1

THE PROMOTER

PENALTY REGIME – HOW

THE ATO IS APPLYING IT

IN PRACTICEBruce Collins

Australian Tax Office

© Commonwealth of Australia 2012

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.

Outline of today’s presentation

� Introduction – history and shape of the laws

� Boutique and wholesale arrangements

� Managing risk

� Importance of acting quickly

� Next 12 months

� Areas of interest

� Reporting a scheme

History of the promoter penalty laws

Dec 2003

Government announcement

6 Apr 2006

Laws take effect

Commissioner’s speech ‘A new relationship with the tax profession’

17 Apr 2008

Release of two ATO practice statements on ATO administration

Commissioner’s speech ‘Putting out more flags’

Oct 2009

Release of Promoter Risk Differentiation framework

7 Apr 2011

Release of Good governance and promoter penalty laws guide

Commissioner’s speech ‘Protecting the community and its tax system’

27 Jun 2011

Initiation of Federal Court proceedings on first two cases

under laws

Marketing and communication strategies on these laws to support and encourage compliance by tax intermediaries

Rolling program of compliance cases for tax intermediaries covered by these laws and their clients, resulting in:

•Voluntary self correction by majority of entities contacted

•Offer/negotiation of Enforceable Voluntary Undertakings with some entities

•Positive responses to ‘Cease and Desist’ letters avoided need for injunction applications

Formal program of governance visits for ‘key

intermediaries’

Consultation with tax intermediaries

2

Basic elements of Division 290: promotion and

implementation of schemes

Objects of Division

290-5(a) Deter promotion of tax avoidanceand tax evasion schemes(b) Deter implementation of schemesmaterially different to product ruling

Civil Penalties

290-50(1) Promoter of Tax Exploitation Scheme (TES)(2) Implementing scheme otherwise

than in accordance with ruling

Voluntary Undertakings290-200(1) Commissioner may accept

Breach of an Undertaking

290-200(3) Commissioner may apply for orders to enforce

290-200(4) Federal Court may make compliance or other

orders

Civil Penalty

290-50(3) Commissioner may apply for and Federal Court may order civil penalty to be paid

Amount of penalty 290-50(4)

Injunctions

290-15

Commissioner may apply for and Federal Court may grant injunction (restraining, or to perform actions)

290-130

Interim injunction

Federal Court

Scope of the laws

� Government specifically did not restrict promoter penalty laws to mass-marketed arrangements

� Tax intermediary organisations need to recognise and manage the risks of contravention

� Many intermediaries have not done so because they thought that:

� They had a ‘reasonably arguable position’ (more on this

next)

� They were providing ‘mere advice’

Managing uncertainties about tax

outcomes

� Entities need to recognise that a ‘reasonably arguable position’ only exists where they have:

� Identified all accurate, relevant and material facts (not just

assumed or instructed facts)

� Identified all relevant points of law (ordinary and anti-

avoidance rules)

� Robustly analysed positive and negative relevant legal

authorities (legislation, extrinsic materials, judicial

authorities and public rulings)

� Taking an overly positive view of a position on an

arrangement may constitute marketing or encouragement, not providing ‘mere’ advice

Managing risk: promoter penalty laws

1

HIGH RISK

INTERMEDIARIES

Deter and deal with in real

time

4

LOWER RISK

INTERMEDIARIES

Monitor and detect shifts

3

MEDIUM RISK

INTERMEDIARIES

Deal with and deter

LIKELIHOOD OF NON-COMPLIANCELOW HIGH

(compliant) (non-compliant)

HIGH

LOW

2

KEY INTERMEDIARIES

Monitor and maintain

(behaviour)

CO

NS

EQ

UE

NC

E O

F N

ON

-CO

MP

LIA

NC

E

3

ATO approach

� The frequency and intensity of ATO action is determined by the current perception of the risks posed by the entity’s conduct

� This will lead to a different approach to engagement and use of different tactics for entities who are:

� Higher risk intermediaries

� Key intermediaries

� Medium risk intermediaries

� Lower risk intermediaries

Information collection

� In promoter penalty enquiries, we use formal access and information gathering powers at first instance to:

� Deal with client confidentiality obligations that would

prevent tax intermediaries from voluntarily providing

information about clients

� Deal with contractual secrecy or intellectual property

limitations that would prevent clients from voluntarily

providing information about tax intermediaries

� Reassure such entities that they are protected from action

by parties whose information they provide to us.

Importance of acting quickly

� The ATO needs to act quickly to deter proliferation of higher risk tax planning arrangements.

� Tax intermediaries need to act quickly in order to limit reputational or business damage, and to protect the position of their clients.

� The community benefits from this occurring by protecting the integrity of the taxations and superannuation systems.

Next 12 months

� First two cases in Federal Court.

� Further cases for Federal Court before 30 June, more likely in following months.

� Ongoing negotiation of voluntary undertakings under these laws.

� Work with the Promoter Penalty Subcommittee of the NTLG on next version of the Guide for tax intermediaries: Good governance and promoter penalty laws, plus

publications for smaller organisations/firms

� Further engagement with professional and industry

associations.

4

Areas of interest

� List of ‘schemes of concern’ in Guide for tax intermediaries: Good governance and promoter penalty

laws. ‘Areas of focus’ being published on ato.gov.au/taxplanning.

� Some arrangements that are likely to result in proceedings include:

� Product ruling arrangement implementation issues

� Deduction (or offset) generator schemes

� Employment arrangement schemes

� Widely offered (retail and wholesale) financial products

� Mortgage structuring arrangements

Product ruling implementation

� The ATO is reviewing a number of arrangements covered by ATO product rulings for the purpose of the 2nd limb of

the promoter penalty laws. Issues detected resulting in material differences in implementation of Managed

Investment Schemes (MIS) include:

� Agricultural MIS

� Forestry MIS

� Partnership Loss Arrangement for MIS (see Taxpayer Alert

2009/13)

� The ATO is also reviewing implementation of financial

product ruling arrangements, as part of a new taskforce on retail and wholesale financial product risks.

Deduction (or offset) generator

schemes

� Traditional form of tax avoidance scheme, involving some/all:

� Levels of claim that are grossly disproportionate to the real

movement of funds

� Exploiting the cash vs accruals difference between entities

� Overly complex and/or ‘round-robin’ transaction trails.

� While incidence of widely offered schemes has decreased, we are seeing more boutique versions,

targeting donation or business expense deductions and R&D offsets (see Taxpayer Alerts 2009/1 and 2010/8)

Employment arrangement schemes

� Various arrangements involving provision of personal services to avoid:

� PAYG(W) or Superannuation Guarantee obligations for

employers

� Income tax and FBT liabilities for employers and income

tax liabilities for individuals

� FBT liabilities for employers or income tax liabilities for

employees for excessive ostensible ‘Living away from

home allowance’.

5

Widely offered financial products

� Taskforce formed to address concerns about certain retail and wholesale financial products that promise tax benefits

that are not reasonably arguable, looking at potential promoter penalty and taxpayer compliance risks, plus

improvements to the ATO product ruling system.

� Current areas of focus for this taskforce include:

� Interest deductibility questions

� Franking credit generators

� Some ‘Deferred purchase agreements’

� Commoditised swap arrangements

� Certain collar arrangements (often zero-cost)

Mortgage structuring arrangements

� The ATO encounters various forms of mortgage arrangement that promise tax benefits that are not available under the law, including:

� Linked loan arrangements (see Taxation Determination TD

2012/1)

� Resurgence of home loan unit trust arrangements (see

Taxpayer Alert 2001/1 and Taxation Ruling TR 2002/18)

and similar arrangements.

Reporting a scheme

� We encourage reporting of entities who are involved with potential tax avoidance or tax evasion schemes to the

ATO to protect the integrity of the taxation and superannuation systems and to maintain a level playing

field.

� All information provided is kept confidential and is

protected from disclosure to entities who may be involved.

� People can contact the ATP Hotline 1800 177 006 or by

email at reportataxscheme@ato.gov.au to provide information about such schemes and those entities involved with them.

© Commonwealth of Australia 2012

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at http://www.ag.gov.au/ccaDisclaimer: This presentation represents laws and policies at the time itwas presented. Persons should make appropriate inquiries, check the law for currency, and seek independent advice before acting in reliance on it.