Examples of how the GAAR applies to tax arrangements

3.3.5 What is the GAAR analysis under clause 2(2)?
3.3.5.1 Are the substantive results of the arrangements consistent with any
principles on which the relevant tax provisions are based (whether express or
implied) and the policy objectives of those provisions?
The purpose of Schedule 13 was to introduce a simple method of charging
income tax on discounted securities held by individuals. The legislation
allowed loss relief to all investors if the security was disposed of or redeemed
at a loss. RDS losses were calculated in the same way as RDS profits.
Transactions between connected persons were at market value.
The artificial market condition (called “market change” but in fact meant no
change) contingency and the fact that a purchaser of the note would readily
be found meant that on a realistic view of the facts the scheme would proceed
as planned i.e. to create the loss. This is what participants understood,
expected and paid fees for.
It is clear that the substantive tax result (a large tax loss) is not consistent with
the principles or policy objectives of the relevant tax provisions.
3.3.5.2 Does the means of achieving the substantive tax results involve one or
more contrived or abnormal steps?
If the true transaction is considered, then it is clear that there are a number of
contrived steps:
• Market change condition – it was certain (i.e., 85%) that this would take
place and the securities would be redeemed by the third party.
• Redemption at the end of 15 yrs or 65 years – this was a hypothetical
possibility but no part of the plan.
• The delay in finding a purchaser for the security.
• If the only real possibility of redemption was considered (i.e., only
option 1 above) then it cannot be said there would be deep gain within
the meaning of paragraph 3, Schedule 13, FA 1996. These steps were
inserted merely to obtain a tax advantage.
In these circumstances, there is little doubt that the arrangement involves
contrived or abnormal steps.
3.3.5.3 Were the arrangements intended to exploit any shortcomings in the
relevant tax provisions?
The scheme sought to exploit paragraph (3)(1)(b), Schedule 13, FA 1996 and
the words “may or might be redeemed at a deep gain”.
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