were often aggressively marketed to participants who had no control over, and very little knowledge of, the internal workings of the arrangements, and
may rely on common structuring features including:
round robin financing
limited or non-recourse loans, and
participant obligations limited to investment profits.
The Tax Office view
Our concerns centre mainly on the financial arrangements surrounding the schemes. These arrangements included round-robin arrangements, limited or non-recourse loans and guaranteed return arrangements.
Round robin arrangements are broadly circular transactions involving the passing of documents between participating parties, usually arranged to take place on the same day, with no change in the overall level of cash.
Non-recourse loans are where the loan provider has no recourse as to the investor’s other assets if the investor defaults on the loan. A limited recourse loan is where the loan provider has recourse as to a defaulting payment; however in these cases it was usually limited to any profits derived from the scheme.
Guaranteed return arrangements involved contributions by investors to a promoter and a guaranteed return to the investor a few years later. The guaranteed return amount was usually slightly in excess of the amount contributed.
The settlement offer
On 14 February 2002 the Commissioner announced a settlement offer for mass marketed investment scheme participants in order to encourage and assist taxpayers in resolving their scheme debts.
Under the settlement terms most participants who entered into a settlement agreement with the Tax Office would have received:
a deduction for cash outlaid under the terms of the original contract for the scheme investment;
full remission of penalties and interest; and
a two year interest free period for debt repayment (subject to entering into a suitable payment arrangement).
The settlement offer closed on 21 June 2002.
Who was eligible for the settlement offer?
The offer only applied to participants in specific schemes identified by the Tax Office. Schemes covered by the settlement announcement were those which were widely marketed and entered into in the 1998-1999 and earlier years.
The offer reflected the following unique circumstances of the participants and the tax system at the time. This combination of circumstances is unlikely to ever occur again.
(1) typical investors possessed the following characteristics:
they lacked full knowledge of the scheme arrangements and the operation of the tax system
were often subject to aggressive and sophisticated marketing techniques
generally had a good tax record, and
typically took advice from people expected to have the necessary knowledge to foresee the pitfalls.
(2) Mass marketed investment scheme participants invested at a time when investor protection measures such as Product Rulings were not available, or had only just been introduced, or in the case of Taxpayer Alerts did not yet exist.
What to read/do next
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