Understanding the Part IVA Tax Benefit: Key Insights and Strategies

Understanding "tax benefit" for Part IVA avoidance

Tax laws often contain provisions designed to prevent avoidance and ensure fairness. One such provision in Australian tax law is Part IVA, which targets schemes that seek to reduce tax liability in ways that the law does not intend. Understanding the Part IVA tax benefit is crucial for taxpayers, accountants, and advisors to navigate compliance and optimize tax planning within legal boundaries.

This article explains how Part IVA tax benefit is applied.

Two recent decisions, Commissioner of Taxation v Hicks [2025] FCAFC 171 (Hicks) and Commissioner of Taxation v PepsiCo Inc [2025] HCA 30 (PepsiCo) — have significantly clarified how courts identify whether a taxpayer has obtained a “tax benefit”.

While PepsiCo set the framework, Hicks is helpful because it distils the principles courts apply in practice.

Before Part IVA can apply, the Commissioner must establish that:

·         there is a scheme, and

·         the taxpayer obtained a tax benefit in connection with that scheme.

If no tax benefit is identified, Part IVA simply does not operate — even if the arrangement looks aggressive. The key question is “What would reasonably be expected to have happened if the scheme had not been entered into?”

In Hicks, the Court summarised the governing principles:

1.     The test is about realistic alternatives — not hypotheticals

A tax benefit exists only if, without the scheme, a reasonable alternative course of action would have resulted in more tax being payable. This alternative must be grounded in commercial reality.

2.     The inquiry is objective — and belongs to the Court

The Court made it clear that:

·            identifying the reasonable alternative is an objective, factual inquiry

·            the Commissioner cannot constrain the analysis by how he frames the scheme or his preferred counterfactual

The court decides what might reasonably have happened — not the ATO.

3.     No artificial “vacuum” analysis

The reasonable alternative cannot be “made in an artificial vacuum divorced from reality or from the wider context and circumstances”.

That means courts will look closely at:

·            the taxpayer’s business

·            commercial constraints

·            real-world relationships (including funding, risk, and control)

4.     Economic substance and non-tax consequences matter

Under section 177CB, the alternative must be reasonable having regard to “the economic substance of the scheme, and its non-tax outcomes”. Importantly, the analysis does not focus on how the tax law itself would otherwise operate, but on what would realistically have happened commercially.

5.     The onus is firmly on taxpayers — and it’s a heavy one

Taxpayers bear the burden of proving they did not obtain a tax benefit. Crucially, it is not enough to show the Commissioner’s alternative is unreasonable. The taxpayer must show either:

·            a different reasonable alternative, or

·            that no reasonable alternative exists.

Key Takeaways

If you’re advising or structuring transactions, keep this in mind:

·         Part IVA is often decided at the tax benefit stage, not just purpose

·         Courts will test alternatives against commercial reality, not theory

·         Related-party arrangements face a higher evidentiary burden

·         Contemporaneous evidence of commercial decision-making is critical

Conclusions

Hicks reinforces that Part IVA is not a purely technical exercise. Courts are asking a practical question “What would a rational businessperson realistically have done instead”?

If that alternative would have produced a higher tax outcome, Part IVA risk remains very real.

Disclaimer

This post is general information only and not legal or tax advice. 

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