This article was originally published in CCH Australia Tax Week Issue 29 (22 July 2022).
The promoter penalty laws in Division 290 of Schedule 1 to the Taxation Administration Act 1953 took effect from 6 April 2006 and were introduced to help prevent outbreaks of mass marketed and employee-benefit tax schemes of the types that were prevalent in the late 1990s and early 2000s.
Recent ATO activities show that they continue to combat the promotion of tax exploitation schemes, as may be seen in the Taxpayer Alerts that they issue. In a recent Taxpayer Alert TA 2022/1 Parents benefitting from trust entitlements of their children over 18 years of age, the ATO again specifically warned that they were considering applying these laws to potential promoters of these types of schemes.
“Promotion” can include recommending these types of arrangements to clients, which could see a wide range of tax advisors come under ATO investigation for potential promotion. This article considers what advisors need to know so that they can protect themselves from these risks – given continuing professional concerns about how widely the ATO may be drawing the promoter penalty net.
What is prohibited conduct under the promoter penalty laws?
There are two types of prohibited conduct to which these laws may apply:
What is a tax exploitation scheme?
“Tax exploitation scheme” (TES) is widely defined as:
A scheme, which can include any arrangement, plan, proposal, action, course of action or course of conduct, will be a tax exploitation scheme if:
• it is reasonable to conclude that at the time the scheme was promoted an entity entered into it with the sole or dominant purpose of that entity or another entity getting a *scheme benefit from it; and• it is not reasonably arguable that the scheme benefit was available at law
This negative requirement that the “scheme benefit” not be “reasonably arguable” to be “available at law” is a critical element in these laws, so recent ATO warnings about potential promoter penalty action on areas of genuine uncertainty or divergences in views about the operation of the law have been quite concerning to many stakeholders.
Who is a promoter?
An entity will be a promoter if:
ATO Practice Statement PS LA 2021/1 provides some guidance on the types of behaviours that could indicate that an entity may be promoting a TES. It suggests that they could be a promoter if they:
If you merely provide advice on a potential TES or are an employee who merely distributes material or information about a TES that has been prepared by another entity, then you are specifically excluded from the definition of a promoter. However, recent Taxpayer Alerts indicating promoter penalty concerns with some tax planning arrangements have alarmed many advisors, given that such practitioners would normally have ‘merely provided advice’ about the operation of the law.
What have the Courts said?
The ATO has been successful in the Federal Court in a number of civil penalty cases, which provide some guidance on how widely the Courts are prepared to interpret Division 290 in awarding liability and determining the levels of civil penalty. Of significant interest are:
This was the first matter considered by the Federal Court and it involved a forestry managed investment scheme with a plan to acquire $20 million of woodlots and to sell further woodlots to secondary investors. The loan obligations were intended to be met by investing profits from commissions, GST refunds, as well as income tax refunds from secondary investors.
On appeal, the Federal Court held that the Commissioner need only show is what the entity was proposing to do and why and means that the promoter penalty laws can apply in situations where a scheme has not been implemented or where promotion has occurred without success.
In imposing civil penalties of nearly $9.5 million against the promoters of scheme involving deductions for the purchase price of purported carbon offset credits, the Federal Court said:
“…penalty should not be fixed by having undue regard to the financial position of the contravener. It was important that the message be sent loudly and clearly that engaging in the promotion and marketing of tax schemes involving tax avoidance and tax evasion was not tolerated by the community. Such conduct required the imposition of a penalty that would achieve both general and specific deterrence to ensure that other persons, and particularly professional lawyers, accountants and financial planners, would not engage in similar activities”
The promoter charged clients a fee calculated as a percentage of the R&D offset received, often paid to an associated company. The Federal Court held that whilst the associated company did not market or encourage the schemes, by receiving the consideration its conduct resulted in other entities being a promoter.
Held that the promoter penalty laws can apply to arrangements tailored and marketed to individual clients, not just mass-marketed tax schemes, as Federal Court imposed a civil penalty on a company and its director for promoting 10 schemes that wrongfully resulted in eight clients receiving more than $3 million of R&D tax offsets to which they were not entitled.
What I can I do to protect myself?
Good Governance is the key to protecting yourself from these laws applying to your firm. Some things that firms can do include:
To join the discussion on how these promoter penalty laws work in practice and resulting risks for practitioners, register for the CCH Learning session with Bruce Collins from Tax Controversy Partners Pty Limited ‘ATO Promoter Penalty Laws - Reasonably arguable, risky or not?’ that will be held next Wednesday 27th July, at 10.30am.