IVA did not apply to Mylan’s loan arrangement, as MAHPL lacked the dominant purpose of obtaining a tax benefit through its structured borrowing and debt consolidation strategies. The Court also rejected the Commissioner’s counterfactual and double deduction claims.
What are the main points?
  • Asset protection is a broad field encompassing strategies to minimise risks in commercial and family dealings. It is cross-disciplinary practice that includes tax advice and management, which is not inherently legal but overlaps with legal measures in business and family matters.
  • There is confusion surrounding the definitions of tax planning, minimisation, avoidance, and evasion. The key distinction between tax evasion and the other practices is legality, with evasion involving criminal offences, while planning and minimisation are associated with strategies that are legal.
  • The GAAR and recent decisions of the Federal Court have reiterated that the test for determining tax liability is objective, and a taxpayer’s subjective intentions are deemed irrelevant under Part IVA.
  • Two fundamental inquiries need to be made in relation to Part IVA. The first is determining if there has been a tax benefit, followed by an assessment using the factors in section 177D of the 1936 Act.
  • There is a distinction between the “but for” test and the alternate postulate test in analysing tax benefits.
  • The distinction between asset protection and tax avoidance is often blurred, particularly for businesses that use company and trust structures.
  • Accountants, particularly those who are registered tax agents, are authorised under the TASA to provide tax-related legal advice, but their scope is limited and does not extend to complex legal matters that are not considered tax-related.
What are the practical takeaways?
  • Some lawful tax minimisation strategies include using companies or trust structures to reduce tax liabilities. For example, a sole trader paying high marginal tax rates may benefit from incorporating their business. Another strategy involves setting up a trust with a corporate trustee to allocate income to beneficiaries at the trustee’s discretion.
  • Lawyers providing asset protection advice without considering the tax implications for their clients may place themselves at risk of negligence claims.
  • Employers may prefer candidates with a Masters degree, especially in technical fields like tax and corporations. Joining relevant professional associations, such as the Tax Institute, can provide valuable resources and networking opportunities in specialised areas like tax law.
Show notesMathew Leighton-Daly, ‘Asset protection and tax avoidance’ (2024) 58(11) Taxation in Australia 615

Bloom, D. (2016) ‘Tax Avoidance – A View from the Dark Side’, Melbourne University Law Review 

The Tax Institute

NSW Young Lawyers Tax Committee

DT = David Turner; MLD = Mathew Leighton-Daly

00:00:00DT:Hello and welcome to Hearsay the Legal Podcast, a CPD podcast that allows Australian lawyers to earn their CPD points on the go and at a time that suits them. I’m your host, David Turner. Hearsay the Legal Podcast is proudly supported by Lext Australia. Lext’s mission is to improve user experiences in the law and legal services, and Hearsay the Legal Podcast is how we’re improving the experience of CPD.

Working side by side with a client’s tax or financial advisor on a new deal or a new venture is remarkably common and often everyone’s responsibilities on the deal seem nicely partitioned. You’ll do the asset protection advice and the tax advisor will look after the tax effectiveness and efficiency of the structure.

But as our guest today will tell us, those lines can be blurred. When might it be ethically incumbent on a lawyer to give advice on the tax consequences of the structure recommended for asset protection purposes? When might the tax advisor’s “law heavy advice” venture into unqualified legal practice? Our conversation today will touch on those blurred lines and how important it is to have an effective interdisciplinary approach to advising clients when it comes to asset protection.

The introduction of the General Anti Avoidance Rules, what we’ll be calling the GAAR, in Part IVA of the Income Tax Assessment Act 1936 (Cth), what we’ll be calling the “1936 Act”, adds a layer of complexity for lawyers providing asset protection related advice. These rules are designed to prevent schemes that exploit tax loopholes, but they also create a fine line that legal advisors have to navigate to ensure that their clients’ asset protection strategies don’t inadvertently trigger these tax avoidance provisions. The issue can be especially relevant in the corporate and commercial sectors where asset protection is often intertwined with tax planning.

In our discussion today we’ll be delving into how and when asset protection advice can cross over into tax avoidance and we’ll explore the nuances of the GAAR, the importance of what’s called the ‘dominant purpose test’ – and I suppose whether it should really be called that – and how legal advisors can protect their clients while remaining compliant with tax laws.

To guide us through all these issues today, Dr. Mathew Leighton-Daly, an experienced lawyer and consultant, practicing in the areas of corporate, commercial, and taxation law. Having built a wealth of knowledge from both practice and theory, Matthew is an invaluable commentator on the complexities of asset protection and tax avoidance.

Mathew, thank you so much for joining me on Hearsay.

00:02:28MLD:David, thank you for the invite.
00:02:29DT:Now, I’m excited to get into this topic. As a commercial lawyer myself, who’s worked with a lot of accountants on new corporate structures, new asset protection structures in my time, I’m really interested to learn what kind of mistakes I’ve been making all these years. But before we get into that, I wanted to find out a little bit about your background in the legal industry, how you got to the work you do today, both in your consulting work and your private practice work and your academic work.
00:02:51MLD:Sure. Well, I developed an interest in corporations and tax law as a Juris Doctor student. And in particular, I did tax as an elective and I didn’t want to do it. I just did it because I didn’t have a choice, I guess.
00:03:07DT:A not so elective, elective.
00:03:09MLD:Yeah, you know, I had a limited number of choices, but I loved it and I won the prize. There was a Tax Institute of Australia prize and I won that. I think I got 96% or something for the subject and…
00:03:18DT:Not bad.
00:03:19MLD:Ever since then, I’ve been interested in taxation law, corporate law and regulatory enforcement. So when I graduated, I secured a position at ASIC, the Australian Securities and Investments Commission, as a graduate and then lawyer, and ended up in the Enforcement Directorate. So I was investigating white collar crime, you might say corporate crime, and engaging in litigation to the extent ASIC was conducting, say, civil pecuniary penalty proceedings. I was doing that in Brisbane. I sat the bar exams, not expecting to pass the first time I did and wound up at the New South Wales bar. Initially, ground floor Wentworth Chambers, which was a heavy tax floor, and then, what was the 16th floor, Wardell Chambers, which was a very good white collar crime floor. Whilst at the private bar, I was doing a lot of tax controversy work and also a PhD at Atax at UNSW. And at some point, my body strenuously objected to my work ethic, and I now have to maintain some semblance of work life balance as part of my treatment plan, literally. So that was a big driver in doing what I’m doing now, which is a combination of what you might call management consulting and traditional legal practice. But, whatever happened with my health in the end perhaps was fortuitous because I genuinely love the diversity that comes with what I’m doing now. So I have a practicing certificate issued by the Law Society, but a lot of the work I do, I think it is more management consulting work, and I might give advice to professional services firms, for example, as well as law firms or directly to small to medium sized enterprises or high net worth individuals. So there’s real diversity there along with some academic stuff. And yeah, I guess that’s how I ended up where I am now.
00:05:20DT:Yeah, we were just talking about it before we started recording actually.  As a fellow ex barrister, the diversity and range of work that you can do as a solicitor in private practice, especially with some other activities around that practice, it’s certainly, I think more accepted in the profession as a solicitor than it is as a barrister, and I think a little easier to interweave and synthesise into work as a solicitor. Yeah, the level of diversity and range of work that you can do on this side of the profession. Certainly I love it, and it sounds like you do too. Alright, let’s get into our topic for today. We’re talking about asset protection advice – how that might interact with or even offend the general anti avoidance provisions in the 1936 Act. Now, asset protection, this is one of these terms that you see in engagement letters all the time. You’ve engaged us to advise on your corporate structure and consider asset protection and other objectives, but we might not think too deeply about what we mean when we use those terms. Let’s start by defining some of the terms we’re going to use today. What is asset protection to your mind, Matthew?
00:06:23MLD:Asset protection is more general, perhaps, than I realised before I had a look at it in scholarly contexts. I understand asset protection refers to the field of commercial and family dealings aimed at minimising business and political risks. That’s pretty broad. It’s cross disciplinary. Obviously, it includes legal services, but I think it also includes accounting and financial advice. So, for example, insurance is an asset protection measure and a very important one. That’s not what I expect to be talking to you about today. I think we’ll be talking about the legal measures or the commercial and family dealings, which overlap with tax advice, in particular, but yeah, it’s not inherently legal. It’s inherently cross-disciplinary. So too, I think is tax. So similarly on the tax side, we’ve got traditional legal practice and tax agent practice or what has colloquially been referred to as the statutory tax profession. That is the tax agent status granted pursuant to the TASA, Tax Agent Services Act. So, asset protection, I guess, is a form of risk management in relation to family and business dealings.
00:07:40DT:Yeah. So, I suppose when a lot of our listeners think of the asset protection purpose that’s described in an engagement letter or something like that, they probably are thinking about the insolvency risk, the sort of, the claims of creditors – especially unsecured creditors – the potential for litigation, adverse awards of damages or costs… But you’re right, there are so many other factors that come into play there. What may happen to those assets in a relationship breakdown? What may happen to those assets with a government expropriation of the property? And you’re right, there is an interdisciplinary relationship there as there is with tax. And in a moment, we’ll talk about just how difficult it is to separate the roles of – as you described it – the statutory tax profession, the financial advisor, and the lawyer. I just wanted to define one other set of terms because I think there’s a lot of misconception around this. Today, we’re going to be using the terms tax avoidance, tax evasion, and tax minimisation. Now, I think it’s sometimes incorrectly said by some people that tax evasion is the illegal one and tax avoidance is the lawful one. And sometimes there’s a term used, which I think I first heard on The Simpsons, which is ‘tax avoision’, the kind of behaviour that you can’t quite categorise as either evasion or avoidance. In fact, that’s not quite right, given the introduction of the GAAR.
00:08:58MLD:Yeah, look, I think there’s more controversy around the terms or the definitions of tax planning or minimisation, tax avoidance, and tax evasion than there should be. And I think the GAAR is partly responsible for that. In relation to evasion as distinct from avoidance and minimisation, I think there is a clear line there – albeit one that can be difficult to ascertain in practice or in a given matter – but the line is legality. So, if someone advising a taxpayer is giving advice that is aiding and abetting a criminal offence, or if the taxpayer is committing a criminal offence, you’re in the realm of evasion. It’s illegal, and to that extent, I think we can easily demarcate evasion from planning, minimisation, and/or avoidance.
00:09:48DT:Yeah, we’re talking there about fraudulent schemes, schemes that misrepresent the true state of affairs… Schemes that, as you say, are illegal in the sense that they are criminal conduct.
00:09:58MLD:Yes, and I think importantly, referable to an offence. So, sometimes I’ve seen in the course of my professional practice, evasion being thrown around a little too readily. I think evasion is distinct from avoidance on the basis of an illegality and that means in turn, it has to be referable to a criminal offence. So what are the relevant criminal offences? Well, if we’re looking at federal taxes, we’re looking at the Criminal Code Act, the Schedule of the Criminal Code, and we’ve got general dishonesty offences, we have obtaining a financial benefit by deception – they are your classic fraud offences, as well as conspiracy to defraud. So they’re your kind of classic, tax evasion criminal offences.

TIP: So Mathew just mentioned that tax evasion can constitute a criminal offence or criminal offences as set out in the Criminal Code. Matthew noted the offence of obtaining property or financial benefits through deception. That’s section 134 of the Commonwealth Criminal Code. We also have section 134.1 of the Commonwealth Criminal Code which prohibits someone dishonestly taking property belonging to the Commonwealth – that includes taxes owed to the ATO. And we have section 134.2 which prohibits instances where a person gains a financial advantage from a Commonwealth entity by being dishonest, such as providing false or misleading information on a tax return. These charges carry a maximum penalty of up to 10 years in prison.

If we can’t attribute a taxpayer’s behaviour to one of those offences, then I guess we’re not in that evasion realm. We’re possibly in the avoidance realm, but yeah, I think it’s the legality, or lack thereof, that demarcates minimisation and avoidance from evasion. Yeah, so a clear line to that extent, at least in theory. Planning, minimisation and avoidance – not so straightforward, to the extent that evasion is straightforward. There’s an old case, and it’s still quoted, and I think it still has work to do, at least at common law, known as the Duke of Westminster case. And in this case, Lord Tomlin famously said “every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax” Now that’s, at common law I guess, that is planning, that is minimisation, that is not avoidance.

TIP: So we’ve been talking about an English case here, the Duke of Westminster, it’s still good law in Australia, and the full citation for that one is Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1. Now in that case, the Duke of Westminster figured out a way to reduce his tax liability. Instead of continuing to pay his gardener a traditional wage from his post tax income, he stopped paying the gardener a regular salary and set up what was called in those days a covenant. And this covenant allowed him to pay the gardener the same amount as he was paying him in wages at specified intervals, but under the tax laws at the time, those payments were tax deductible for the Duke. As a result, the Duke lowered both his taxable income and his liability for income tax and other taxes. The Inland Revenue Service challenged this arrangement, arguing it was a form of tax evasion masked as legal tax avoidance, but the court sided with the Duke. The Judge Lord Tomlin famously ruled that taxpayers are entitled to structure their affairs in a way that minimises their tax burden, as long as it remains within the bounds of the law. He emphasised that even if the tax authorities or fellow taxpayers disapproved, the Duke had done nothing illegal. This ruling became a landmark decision in tax law, reinforcing the distinction between legal tax avoidance and illegal tax evasion, and it continues to influence discussions about tax strategies to this day. Although, the anti avoidance provisions have substantially muddied the waters about the continuing applicability of the Duke of Westminster’s case.

Unfortunately, with the enactment of provisions such as the GAAR – as you’ve defined it, David – I think the distinction has been blurred. And even in the explanatory materials to the bill that is now enacted in the form of Part IVA – I think it was John Howard who said he was acutely aware that views on tax avoidance differ. So, it started off with – at least a common law – this distinction between planning or minimisation and avoidance. The GAAR, I think, has blurred it.

00:14:47DT:Yeah, and that’s because Part IVA does not make this conduct criminal. It renders ineffective the structuring might fall into the category of tax avoidance.
00:15:01MLD:Yeah. It’s quirky, I guess, because it doesn’t render it illegal, as you say, and it doesn’t even operate automatically. It entitles the Commissioner of Taxation to a discretion to cancel a tax benefit. So I don’t think it has clarified things. I mean, the legislation itself and the provisions – which I think we’ll go through later – they give us a roadmap to follow, but I don’t think we have the traditional distinction between tax minimisation or planning and avoidance that we had at least at common law.
00:15:36DT:And it’s important to understand the kind of policy genesis of legislation like this. We were talking about this just before the show, in fact, that so far as I understand it, Part IVA was really directed to the loss of tax revenue from avoidance schemes orchestrated by large multinationals, large public entities that pay far less tax than you would expect having looked at their EBITDA. But the context in which you and I are now talking about it is the context of a solicitor, or a tax agent, or a tax advisor, giving advice to a SME, giving advice to a family business. Not really the intended target of these provisions, but one whose task has been made a lot more difficult as a result.
00:16:24MLD:Yes. Yes, I think that’s right. And some of the recent Part IVA litigation that culminated in the Federal Court of Australia has involved some pretty substantial transactions from multinationals. I mean, there are some general principles in there that we can ease out and apply in the context of asset protection, but I don’t think it’s something that has been explored as much as it ought to be because there is the obvious potential application of Part IVA or the GAAR to what are colloquially referred to as ‘asset protection related transactions’.
00:17:04DT:So let’s talk a little bit more about What a tax avoidance scheme under the GAAR is. As you say, if something is a tax avoidance scheme, then the commissioner has a discretion to cancel the tax benefit that the scheme creates. But what is a scheme? Because there’s a test set out in the provisions of Part IVA, and it’s called the ‘Dominant Purpose Test’. But, that is maybe a misnomer?
00:17:28MLD:Yeah, I think so. I think so, because, to the extent the legislation doesn’t, the cases have made it clear that the test is an objective one, and a taxpayer’s subjective intention in relation to a scheme to which Part IVA may apply is really irrelevant, and it advises subjective intention. Understanding, belief – that’s perhaps more relevant. But yeah, from the taxpayer’s point of view, their intention is absolutely irrelevant.
00:18:00DT:Yeah. The section we’re talking about here, on which I guess the whole architecture of the part turns, is section 177D.
00:18:06MLD:Yes.
00:18:07DT:Which effectively establishes a threshold test for obtaining a tax benefit. There’s a list of factors to have regard to, in considering whether or not the threshold is reached.

TIP: Okay, so we just talked about the objective factors that a decision maker has to have regard to in determining whether something is a scheme for the purpose of obtaining a tax benefit under section 177D. It’s subsection 2 of that section under the general anti avoidance regime. And for completeness, here are all of those factors listed out:

  • so, the first factor is the method by which the scheme was initiated or executed;
  • then the form and substance of the scheme; 
  • the timing of the scheme’s initiation and the duration for which it was implemented;
  • the outcome regarding the enforcement of this Act that the scheme would achieve if the part were not in effect – in other words, what would the result of the scheme be but for the general anti avoidance provisions?;
  • any changes in the financial status of the taxpayer resulting from or expected to result from or reasonably anticipated to result from the scheme;
  • any changes in the financial status of other individuals connected through business, family, or other relationships to the taxpayer;
  • any additional consequences for the taxpayer or for any of the related business, family, or other individuals resulting from the initiation or execution of the scheme;
  • and finally, the type of relationship, whether it’s a business relationship, family relationship or some other kind, between the taxpayer and those individuals that may also be affected by the scheme.

None of those factors are what either the advisers or the clients intended to achieve with the scheme, right?

00:19:35MLD:That’s absolutely right, yeah. And if I might go back a step, there’s really two fundamental inquiries that one has to make in relation to Part IVA. The first is whether there’s been a tax benefit, and that’s where we see references in the legislation and cases to alternative postulates. We have to look at whether there was a tax benefit obtained or occasioned before we then go to that next step of looking at 177D. But you’re absolutely right, David, in that the inquiry there is objective and has to be undertaken by reference to those matters in subsection (2)(b), rather than looking back at some of the old cases like the Duke of Westminster or even Newton’s case, which is another old classic one, which referred to tax avoidance as being “blatant, artificial, or contrived”. I think those cases are still helpful, but there is really no substitute for going through those matters in s 177D(2).

TIP: We’ve also just mentioned Newton’s case. We’re going to continue to talk about Newton’s case throughout the episode, so it’s worth spending a bit of time understanding it now. The full citation is Newton v Federal Commissioner of Taxation 98 CLR 1. The Privy Council introduced the concept of ordinary family or commercial dealing in the context of tax avoidance, a principle that continues to influence Australian tax law. The case dealt with section 260 of the 1936 Income Tax Assessment Act, which was actually a precursor to Part IVA, the current general anti avoidance provisions. And although section 260 itself didn’t explicitly refer to what we call ordinary family or commercial dealings, the concept was established by the Privy Council in Newton’s case. Lord Denning in that case famously stated that to apply the section, one must focus on the arrangement’s effect, regardless of the motives behind it. If the transaction was implemented specifically to avoid tax, it would fall within the anti avoidance provision. But, if the transaction could be explained as part of an ordinary business or family dealing without being labeled as a tax avoidance scheme, then it wouldn’t trigger the provision. Lord Denning provided examples of what could be considered ordinary family or commercial dealings, like the transfer of shares with dividends attached, converting a private company into a non private company, or a father declaring a trust in favour of his wife and daughter – remember it was 1958, fairly gendered language in these cases. These examples illustrated situations where legitimate family or business transactions could occur without being classified as tax avoidance. Newton’s case is now embedded in section 100A of the Income Tax Assessment Act and it influences the interpretation of Australia’s general anti avoidance provisions to this day. Although, as Mathew has said, we no longer look for schemes that, in the words of Lord Denning, are “artificial, blatant, or contrived.”

00:22:27DT:We should just say for completeness – because we’ve talked around it for a moment – section 177D is about whether the scheme was entered into for the purpose of obtaining the tax benefit. As we’ve said, although that sounds like it would be a test where the intention of the parties – for what purpose did they enter into the scheme – might be relevant, the factors that the subsection (2)(b) invites us to consider, do not point to the subjective intentions of the parties. And so we’re really left with this idea of, well, you know, is it the purpose that you’d have to infer looking at all of these objective circumstances, rather than the subjective intention of what the advisors set out to achieve.
00:23:13MLD:Yeah, that’s right. That’s right. The taxpayer and or the advisor. And commerciality – that’s something that lawyers, accountants refer to in terms of justifying recommendations, advice… Commerciality is of itself of limited help because the overall commerciality is not relevant. So if there are steps along the way – so this is Hart, one of the seminal cases – if there are steps along the way that are uncommercial, under a framework that is commercial overall, you’re still in tax avoidance territory.
00:23:51DT:Yeah.
00:23:51MLD:Yeah, so it’s potentially a very broad application. Just bringing it back to asset protection, I don’t think it’s enough to say that a scheme – if I can use the words of the GAR – a scheme is commercial. I think we have to look at both the steps along the way, as well as the scheme overall, in order to consider potential application of Part IVA.
00:24:19DT:So I suppose we’ve been talking about the dominant purpose test, the factors that must be considered under section 177D(b) – those eight factors in determining whether or not the purpose of the scheme was to obtain a tax benefit… You raise an interesting point in a recent article, which is to say, well, you would think that a lawyer engaged to provide asset protection advice, who’s perhaps explicitly said, “I’m not providing any advice on consequences of this structure or the tax liabilities that might arise from this structure,” – you might think that in that circumstance, it couldn’t possibly be the case that the dominant purpose of that structure is to obtain a tax benefit because the advisor has said, “well, I’m not giving you any advice on that and the client has accepted and acted on that advice apparently without any regard to it.” But as we’ve been saying, the dominant purpose test might be a bit of a misnomer because that’s not necessarily how it’ll turn out.
00:25:16MLD:That’s right. I mean, it’s going to be considered objectively by reference to 177D of the ‘36 Act and the intention of everyone involved is not really relevant. I mean, it may be in the case of advisors – if you’ve got a promoter, for example, promoting a scheme, that’s a bit different – but it’s all very objective. And David, you mentioned my article – I consider three different situations. One is this phenomenon of non legally qualified asset protection advice. So if you’ve got someone who is an accountant giving advice on the legal effect of transactions, and you at some point seek to rely on that in the context of the possible application of the GAAR, I just don’t think it’s going to work because the advice is illegitimate. You’ve got non qualified advice. I mean, it’s potentially a criminal offense to give it in the first place.
00:26:16DT:Yeah. I think it’s section 10 in New South Wales – unqualified legal practice.
00:26:20MLD:But it’s just illegitimate, I mean, it’s not qualified. And then the situation, secondly, distinct asset protection advice – giving it without consideration of tax consequences – I mean, I think that’s very dangerous. I mean, if you’re not at least trying to disclaim the relevance of any tax legislation, federal or state, you know – and the state ones are important, you’ve got stamp duty, for example – there’s potential negligence and/or misconduct issues. And then yeah, the third situation – which is this idea of considering your asset protection and tax advice contemporaneously with a view to being able to offer solutions to a client’s problem, rather than part of a potential solution – I think that’s the preferable one.

TIP: Section 10 of the Legal Profession Uniform Law (“LPUL”) prohibits any entity from engaging in legal practice in New South Wales unless it’s a qualified entity. Equivalent provisions exist in the other uniform law states, and so too in the non-uniform law states, although there might not be section 10. The LPUL says that to engage in legal practice is to practice law or provide legal services, but doesn’t include policy work like developing and commenting on legal policy. Some cases have helped us to clarify what it means to engage in legal practice and to provide legal services. If someone performs actions typically done by a solicitor and does so in a way that suggests they are a solicitor, then it might be considered to be acting as one – the old ‘walks like a duck, and quacks like a duck’ test. Giving advice on the legal character and prospects of litigation, especially after reviewing evidence, clearly constitutes legal practice, as it implies that the person offering the advice is qualified to do it. A person who’s not a qualified legal practitioner will be deemed to be practicing law if they perform tasks restricted by law to those with legal training. Charging a fee for legal work can indicate engagement in legal practice, but isn’t necessarily a condition for such a finding. So, you don’t need to charge your clients in order to be held to be unlawfully engaging in legal practice. And finally, the cases indicate that the so-called core of legal practice is advising individuals on their specific legal situations and preparing documents that affect their legal rights that are tailored to their unique needs. The maximum penalty for engaging in legal practice without proper qualification is a fine of 250 penalty units, that’s about $28,000, imprisonment for up to two years, or both. So you can certainly see how, arguably, a tax advisor falls foul of these provisions when they advise on the specific legal rights of a particular individual or company or prepare documents that affect those specific legal rights when advising or preparing certain tax structures.

In terms of working through the GAAR, my professional observation is people just talk about the commerciality. And as we’ve discussed – and it was particularly Hart‘s case, I think, and Spotless Services before it, actually, now that I think of it, they both make the point that overall commerciality is not enough – you’ve got to look at the steps along the way. And similarly, there’s this common reference to Newton‘s case and the wording in that case – “blatant, artificial, and contrived.” That is often thrown around, you know, “well, this scheme is not ‘blatant, artificial and contrived.’” That’s not the test. That’s an old case. And although the explanatory memorandum accompanying the bill to introduce Part IVA describe the test in 177D as being similar to Newton’s case, I just think you have to look at 177D. And some of the other seminal cases – Peabody, I’ve mentioned Hart already – they talk about,  you must consider all eight factors there in 177D. It’s not relevant that every factor be proven in respect of every scheme. Indeed, it was held in Hart that the presence of one factor alone may be sufficient to constitute a dominant purpose, and the actual subjective purpose of any relevant person is not a relevant matter as we’ve discussed ad nauseum now.

00:30:20DT:Yeah, and I think you make a good point, right? The test in Newton’s case – well, it’s instructive in the sense that a scheme that is blatant and contrived is highly likely to offend section 177D – but that’s kind of the easy stuff, right? We’re not so concerned with the obvious results, but the difficult results that sit along the border.
00:30:39MLD:Yeah.
00:30:40DT:It’s a similar test, but it’s not the same. And where are the differences?
00:30:43MLD:Yeah, “blatant, artificial, and contrived” is really a conclusion.
00:30:47DT:Yeah, that’s right.
00:30:47MLD:That we might draw from having considered the matters in 177D, but I don’t think it’s that helpful in working out whether the GAAR is going to apply itself. The form and substance of the scheme – so this is 177D(2)(b) – that’s an interesting one. There’s an article by David Bloom of King’s Council, ‘Tax Avoidance – A View from the Dark Side,’ or similar. And Mr. Bloom points out that normally in commercial transactions, especially if you’re looking at deeds, it’s form that’s relevant. If we comply with the formalities of a deed, we will create a trust relationship – generally speaking – I mean, just speaking on the law of deeds and Toll v Alphapharm and those cases that say something’s got a signature on it, the party’s bound by it. When we look at Part IVA, we shift our focus to the form and substance of the scheme. But interestingly, if Part IVA doesn’t apply, we shift from the substance back to the form.
00:31:50DT:Yeah, that is interesting.
00:31:51MLD:So, yeah, I thought that was quite helpful in understanding a bit more deeply some of these provisions in 177D.

TIP: So Matthew just mentioned the article written by David Bloom KC, who was a QC at the time he wrote the article, called ‘Tax Avoidance – A View from the Dark Side.’ In that article, Bloom argued that Part IVA of the Income Tax Assessment Act is incompatible with the Duke of Westminster case, as illustrated in the Spotless Services case. Now in Spotless Services, the majority noted that while the Privy Council echoed Lord Tomlin’s statement that individuals are entitled to arrange their affairs to minimise tax liabilities, as was said in the Duke of Westminster, this principle holds no relevance in cases governed by the general anti avoidance provisions in Part IVA. Instead, Part IVA has to be treated as an integral part of the tax law, requiring consideration of both the form and substance of a transaction when assessing a party’s dominant purpose under Section 177D, basically arguing the Duke of Westminster no longer applies. Once it’s determined that Part IVA doesn’t apply, then there’s no justification for prioritising substance over form in tax assessments. This principle was reinforced in the case of Australia and New Zealand Savings Bank Ltd v Commissioner of Taxation [1993] FCA 393, where it was said that the nature of a transaction should be analysed based on the legal rights conferred. In the absence of claims that the transaction is a sham or the application of anti avoidance measures under Part IVA, then the court has to focus on the formal aspects of the transaction. So, while the substance can be considered when determining the applicability of Part IVA, once Part IVA is determined not to be applicable, the focus should then shift to the form of the transaction rather than the substance. We’ll leave a link to David Bloom KC’s article in the show notes.

I guess another important one by reference to some of the recent cases – and there are a couple of Federal Court cases which I didn’t touch upon in my article, partly because of the timing and partly on reflection, because they are more to do with very large corporate restructures – I made a reference earlier to this ‘alternate postulate’ test, which is used in relation to the analysis of any tax benefit. It’s important that we understand that that is not the same thing as a ‘but for’ test. Now, previously it was considered to be a ‘but for’ test. So Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28 – that, I think, confirms that we’re not looking at a ‘but for’ test in relation to the operation of Part IVA. And it’s significant because I was looking at a precedent letter for CPA Australia – which they recommend to their members to send out to advise a client about Part IVA risks – and they refer to a ‘but for’ test.

00:34:37DT:That’s interesting.
00:34:37MLD:I’m guessing the letter predates… There are actually two cases. There’s Minerva and the other one is Mylan. So two Ms, both Federal Court cases haven’t quite made it to the High Court. I’m not sure if they will or not, but I mean, ‘but for’ is a test that we’re familiar with as lawyers. We’re not looking at that in relation to Part IVA tax benefits. We’re looking at ‘alternate postulate’ and ‘sole’ or ‘dominant purpose.’
00:35:07DT:Yeah, and when you say “alternate postulate” – distinguish that from a ‘but for’ test for me a little bit.
00:35:13MLD:So, I guess to distinguish a ‘but for’ test from the test required by Part IVA, the Mylan case is very helpful. So Part IVA, according to Mylan, doesn’t pose a ‘but for’ test. The dominant purpose cannot be drawn merely because as a matter of objective fact it is to be included but for the relevant tax benefit. Another cause of action would have been adopted. Justice Button, in the Federal Court in that case, reiterated that for the purposes of the dominant purpose inquiry, it is not enough to merely point to the fact that less tax has been paid under the former transaction that was ultimately selected or executed. I should say there too that there’s really two inquiries here and we need to be careful not to conflate them. There’s this issue of tax benefit, and then there’s the issue of whether it was a sole or dominant purpose.
00:36:19DT:Yes, that’s right. And what we’re really talking about here is the existence of a tax benefit.
00:36:23MLD:Yes. And so in Mylan, the taxpayer went down on tax benefit, but they got up on sole or dominant purpose.
00:36:31DT:On it not being a dominant purpose. Yeah, that’s a good point. So when we’re talking about ‘sole or dominant purpose’ is to obtain the tax benefit, that’s when we’re talking about these eight factors, all of which must be considered, but need not all be present when we’re talking about alternative postulates or the inappropriateness of a but for test. We’re saying it’s not enough to say, “well, if you had done something else, you would have paid more tax.” We need to consider, I guess, multiple scenarios for the tax that might’ve been payable with or without the scheme.
00:36:59MLD:Yeah, I think that’s right.
00:37:01DT:Before we move off our discussion of how the GAAR works, and then talk to how we might interact with it when giving asset protection advice, it might just be helpful to give some simple examples of the three categories that we’ve described. No doubt you’ll have seen them in your work both at the bar, and as a consultant, and as a solicitor. Evasion; the kind of very clear criminal conduct. Avoidance; which maybe is not illegal but which has the dominant purpose of obtaining the tax benefit and is thus liable to be cancelled. And lawful minimisation. Maybe let’s start with evasion. Give us as juicy an example as you can think of.
00:37:38MLD:Yeah, I think I can give you some examples that have been litigated and in relation to which appeal periods have expired now. Look, some of them are very sophisticated and some of them are very unsophisticated. Your classic tax evasion, or tax crime, or tax fraud, can just simply involve an understatement of assessable income or an overstatement of allowable deductions. And it’s as simple as that. Simple example, again, a taxpayer with a cash business – which is becoming less and less so these days – but just again, by reference to classic examples of tax crime, a taxpayer will have a cash business and they’ll complete their income tax return and just understate the amount of income. That is a simple example of tax crime, tax evasion, tax fraud. A more sophisticated example is where someone can manage to domicile some of their assets in a foreign jurisdiction or in someone else’s name and then purport to loan the money or assets back, and do so in a way that is effectively sham and doesn’t really have the attributes, at law, of a traditional loan. That sort of transaction is perhaps a bit more of a sophisticated example of a tax crime. So yeah, they’re both examples of criminal behaviour. An example of avoidance – and again, I quote the Honourable Mr. John Howard here about how views differ on exactly what avoidance might be – this is an example from one of the explanatory memorandums to what is now Part IVA; a taxpayer borrows money to acquire both a family home and a property to use in their business. The taxpayer enters into a borrowing arrangement whereby the repayments are applied exclusively to the family home, in other words the capital is going to the home, and the deductible interest payments are used for the business property borrowing. So that kind of attribution of capital to a family home and interest payments to the business, that’s a recognised example, I think, of tax avoidance for the purposes of the general anti avoidance provision. We’re not talking about specific anti avoidance provisions today, but because we’re talking about asset protection, I thought I’d just give you this example too. Suppose a family trust allows a distribution of discretionary income to family members. Distributing to minors is subject to a specific anti avoidance rule. Once you get over certain prescribed thresholds, you’re going to have that income taxed in the hands of the child at the maximum marginal rate.
00:40:39DT:There was, for a brief period, a lot of people under 18 earning $18,000 a year.
00:40:44MLD:Yeah, that’s right.
00:40:45DT:But I think it’s a good example because it demonstrates no one’s going to go to prison if you distribute money under discretionary trust to the parties who have a lower tax bracket. and therefore pay less income tax on the money distributed. There is an enforcement priority for the ATO to make sure that those distributions are genuinely occurring, and not just unpaid prison entitlements that are sitting there on paper. But the specific anti avoidance rule around ensuring that minors are paying tax at the highest marginal rate, to ensure that that distribution to infant children isn’t being done for tax avoidance purposes, is a great example of a kind of non criminal tax avoidance rule.

TIP: So the distinction between tax avoidance and tax evasion has never been straightforward, but it was a little easier to understand in the past. Historically, ‘tax avoidance’ has been seen as a legally permissible strategy, meaning individuals could minimise their tax liabilities legally, while ‘tax evasion’ was the term applied to illegal activity. But in recent years, the line between these two concepts has been blurred, mainly by the application of provisions like Part IVA. The confusion now persists to such an extent that some tax officials now prefer the terms ‘compliant’ and ‘non compliant’, instead of distinguishing between avoidance and evasion. In the past, tax avoidance referred to taxpayers using legitimate methods or schemes to reduce their tax obligations, without implying any intentional wrongdoing, like in the Duke of Westminster’s case. It simply meant paying less tax than you would otherwise be required to. This practice is also often called tax minimisation, and it represents the ultimate goal of tax planning. Tax planning in its most benign sense can be viewed as taking advantage of tax concessions in line with the Parliament’s intentions. Most investors, shareholders in companies, owners of investment property likely engage in some form of tax planning even if they’re unaware of it. 

A really simple example is the use of discretionary family trusts as vehicles for holding investment properties. Over the past 40 years, since the introduction of the GAAR, tax avoidance has taken on a negative connotation. It’s now difficult to apply the term tax avoidance to legitimate and lawful strategies employed by taxpayers because of the general anti avoidance provisions that make tax avoidance something avoidable. By contrast, tax evasion is always illegal. It involves culpable actions or omissions by the taxpayer, and it’s considered fraud, punishable under the Commonwealth Criminal Code. Tax evasion usually includes illegal practices like underreporting income, making false statements on your tax return, or overstating deductions or exemptions to avoid paying taxes. Individuals caught evading taxes can receive significant penalties like hefty fines or in serious cases custodial sentences. 

In 1981, John Howard spoke to Parliament’s intention for the function of the general anti avoidance provisions in the second reading speech for the act that introduced the provision. Now in that speech, Mr. Howard said, I quote, “we’re acutely aware that the term tax avoidance means different things to different people. Reasonable men and women are bound to differ on this crucial question and on the appropriate tests for determining what behaviour a general anti avoidance provision ought to prescribe.”

While John Howard further mentioned that the provisions should be limited to “blatant, artificial or contrived” arrangements, these terms didn’t make it into the statute and they’ve generally been overlooked by the courts in interpreting the anti avoidance provisions. Even with the intention of making the distinction between evasion and avoidance clearer, we don’t really have a clear answer to this question nearly 40 years on. 

Some of our listeners are probably thinking, “well, what can you do to lawfully minimise your tax?” Can you give us an example of a lawful tax minimisation strategy?

00:44:07MLD:Well, I don’t want to say here, it depends who you ask. I think some lawful tax minimisation strategies are the use of companies and/or trust structures or trust relationships. If a sole trader is paying more than the top rate of marginal tax, they may wish to consider carrying on their business if permitted via a corporate entity. That’s a very simple example of tax minimisation, and also asset protection. A slightly more sophisticated example would be the use of a trust with a corporate trustee, so that instead of the applicable marginal rate being payable by the company, the company acting as trustee will be allowing or facilitating a flow through via the trust to the beneficiaries of the trust, which can be allocated at the discretion of the trustee to minimise tax in the hands of the beneficiaries. I think they’re some straightforward and readily accepted examples of tax minimisation. And again, there is an overlap there, as you can see with asset protection.
00:45:19DT:Yeah, thank you for those examples. It does muddy the waters though, doesn’t it, the GAAR? In that, you could describe those widely accepted and widely used tax minimisation strategies. I mean, just about every asset holding structure I know of is a family trustee company that benefits from both franking credits on the dividends, but also the capital gains benefits that trusts enjoy. You could describe that decision as one primarily driven by the desire to reduce the tax payable – there are other benefits like asset protection, I suppose – but it does muddy the waters a little bit. There are a great many decisions that businesses and individuals make because they’re tax effective.
00:45:58MLD:Yeah, it’s hard and it is hard to separate them out. It’s the case that, as you say, I mean, once businesses get to a certain size, they’re going to incorporate. Now, it may even be impossible to work out whether, in many of the cases, they’re using company and or trust structures for protection or for tax or both, it’s a murky area. If I go back to the definitions of asset protection and tax avoidance, or even tax practice, I feel like there is overlap there. I mean, the definition articulated by Associate Professor David Chaikin at the University of Sydney on asset protection, includes protection from excess taxation. But as you said, David, I think at the outset, asset protection does have more of a focus on protection from unsecured creditors. Whereas tax advice, tax planning, tax minimisation is more concerned with preventing the liability from arising in the first place. So there’s overlap, but there’s some murkiness there.
00:47:02DT:Yeah, and even that idea of excess tax draws on that conception of the relationship between the Commissioner of Taxation and the taxpayer in that sort of Duke of Westminster lens of, “well, this is a bit of a cat and mouse game that we play. I’m entitled to play it in such a way that reduces my liability. You’re going to play it in such a way that maximises it and may the best man win.” Let’s talk now about asset protection and its interplay with the GAAR. In a recent publication, you talked a bit about how interdisciplinary asset protection advice can be in practice, and you talked a little bit about who’s really best placed to give asset protection advice. Now, you and I both know that small businesses around the country are going to solicitors for asset protection advice. They’re also going to their accountants. They might be going to the accountant they use as their tax agent for this advice. Let me ask this two ways; who’s best qualified to give asset protection advice and who’s qualified at all to give asset protection advice?
00:48:01MLD:Practically, I know some accountants, some of whom are legally qualified although they’re not admitted practicing lawyers, who are very, very knowledgeable in that area. But in terms of the law and what lawyers and accountants can and can’t do, I think the situation is – obviously, advice and advocacy is a realm of lawyers, obviously – but drafting documents, giving advice in relation to those documents, and giving advice on the tax law – those latter matters, I think, are classically legal in nature as well. I mentioned the Tax Agent Services Act, or TASA, earlier. Since that legislation was enacted, that seems to have had the effect of giving non-lawyers, typically accountants who are registered tax agents, the statutory authority to give at least tax related legal advice. That to me seems like quite a big deal. I would have thought “leave law to lawyers,” because I’m aware via my affiliation with the University of Sydney of how much study someone has to do to become a lawyer versus how much study someone has to do to become a tax agent. So, under the Tax Agent Services Act, I think accountants can give tax related legal advice, but that’s limited, so it’s not going to include, for example, advice in relation to business structures, at least rights and obligations arising from the tax system, contracts or deeds – so like a trust relationship created by a deed. I don’t think accountants can do that even if they are tax agents with the protection of the Tax Agent Services Act. I don’t think they can give law heavy advice either. So I don’t think accountants can give advice on the legal effect of transactions entered into. I don’t think tax agents can give advice on the operation of Part IVA of the Income Tax Assessment Act 1936 or the GAAR because I think it’s too law heavy.

TIP: So Mathew just mentioned the TASA. You can become a registered tax agent under the TASA if you prepare income tax returns for 10 or more clients and you’re an individual engaged in a business or occupation that includes preparing income tax returns. The eligibility requirements for a tax agent can be found in section 20.5. Individuals have to meet some pretty basic criteria – they have to be 18 years old, and they have to be a fit and proper person, just like a lawyer, who complies with the requirements set out by the regulations. Tax agents can be individuals, but they can also be partnerships or companies, and if they’re companies, they obviously can’t be an external administration. To provide tax agent services for a fee or engage in any related activities to providing tax agent services for a fee, you have to be registered with the Tax Practitioners Board and when you register, you register for a minimum of three years. The Federal Government recently released a consultation paper reviewing the registration requirements for tax practitioners. focusing on requirements for education, qualifications and experience both for new practitioners and existing ones. The proposals aim to strengthen regulatory frameworks for tax agents in response to issues raised by the PwC tax scandal. One of the key points in the consultation paper is whether legal practitioners who provide tax agent services should be required to register with the Tax Practitioners Board. Currently legal practitioners are exempt from TPB registration unless their services include preparing or lodging tax returns. The consultation seeks input from the public and from the profession on whether this exemption should continue or whether legal practitioners offering tax advice should also be regulated by the TPB, regardless of whether or not they prepare returns. CPA Australia made a submission in response to the consultation paper and said that legal professionals providing complex or so called “aggressive” tax advice might not face the same oversight as registered tax agents, which could lead to asymmetry and penalties if both a lawyer and a tax agent work on the same case. CPA Australia also highlighted that tax issues rarely reach legal profession boards and questioned the effectiveness of the current regulatory system for lawyers in tax matters. It’s an interesting question because in other areas of interdisciplinary practice where lawyers work alongside non lawyer practitioners, there’s a general trend of reducing the need for multiple registrations. For example, only recently we saw that lawyers who provide similar services to migration agents no longer have to be registered as migration agents. Introducing a requirement for lawyers to be registered with the Tax Practitioners Board would be going in the opposite direction to some of these changes.

So what does all that mean? Fundamentally, tax agents who are non-lawyers can give a certain amount of tax related advice, but it is limited as compared to what a lawyer can do. I think the advice on the legal effect of transactions, the drafting of transactional documents and advice on general or specific anti avoidance provisions ought to come from lawyers.

00:53:16DT:So I guess based on that answer, you’d say, well, “lawyers are the best place to give asset protection advice. There’s really so many carve outs that a registered tax agent would have to make from that advice that it’s appropriate that advice come primarily or solely from a lawyer,” but on the other hand, in your article, you argue that there’s potentially an ethical or a negligence issue to fail to advise on the tax consequences of a structure recommended for asset protection purposes. And in your article, you also say – which I think is true – the tax consequences of that sort of structure are often beyond the competency of many lawyers to advise on. So, one way of handling this that I’m aware that firms both very large and very small use, is to expressly exclude from the scope of their engagement or the scope of their retainer, advising on the tax consequences or tax liabilities arising from any of the advice they give. Is that effective?
00:54:12MLD:I think it can be effective. I think it’s difficult practically because – I use this example outside – a client, they’ll go to a professional, maybe a firm, maybe a sole practitioner, because they’ve got a problem and they want all of the pieces of the jigsaw puzzle in the advice that they get. They don’t want three pieces and then to be told to go somewhere else.
00:54:36DT:As it was very popular to say about 10 years ago that; “we’re in the solutions business,” right? Not the law business or the accounting business and that the client wants a complete picture.
00:54:46MLD:Yeah, but by the same token, there’s so much law and so many discrete areas of specialisation and expertise that one practitioner can’t necessarily be expected to give a holistic advice or even one firm. I think you can disclaim, but I think an alternative could be to prepare a draft advice, disclaiming and then encouraging involvement from a relevant specialist. So if your bias is commercial law, maybe engage with a tax practitioner early on and I would say vice versa. David, your experience is more commercial than tax. My experience in dealing with both commercial and tax practitioners is; sometimes the commercial practitioners are much better, say, with the law of equity, including trusts. The tax practitioners will be better with the tax legislation, the cases, dealing with it. So having not a cross disciplinary approach necessarily to giving the advice, but a team focused or I hear this term come up regularly in the context of regulatory agencies, you know, this “siloing” of information. So even in one firm, you might have a tax partner, a commercial partner, if they’re not talking to one another, that’s great. I feel like the best approach rather than just disclaiming it, pushing it back on the client, would be to engage in a team focused approach to the advice. And look, the reality is it’ll probably end up cross disciplinary as well. The stuff I do, I’m loath to do anything without the accountant being involved and I’m loath to have an accountant who’s not a chartered accountant. So yeah, I mean, this is perhaps a bit crude to say in a forum such as this, but you know, “put a team together.” You see it all the time in those Hollywood movies – “put a team together.” I feel like the best approach to this sort of thing is to put a team together and engage rather than disclaim.
00:56:44DT:I agree. And to me, that’s the real practical takeaway here is that, look, an engagement letter that says “we’re not going to advise on tax or tax liabilities. You sort that out yourself.” Well, the only party who’s likely to be happy with that is your professional indemnity insurer. The client’s not going to be particularly impressed because as you say, they want a complete solution and really, even if you say that, if you ever dare venture into dipping your toe into providing that advice, for example “we’re not going to advise on tax liabilities,” but then at some point in the course of the matter, you do give some advice about what you believe to be the tax effectiveness of, for example, a corporate trustee of a discretionary trust, well, potentially you’ve stepped outside of that scope anyway. For me, the practical takeaway is for anyone who’s listening, who’s experienced in advising small businesses or even larger ones, we’re pretty used to making sure that the client has access to all of the right advisors and that’s part of the sort of value add that we bring is our network of other advisors, making sure that they’re getting advice from the right people in the right disciplines but the fact that, as you say, asset protection advice is inherently interdisciplinary, tax practice is inherently interdisciplinary, means that it’s not enough to just say, “have you got a tax advisor? Okay, great.” “Have you got a chartered accountant? Okay, great.” “Have you got someone to look at management accounting for you? Okay, great.” You do, as you say, have to put a team together and you have to work collaboratively with those professionals to produce some work product that has considered things from all angles. So I think it’s a great practical tip to say, prepare the asset protection advice on the basis that you’re not considering tax liabilities. Give it to the tax advisors to tell you what the likely outcome is here. Maybe you can append to it some workings of what the tax liability is likely to be for this structure and others, and give that complete and holistic advice rather than seeking to disclaim, expecting that other professionals will disclaim your parts and giving each piece of that advice in isolation.
00:58:51MLD:Yeah, and I’m not sure that disclaiming will work all the time. I mean, if you’re giving advice and it’s final advice and the client is reasonably going to act upon it, a token disclaimer may not do the trick.
00:59:05DT:Yeah. Well, I mean, there’s a classic example, I cannot remember the name of the case, but an engagement that explicitly excluded any advice as to tax liabilities arising in the transaction. The transaction involved drafting a sale agreement. The sale agreement included provisions about the treatment of GST on the sale – that was held to be giving advice about the tax consequences of the transaction because the sale agreement itself purported to declare “this is or is not a taxable supply” or “the margin scheme does or does not apply.” So there are plenty of ways that you can venture into that scope without necessarily giving a fully formed formal advice on the tax consequences.
00:59:49MLD:Yeah, I think that’s right. Yeah.
00:59:50DT:Well, Matthew, we’re nearly out of time. Before I let you go, though, something I like to do at the end of each interview is ask if you’ve got any tips for our younger listeners, either who have recently joined the profession or who are about to join it, for how they might get into the area of work that you’re in now. For any of our listeners who want to learn more about tax practice, who want to pursue maybe an interdisciplinary tax and legal career as you’ve done – what would be your advice for them?
01:00:21MLD:I’d say first of all a Masters degree has almost become a prerequisite. There are many employers who would want to see that. I don’t know whether I agree with that. I think it depends upon the work that lawyers or tax practitioners are undertaking but a Masters degree is regarded by some as being a prerequisite, and especially in relation to tax, and corporations too, they are so technical but a Masters degree can be a good way to get on top of some very technical content. The other point I’d make is consider joining relevant professional associations. So I know that as lawyers, we’re members of the Law Society or the Bar Association. As accountants, we might be members of the Institute of Chartered Accountants or CPA Australia, for example, but consider the specialist ones. So in the tax space, you’ve got the Tax Institute, and that’s a great association in my opinion. They do all sorts of helpful things, including offer professional courses and have different levels of membership to reflect expertise. So they’re two things I’d recommend. Thirdly, go for it. I mean, as you know David, it’s a dynamic area, which, as far as I’m concerned, keeps it interesting, you know, it’s not a dull area. It’s not an area where you are often doing the same thing over and over again. There’s a lot of interesting nuances.
01:01:44DT:Yeah, absolutely. And one thing I’d say about your second tip there around joining a specialist organisation, I would say don’t be intimidated in doing that. You might think, “well, what have I got to add in a meeting of these luminaries on the topic?” These organisations often have young lawyer or young professional committees who are made up of recent entrants to the profession or who are just learning about the field. One great example is the Young Lawyers Tax Committee – meets every month at the Law Society of New South Wales – if you’re in New South Wales, equivalent organisations in other states in Australia – great way to start your journey in a specialist area of practice with people who are also learning about the area alongside you. Mathew Leighton-Daly, thank you so much for joining me today on Hearsay.
01:02:26MLD:Thanks, David.
01:02:37DT:As always, you’ve been listening to Hearsay the Legal Podcast. I’d like to thank my guest today, Dr. Mathew Leighton-Daly, for coming on the show. Now, if you’re interested in more tax law related content, this was an episode on federal tax legislation, why not listen to an episode on state taxes? This one’s from a little while back. It’s episode 20 of the show with Barrister Oliver Berkmann, ‘The State of State Taxes in NSW’.

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