Motive Test is the test often found in tax rules. It is designed to prevent tax avoidance. For example, the rules may provide that certain consequences will follow if the sole, main or principal purpose of certain transaction is the reduction of tax.
The two main issues faced by the test are:
Despite numerous valiant attempts there has never been a consensus about what is meant by 'tax avoidance' and the term is itself somewhat emotive; one man’s 'tax avoidance' is another man’s 'tax efficiency'; and
Whilst the purpose/reason behind any transaction is basically simply a question of fact, virtually every transaction has a number of different purposes and interpretation of them is inevitably subjective.
The motive test attempts to solve the issues by:
Avoiding any mention of the term 'tax avoidance', settling instead for the rather more neutral concept of a 'reduction in tax'; and
Providing a statutory definition of what is meant by 'a reduction in tax'.
The second issue is addressed by means of tests of the main purposes for a controlled foreign company’s transactions and the main reasons for its existence - with each case to be decided on its own facts and circumstances.