Section 179: what makes an arrangement an impermissible avoidance arrangement

Introduction

General anti-avoidance classification requires a main tax-benefit purpose plus at least one listed abnormality: non-arm's-length rights, Act misuse, lack of commercial substance or non-bona-fide means. A tax-motivated step can trigger the presumption even if the overall arrangement has another stated purpose.

Key takeaways

The definition

An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it:

• creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length;
• results, directly or indirectly, in the misuse or abuse of the provisions of the Act;
• lacks commercial substance, or is deemed to lack commercial substance under Section 180, in whole or in part; or
• is entered into, or carried out, by means or in a manner not ordinarily employed for bona fide purposes.

Presumption on main purpose

An arrangement is presumed - unless the assessee proves otherwise - to have been entered into or carried out for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, even if the main purpose of the whole arrangement is not to obtain a tax benefit.

Analyse each step as well as the whole

Document the commercial aim, rights created, cash flows and business risks for each step. Subsection (2) places the burden on the assessee to rebut the main-purpose presumption when a step or part principally seeks a tax benefit.

Step-by-step flow for applying Section 179

1. 1

   Is there an arrangement that gives a tax benefit?

   Map every step and part of the arrangement and the tax benefit it produces.

   • No tax benefit: Section 179 is not engaged.
   • Tax benefit exists: Go to the next step.
2. 2

   Is obtaining the tax benefit the main purpose?

   Under Section 179(2), if the main purpose of any step or part is a tax benefit, the whole arrangement is presumed to have that main purpose, even if the whole arrangement's main purpose is different. The assessee may prove the contrary.

   • Main purpose is not a tax benefit (including a rebutted presumption): Not an impermissible avoidance arrangement under Section 179.
   • Main purpose is a tax benefit: Go to the next step.
3. 3

   Does at least one of the four tests in Section 179(1) apply?

   (a) rights or obligations not ordinarily created at arm's length; (b) direct or indirect misuse or abuse of the Act; (c) lack of commercial substance, or deemed lack under Section 180, in whole or in part; (d) means or manner not ordinarily employed for bona fide purposes.

   • None applies: Not an impermissible avoidance arrangement.
   • One or more applies: Go to the next step.
4. 4

   Record the conclusion and the evidence

   The arrangement meets the Section 179 definition. Keep the step-by-step analysis, the tax-benefit computation and any rebuttal evidence on file, since the consequences follow in the later GAAR provisions.

Practical checklist

Glossary

Tax benefit

The tax advantage relevant to the arrangement's main-purpose test.

Commercial substance

The economic reality of an arrangement assessed under Section 180.

Frequently asked questions