$4.25 million penalty for promotion of boutique R&D schemes
In 2018, the Federal Court ordered a Queensland company to pay a $4.25 million penalty for its promotion of tax exploitation schemes.
We commenced promoter penalty proceedings against Australian R&D Funds and Grants Services Pty Ltd (later known as International Indigenous Football Foundation Australia Pty Ltd) and its Director, for encouraging their clients to lodge overstated or ineligible claims for refundable research and development (R&D) tax offsets.
We identified that their clients had issues in relation to their claims for R&D tax offsets, which included:
- an inability to show R&D expenses had been incurred
- ordinary business expenses claimed as R&D expenses
- R&D expenditure incurred with related parties, but not paid or not paid in the relevant year
- invoices for goods or services associated with R&D activities provided by related parties, but charged at inflated prices
- an inability to demonstrate a nexus between the expenditure and eligible R&D activities.
The Federal Court found that both the company and its director had breached the Promoter Penalty Laws for 10 schemes that wrongfully resulted in eight clients receiving more than $3 million of R&D tax offsets that they were not entitled to.
This case shows that the Promoter Penalty Laws can apply to arrangements tailored and marketed to individual clients, as well as to mass-marketed tax schemes.
$1.5 million penalty for charity donation scheme
A $1.5 million penalty was issued to a Canadian adviser and his related companies for their role in a tax exploitation scheme involving donations of pharmaceuticals to charities in Africa.
In 2015, the Federal Court determined the adviser, as well as companies Leaf Capital and Donors Without Borders, engaged in conduct that resulted in them being a promoter of a tax exploitation scheme.
The scheme involved the purchasing and donation of AIDS treatment pharmaceuticals to a charity based in Kenya. Under the arrangements, purchasers paid just 7.5% of the price of the treatments but claimed tax deductions of 100%.
The adviser brought the scheme to Australia in 2009 and 2010, marketing it to a number of financial advisers as well as directly to investors.
Participants would buy at least 10 ‘donation units’ priced at $2,000 each where each unit consists of 10 ‘treatment kits’ and pay 7.5% of the purchase price (or $150 per unit) immediately. The $1,850 balance was payable in 50 years' time, with a nominal interest rate of 0.108% per annum paid in advance.
An invoice for the full cost of the treatment kits allowed purchasers to claim a tax deduction for the full $2,000 amount, despite having paid only a fraction of that amount. Thus, the minimum purchase of 10 donation units would result in a deduction of $20,000 despite participants having outlaid less than $2,000 – as was highlighted in the adviser’s marketing of the scheme.
While it’s believed treatment kits were actually delivered to the nominated charity, it came at a high cost to investors and Australian taxpayers. Experts consulted during the trial estimated that the price at which the $2,000 treatment kits could be purchased on the open market in Kenya would be, at highest, just over $4.
The adviser, a Canadian citizen, previously engaged in similar schemes in Canada, which resulted in the Canada Revenue Agency revoking the registration of an entity involved in the schemes.
In handing down judgment, Justice Edmonds stated he was firmly of the view that the adviser engaged in conduct that resulted in himself, Leaf Capital and Donors Without Borders being a promoter of a tax exploitation scheme.
First use of Promoter Penalty Laws upheld on appeal
In the first use of Promoter Penalty Laws, the Full Federal Court upheld the ATO’s view on appeal, finding two financial advisers were promoters of a tax exploitation scheme and ordered a $180,000 penalty.
The advisers had both been involved in a plan to acquire $20 million worth of woodlots in a forestry managed investment scheme, and to sell further woodlots to secondary investors. Under the plan, loan obligations were intended to be met by investing profits from commissions, GST refunds, as well as income tax refunds from secondary investors.
Following an appeal, in 2013 the Federal Court found that both advisers’ activities were a tax exploitation scheme as defined under the Taxation Administration Act 1953. This is because it was reasonable to conclude they had entered into the scheme for the sole or dominant purpose of getting a scheme benefit. The advisers were also found to be promoters as they had marketed the scheme and received consideration in respect of that marketing.
The result was also important in confirming that the Commissioner does not need to prove an 'alternative postulate' before alleging a scheme benefit. What is required is what the entity was proposing to do and why and does not involve alternative positions. This conclusion makes it clear that the Promoter Penalty Laws can apply in situations where a scheme has not been implemented or where promotion has occurred without success.
Penalty and ban for promoter of illegal early access to super
The Federal Court imposed a $220,000 penalty and a seven-year ban for the promoter of an illegal early release of super scheme involving SMSFs.
The ATO, as regulator of the SMSF sector, commenced legal action against the New South Wales woman in 2018.
She had set up, or intended to set up, 35 SMSFs on behalf of 68 individuals between 2016 and 2018. She then helped the individuals, who were not yet legally entitled to access their super, to transfer their balances to the SMSF so they could withdraw it. This sometimes occurred on the same day.
Participants in the scheme reportedly used the money to fund a number of personal expenses including home renovations and stamp duty.
After seeking an initial injunction that placed a number of restrictions on the scheme’s facilitator, the ATO filed an application in the Federal Court seeking declaratory relief, a final injunction and payment of a civil penalty.
The case marks the first time we have used the Superannuation Industry (Supervision) Act 1993 to put a stop to a promoter of an illegal early release of super scheme. Further, it indicates that the court may impose a strong penalty for promoters of these sorts of arrangements.
Super is money set aside to provide for your retirement. Withdrawing your super early without meeting a condition of release can result in long-term financial damage. This can leave people with little or no super for their retirement as well as a significant tax bill on the amount withdrawn.
For more information, see media release Largest promoter penalty in R&D history handed down.
How Promoter Penalty Laws apply to make promoters of tax avoidance and evasion schemes accountable.