Two Draft Practice Statements were issued for public consultation by the Australian Taxation Office (ATO) on 15 March 2007, setting out the administrative procedures to be used by the ATO in applying the promoter penalty laws.
The Financial Services Industry appears to be the industry most directly in the ATO’s radar.
Background
The promoter penalty laws (which were introduced in the form of Division 290 of Schedule 1 to the Taxation Administration Act 1953) are designed to deter the promotion of tax avoidance schemes and tax evasion schemes, and the implementation of schemes that have been promoted, on the basis of conformity with a product ruling, in a way that is materially different from that described in the product ruling. These rules apply to conduct on or after 6 April 2006.
The Draft Practice Statement on product rulings provides instructions to ATO staff on the administration of the promoter penalty laws in relation to entities that engage in conduct that results in a scheme that has been promoted on the basis of conformity with a product ruling being implemented in a way that is materially different to that described in the product ruling.
The Draft Practice Statement on tax exploitation schemes provides instructions to ATO staff on the administration of the promoter penalty laws in relation to entities that engage in conduct that results in them or another entity being a promoter of a tax exploitation scheme.
For further information in relation to the legislative background and the promoter penalty laws, please refer to the following prior editions of TaxTalk:
- The special edition of TaxTalk issued on 20 February 2006 containing the article titled “Deterring the promotion of tax exploitation schemes"; and
- The September 2005 edition of TaxTalk containing the article titled “Deterring the promotion of tax exploitation schemes - Exposure Draft Legislation - red tooth in the claw?"
Some general points to note
- Both Draft Practice Statements appear to address some concerns from the tax profession about the potential overreach of the provisions. For example, the establishment of an internal ATO “Panel" to govern the decision to enforce the promoter penalty provisions could be seen as an important “check and balance" in the process.
- The Draft Practice Statements are necessarily extensive in length and contain numerous examples which warrant careful consideration.
- The Draft Practice Statements should be of particular interest to taxpayers in the financial services industry.
The Draft Practice Statement on tax exploitation schemes contains a series of useful systematic flowcharts to
1. identification of a tax exploitation scheme (see attachment 3 of Statement);
2. identification of an entity engaging in prohibited conduct (see attachment 4 of Statement); and
3. circumstances where exceptions may apply (see attachment 5 of Statement).
Financial Services industry impact
In addition to the flowcharts, the Draft Practice Statement on tax exploitation schemes also contains examples of direct relevance to the financial services industry, including:
- Example 2 in relation to the precondition requiring a reasonable conclusion that the entering into or carrying out of the scheme was for the sole or dominant purpose of obtaining a scheme benefit. The example notes that it does not matter that an entity did not actually obtain a scheme benefit (as long as the scheme was carried out with the sole or dominant purpose of obtaining a benefit).
- Example 8 in relation to identifying entities that are “promoters" requires there to be an element of “marketing or encouragement". The example outlines a situation involving a Financial Planner persuading a client to enter into a tax exploitation scheme in consideration for a fee which is “significantly higher…than his normal billing rate". The example concludes that such conduct could constitute “marketing or otherwise encouraging growth" in a scheme.
- Examples 12 and 13, which provide examples supporting the exclusion for entities such as “financial planners, tax agents, accountants and legal practitioners" who merely give advice about a tax exploitation scheme (as opposed to promoting it) “…even if that advice provides alternative ways to structure a transaction…".
- Example 18 in relation to exclusions preventing an entity from being a promoter. The example involves an investment bank developing a tax exploitation scheme and an employee who receives substantial commissions for the successful marketing of the scheme. The example notes that the bank would be the entity regarded as the promoter, with the employee being excepted as someone who merely distributes information or material prepared by the employer promoter.
- In contrast, Examples 19 and 20 outline examples involving a boutique financial institution and an investment bank providing investment products with employees who have acted outside their authority in “promoting" those products (so as to be considered promoters themselves).
- Examples 23 and 24, involving examples in the financial services industry where arrangements are marketed via a network of entities that may be agents of, or otherwise associated with, a promoter. These examples involve authorised representatives of financial service licensees selling products which are later found to be tax exploitation schemes. Both examples demonstrate that there must be a “substantial role" or there have been acts outside authority by the authorised representative in order for them to be considered a promoter.
- Example 28 in relation to joint venture arrangements involving participants jointly developing and enhancing schemes later found to be tax exploitation schemes. In the example, one firm originally develops a scheme, another firm enhances the scheme to include “financing" for the participants, with another firm providing the “non-recourse lending". In such circumstances, the Draft Practice Statement notes that the ATO would examine the conduct of each joint venturer separately.
The examples contained in the Draft Practice Statement signal the potential significant impact of the rules on certain aspects of the financial services industry. It is therefore imperative for individuals and entities in the industry to not only be aware of the potential scope of the rules, but also the pitfalls that necessarily follow.
