Introduction
Two years after commencement of the promoter penalty legislation, the Australian Taxation Office (ATO) has finally, on 23 April 2008, released its Practice Statements explaining its view of the application of the promoter penalty laws to:
- the promotion of tax exploitation schemes (TES) (Practice Statement PS LA 2008/7), and
- schemes involving product rulings that depart from the facts in the product ruling (Practice Statement PS LA 2008/8).
Who is affected?
Many entities are affected, including professional advisers, financial providers, accountants, tax managers, in-house advisors, employees and tax agents. In short, this can be anyone in the business of making recommendations or giving advice to other entities to enter into what might be a TES and who receive some reward or benefit from that activity. Such fees or reward include receipts of salary, bonus, commission, non cash benefits, or fees that can be attributed to promoting a TES directly or indirectly regardless of the volume of promotions. The ATO example states that promotion to one person is enough (example 6 in PS LA 2008/7).
If you fall within the provisions, the possible consequences include heavy fines - $550,000 for individuals and $2.75 million for a body corporate, injunctions and even referral for criminal prosecution where applicable.
Are there exclusions?
Yes. Generally, a person/entity who merely provides advice, or is distributing information, will not be a promoter. However, the examples below make clear this is a question of fact and degree in each and every case, and the lines between promoting or not promoting are fine. Examples in PS LA 2008/7 are:
- an in-house advisor devises an arrangement for a reduced tax liability (tax benefit) which his employer implements. The in-house advisor receives a 20 percent bonus on implementing the arrangement. The arrangement to reduce the tax liability is disallowed by the Commissioner. The in-house advisor would not be a promoter because neither he nor his employer attempted to market the arrangement to other entities (example 21)
- a tax agent provides advice to a client and reduces the client’s tax liability. The advice is supported by a favourable and thorough legal opinion from a respected senior counsel. The advice is implemented and tax benefits are claimed. As a result, the tax agent receives additional remuneration. The Commissioner subsequently disallows the tax benefits under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936). Because the entitlement of the tax benefit was ‘reasonably arguable’ at the time of the subject conduct, this conduct will not amount to promoting a scheme (example 3)
- a bank employee distributes details of a loan package developed by the bank for investment and private purposes. Under the arrangement participants receive a ‘tax benefit’. The employee is trained in the features of the loan package by the bank and receives a bonus for the successful marketing of the bank’s loan package. The bank employee is not a promoter because he was merely distributing information developed by his employer (example 18), and
- a financial services provider recommends products from a provider, but relies on the description of the product provided as the source of recommendations. This information allows product disclosure to clients and includes favourable tax opinions. This is providing information, not promoting a TES, although the company providing details of the arrangement may be promoting a TES (example 22).
Evidence is key to the exclusions
What is clear from each example in the Practice Statement is that persons or entities who are alleged by the Commissioner to be promoters will need to provide evidence to the ATO about the circumstances of an arrangement - see examples 3, 8-12 in PS LA 2008/7. This will include whether tax opinions were obtained, who the scheme was presented to and what economic benefits the advisor, agent or employee obtained as a result.
What is the ATO likely to be focusing on now?
- From the financial sector:
- entities who sell financial or capital raising products through product disclosure statements on the basis of the products being tax effective
- From large institutions:
- examining what internal controls and governance measures have been or are contemplated around this risk issue
- identifying situations where the appetite for risk exceeds commercial considerations
- From professional advisers:
- consulting with advisers to understand what protocols they have designed and implemented to satisfy the exclusion requirements
What should you do?
Check if you have risk minimisation measures to protect your organisation. These could include clarifying bonus structures for employees, and having arrangements checked by your advisers that they are ‘reasonably arguable’ in law.
For further information, please contact your usual PricewaterhouseCoopers adviser, or:
Michael Bersten, Partner
Phone: +61 2 8266 6858
michael.bersten@au.pwc.com
Chris Sievers, Partner
Phone: +61 3 8603 4208
chris.sievers@au.pwc.com
Edwina McLachlan, Director
Phone: +61 2 8266 4930
edwina.mclachlan@au.pwc.com
