Some Implications of the Promoter Penalties Regime
The Government and the Australian Taxation Office (“ATO”) were clearly embarrassed by the proliferation of so-called “mass-marketed tax schemes” in the late 1990s and the large number of citizens who found themselves under the unwelcome scrutiny of the ATO. So, in December 2003, the Government announced that it would enact measures to try to redress what it saw as an unfair balance – to expose the promoters of tax schemes to the same kinds of penalties that their clients faced, when the promoters’ claims turned out to be incorrect and the clients found themselves exposed to ATO penalties. The Government released an Exposure Draft displaying its preferred approach in August 2005; the Act was passed by Parliament on 28 March 2006.
The approach has clearly departed a long way from the kinds of problems that spurred the Government to action. This Tax Brief examines some of the dangers – and some of the myths – surrounding the final version of the Government’s measures.
The Building Blocks of Exposure to Penalty
The Act allows the Commissioner to apply to the Federal Court for it to impose a penalty of up to $550,000 against an individual and $2.75m against a body corporate, or twice the proceeds from selling a scheme, if that is larger. The regime also allows the Commissioner to ask for an injunction or negotiate an agreement which is then enforceable as if an order of the Federal Court.
The Federal Court can impose a penalty where a person is engaged in three kinds of conduct:
- where the person engages in conduct that amounts to being the “promoter of a tax exploitation scheme;”
- the person does something which “results in” another person being the “promoter” of a “tax exploitation scheme;” or
- the person promotes a scheme on the basis of a Product Ruling, but then implements the scheme in a materially different manner. (This was in fact not an uncommon problem faced by taxpayers who invested money with some promoters.)
A person is a promoter of a tax exploitation scheme if they have “a substantial role” in marketing a scheme and receive consideration in respect of that activity.
A scheme is a “tax exploitation scheme” if it is reasonable to conclude that participants would enter the scheme with the sole or dominant purpose of securing a tax benefit and it is not reasonably arguable that the tax benefit is available. In other words, it is necessary both that people would implement a structure or undertake a transaction for its tax advantages, and the hoped-for tax advantages do not follow.
Some unstated consequences
The bare structure of the law is quite stark and it is worth pausing to remark what is not there.
First, despite the origins of these measures, nothing in the Act limits the idea of a promoter to someone who deals with a number of people. Nor is there a requirement that the promoter is involved in multiple transactions with the same features. These measures can affect a person dealing with just one other person, and in respect of a unique transaction or structure.
The obvious implication of this is that external advisers, such as investment bankers, have to consider the possible application of these rules if, say, a structured finance package is being considered with a client.
Secondly, nothing in the Act limits the idea of a promoter to someone who deals with the public. For example, these measures can affect activities which are undertaken by an employee for the benefit of his employer. It seems clear that an employee and their employer are not the same single person in these rules.
The obvious implication of this is that in-house advisers, such as corporate tax managers, have to consider the possible application of these rules. While there is a specific defence for some employees, it applies only to employees who do no more than distribute information prepared by their employer.
Thirdly, there is no specific allocation of responsibility between employers and employees. The Commissioner can decide to pursue either the employer or employee for a fine; the only prohibition is against him pursuing the employee after having already succeeded against the employer.
Fourthly, although the legislation is written using terms like “tax exploitation scheme”, it applies simply to structures and transactions with purported tax advantages. It would be a mistake to view these rules as applying only to highly artificial structures that smack of tax avoidance.
The available defences
The legislation contains a number of exceptions and defences located at various steps in the text. Sometimes, the exception protects against exposure to only some of the possible conduct – for example, few of the defences apply where the conduct is failing to implement a scheme in the manner set out in the Ruling.
The most significant defences are embedded in the text which describes the prohibited conduct. First, it is a defence to being a “promoter” or causing someone else to be a promoter, that the tax advice is accurate. There can only be a tax exploitation scheme if the scheme is ineffective, and it was not reasonably arguable that it would be effective. Accurate advice protects both the taxpayer from penalty and others from exposure to being a promoter.
Secondly, a promoter is someone who receives consideration in respect of marketing or encouragement of a scheme. Where there is a “sale price” for a product or a “performance” fee for a transaction this will be obvious. It is also possible that salary or wages could amount to consideration for marketing or encouragement in the right circumstances. But a corporation which sent out a prospectus which advised (erroneously) of the tax implications of a share buy-back, would not face exposure. However, if the advice related to a new share issue, there would be scope for argument about whether the company had received consideration. (It is worth noting, however, that it is not necessary for a person who caused another to be a promoter to receive consideration.)
This raises a third defence – the person is acting in accordance with a ruling, or statement in an ATO publication. So, where a corporation secures a Class Ruling or a Product Ruling for a transaction, the person’s exposure to promoter penalties is removed. This gives a further reason for seeking rulings.
There is no complete and automatic defence for advisors or consultants. It is clear that the Commissioner wants to expose advisers and consultants to penalty where their activities go beyond the provision of professional advice for a fee.
There are other defences which are more relevant where the offending conduct is failure to implement the transaction in accordance with a Ruling – for example, where the relevant conduct occurred due to a mistake of fact or despite reasonable precautions.
But the lesson of these provisions is clear: despite strong submissions, the regime is not limited to the types of schemes that were mass-marketed to “Mum and Dad” investors by less than scrupulous promoters. The regime will be just as applicable to anyone involved in marketing, encouraging or implementing transactions which appear to provide tax benefits. They should review their exposure to penalty under this new regime very carefully, and organisations need to begin implementing systems and protocols to deal with this exposure.
For further information, please contact,
Andrew Mills
61 2 9225 5966
andrew.mills@gf.com.au
Jacinta Oner
61 2 9225 5985
jacinta.oner@gf.com.au
These notes are in summary form designed to alert clients to tax developments of general interest. They are not comprehensive, they are not offered as advice and should not be used to formulate business or other fiscal decisions.
Greenwoods & Freehills Pty Limited