Overview
Advisers who are involved in the design, marketing and implementation of schemes that claim to provide tax benefits should consider the promoter penalty laws.
The promoter penalty laws are concerned with arrangements that avoid or evade tax, and where the benefit claimed isn't available under the tax laws. They are collectively referred to as tax exploitation schemes.
The promoter penalty laws aren't intended to obstruct tax advisers and intermediaries from merely providing advice to their clients.
There are exceptions for advisers who make reasonable mistakes of fact or are subject to events beyond reasonable control (if they also took reasonable precautions and exercised due diligence).
We actively monitor adviser behaviour and take action against potential promoters through application of the promoter penalty laws.
Understanding promoter penalty laws
The promoter penalty laws were introduced to deter the promotion of tax avoidance and tax evasion schemes.
It is also to deter implementation of schemes that have been promoted on the basis of conformity with a product ruling in a way materially different from that described in the product ruling.
The promoter penalty laws are not restricted to widely offered schemes. They can even apply where there is only one client in an arrangement.
The promoter penalty laws apply to conduct both within and outside Australia that is prohibited conduct, unless an exclusion or exception applies.
Prohibited conduct means conduct that results in:
- any entity being a promoter of a tax exploitation scheme
- 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 the way it has been described in the product ruling
- a scheme will be implemented in a way that is materially different from the way it was described in a product ruling, if it results in a different tax outcome for investors than the one described in the product ruling.
A scheme will be a tax exploitation scheme if both applies:
- at the time of promotion, it has the sole or dominant purpose of an entity gaining a scheme benefit
- the scheme benefit would not be legally available otherwise.
An entity will be a promoter if:
- it markets or encourages growth of the scheme, including schemes promoted but not implemented
- it directly or indirectly receives a benefit in respect of marketing or encouragement
- it causes another entity to be a promoter
- it has a substantial role in respect of marketing and promotion.
Exclusions and exceptions
Exclusions and exceptions to the promoter penalty laws include:
- employees or other entities that have only minor involvement
- conduct that occurred by reasonable mistake or accident
- something outside an entity's control and the entity took reasonable precautions
- a 4-year time limit, unless there is tax evasion.
The practice statement sets out the processes we follow when administering the promoter penalty laws. For more details, refer to PS LA 2021/1 Application of the promoter penalty laws.
Managing promoter penalty risks and corrective action
Penalties
If an entity is suspected to be a promoter of a tax avoidance scheme, the legislation enables us to apply to the Federal Court of Australia to impose a civil penalty.
The maximum penalty the Federal Court can impose is the greater of:
- 5,000 penalty units for an individual
- 25,000 penalty units for a body corporate
- twice the consideration received or receivable by the entity or its associates in respect of the scheme – whether directly or indirectly.
For more information, see Penalty units.
Other corrective action
Depending on a range of factors, we could also consider:
- voluntary self-correction for less significant non-compliance with these laws
- applicants for legally binding advice (public, private or oral rulings) providing additional promises or guarantees to mitigate taxation risks, including material differences in implementation of the relevant arrangement
- executing an enforceable voluntary undertaking
- applying to the Federal Court to seek an injunction.
Guidance on offering an enforceable voluntary undertaking
We'll determine the most appropriate response to any prohibited conduct based on a range of considerations, including the facts and circumstances of that conduct.
Offering us an enforceable voluntary undertaking may, in appropriate circumstances, be relevant to:
- a decision about whether proceedings should be initiated in the Federal Court
- certain decisions made by the Federal Court in respect of such proceedings.
When we accept an enforceable voluntary undertaking offer, it doesn't mean that we can't make an application to the Federal Court for a civil penalty or an injunction against the entity responsible for the prohibited conduct.
For example, even though we may have accepted an enforceable voluntary undertaking, we may form the view that the appropriate way to bring the conduct (or threat of future conduct) to an end is by applying to the Federal Court for an injunction.
We are unlikely to accept a document that doesn't include meaningful undertakings relating to:
- the cessation of marketing or encouragement of the growth of a scheme or schemes
- actions designed to prevent future involvement in tax exploitation schemes.
We also can't be bound to take action or to refrain from action in an enforceable voluntary undertakings document.
Case studies
These case studies demonstrate how promoter penalty laws are applied to keep promoters of tax avoidance schemes accountable.
- Media release on Largest promoter penalty in R&D history handed down
- Promotion of boutique research and development schemes results in $4.25 million penalty
- $1.5 million penalty for charity donation scheme
- First use of promoter penalty laws upheld on appeal
- Strong penalty for promoter of SMSF illegal early release of super.
Court cases
Read about the outcome of Federal Court cases concerning the promoter penalty laws:
- Commissioner of Taxation v Rowntree [2020] FCA 1322
- Commissioner of Taxation v Bogiatto [2020] FCA 1139
- Commissioner of Taxation v Pavihi [2019] FCA 2056
- Commissioner of Taxation v International Indigenous Football Foundation Australia Pty Ltd [2018] FCA 528
- Commissioner of Taxation v Arnold (No 2) [2015] FCA 34
- Commissioner of Taxation of the Commonwealth of Australia v Barossa Vines Ltd [2014] FCA 20
- Commissioner of Taxation v Ludekens [2013] FCAFC 100.
Decision impact statements
The following Decision impact statements outline our views on the applications of the relevant court decisions.
- Decision Impact Statement – Bogiatto – published 4 February 2021
- Decision Impact Statement – Ludekens – published 7 May 2014
- Decision Impact Statement – Barossa Vines Ltd – published 31 March 2014.