The fact sheet Recognising and reporting tax avoidance schemes is also available to download in Portable Document Format [PDF 80 KB].
Your clients may ask you about minimising tax through tax effective schemes. They may ask you to complete a tax return based on advice they obtained from another adviser or scheme promoter.
As your client’s tax agent, you act in the best interest of your client. However, as an intermediary between your client and us, you also must act in the interest of the community. As such, your obligation to your client must be subject to the law.
Therefore, you need to:
- be able to explain the difference between tax minimisation and tax avoidance to your clients
- be able to recognise signs of a tax avoidance scheme
- know how to investigate a potential tax avoidance scheme
- tell us about anyone who promotes potential tax avoidance schemes.
Tax minimisation is when taxpayers legitimately arrange their affairs to reduce the amount of tax they pay. It complies with both the letter and spirit of the law.
Tax avoidance is when taxpayers try to improve their financial position through arrangements that may:
- comply literally with parts of the law but not with the intention
- be defeated by anti-avoidance laws.
The following characteristics, alone or together, are signs of tax avoidance schemes.
The scheme:
- is contrived or artificial in the way it is carried out
- uses complex structures or intra-group transactions to create tax benefits which are not related to the commercial activity
- involves a low level of financial risk and a large tax benefit that you would not expect in a commercially driven transaction
- is aimed at duplicating the tax benefits of a single investment or activity, whether within Australia or between Australia and another jurisdiction
- is based on assumptions, including ‘blue sky’ projections, which can lead to
- asset valuations that seem excessive
- inflated deduction claims
- includes any of the following
- round robin finance
- circular funds movement
- non recourse or limited recourse loans to be paid off by future earnings
- contains mechanisms for winding up or exiting an arrangement before net income is generated for investors or to avoid collection processes
- is not carried out according to contracts or other legal documents
- abuses concessions within the tax laws or seems to go against the policy behind those concessions (eg research and development or primary production concessions)
- uses tax exempt entities (eg charities), or entities with accumulated tax losses, to wash income
- defers income or accelerates deductions to defer or avoid paying tax altogether
- involves a tax haven or bank secrecy country without any sound economic reason
- may include
- large up front deductions
- inflated fee prepayment
- guaranteed returns
- little direct involvement by investors.
As a tax agent, you need to take reasonable care to make sure your clients correctly interpret and apply the law.
You have a duty to ask about key aspects of an arrangement and to explain to your client in a balanced way how the law applies to their circumstances, including how we may apply anti-avoidance rules.
If you are not sure how a tax law applies to a particular scheme, the following may help you:
- tax law and supporting material (eg explanatory memoranda)
- court decisions on tax laws interpretations
- our views on how tax laws operate (rulings and determinations)
- our views in documents such as income tax form instructions, BAS instructions, fact sheets, practice statements and alerts.
Commentaries, information services or professional association publications may help you with initial research, but will not provide any protection from potential penalties for false statements.
If you think a scheme may be a tax avoidance scheme:
- check licence details free at www.fido.gov.au – people who offer financial products and advice must work for a business that holds an Australian financial service licence issued by the Australian Securities and Investment Commissions (ASIC)
- if your client hasn’t received either a product disclosure statement or prospectus (potential investors must be given one of these), contact the provider. If the provider cannot supply one, contact ASIC at infoline@asic.gov.au
- check with us at www.ato.gov.au or by phoning us on 1800 177 006 to find out if the scheme has a product ruling – many tax effective investments have product rulings. A product ruling provides the taxpayer with a legally binding assurance that the tax benefits set out in the ruling will be available, as long as the scheme is carried out as described in the ruling
- check taxpayer alerts at www.ato.gov.au or phone us on 1800 177 006 to find out if the scheme has any of the characteristics described in the alerts. Our taxpayer alerts are early warnings of significant and emerging tax planning issues we are assessing
- visit our website at www.ato.gov.au to apply to us for a private ruling for your client to confirm the tax effects of the arrangement. Taxpayers can rely on private rulings as binding, as long as the scheme is carried out as described in the ruling.
We recommend you advise your client that:
- it is their responsibility to comply with the tax laws
- if the scheme breaks the law, they will be liable for the tax they avoided plus penalties and interest
- you have a responsibility as their professional registered tax agent to leave out any false or misleading claims from their return.
If your client still insists on lodging a false return, you should not continue to prepare that tax return.
Tax avoidance scheme promoters damage their clients’ interests, the tax profession and the broader community, as well as trying to obtain an unfair advantage over more responsible practitioners.
If you have reviewed a tax scheme for your client and have concerns about the promoter or the scheme, phone our priority Tax Professional Integrity Service on 1800 639 745.
We will investigate further and take action to stop the promoter marketing the scheme if it seems outside the law. This will help stop other taxpayers from investing in the scheme and the promoter gaining a bigger foothold in the marketplace.
How can your clients obtain warnings?
Before investing in tax effective schemes, we recommend taxpayers:
- seek independent advice from tax professionals like you
- check information and warnings about investment schemes and scams on the Australian Securities and Investment Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) SCAMwatch websites.
For more information about tax planning, schemes and promoter penalty law, visit:
- our website at www.ato.gov.au and select Compliance issues – Tax planning and schemes
- the ASIC consumer website at www.fido.gov.au
- the ACCC SCAMwatch website at www.scamwatch.gov.au
Last Modified: Friday, 24 April 2009
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