Good governance and promoter penalty laws

Risk in purchasing an existing business unit from another entity

Where a tax intermediary purchases an existing business unit from another entity, there are potential promoter penalty and controversial tax position risks that flow from the vendor to the purchaser. These include:

• the impact that the acquisition of a business unit with a history of association with controversial tax positions may have on the risk profile of the purchaser's business and that of their clients
• pre-existing contractual arrangements involving controversial tax positions that the purchaser may then be responsible for implementing. These sort of risks may not have gone through the purchaser's full internal control or governance processes and may not have been considered in the due diligence process for the acquisition
• continuing sale of products or services involving controversial tax positions previously offered by the vendor, which the purchaser may then be marketing or encouraging. These sort of risks may not receive normal scrutiny by the purchaser's internal control or governance processes, because the staff in the new business unit are already offering these products or services at the time of the acquisition
• pre-existing staff in the new business unit (especially senior leaders) may have a different attitude about acceptable conduct or risk exposure for the business that are not aligned with that of the purchaser. This culture may lead to staff not following either the spirit or the letter of the purchaser's internal control or governance processes
• pre-existing relationships with higher risk appetite external advisers may continue, without the application of the purchaser's normal internal control or governance processes that would normally be used to engage such advisers.

The damage to the purchaser can be significant, so we encourage entities considering or making such purchases to factor these risks into their decision-making. Conversely, if an entity disposes of a business unit with a higher risk appetite, it may lower the level of these risks.

Many entities contacted by the ATO have recognised that these issues should be better and more overtly considered in due diligence processes carried out to support the acquisition of existing business units from another entity. Some entities have begun asking questions about the business unit's involvement with controversial tax planning arrangements that may have been questioned or challenged by the ATO, which may create future risks of promoter penalty action and resulting reputational or financial impacts.

Sections within Behaviours of concern

• Problematic marketing of tax services
• Contingent fees impeding objectivity of advice
• Caveats used ineffectively
• Misrepresentation of facts in ruling applications
• Misuse of ATO advice
• Mistaking a position as being reasonably arguable
• Incorrect implementation and marketing of product ruling arrangements
• Risk in purchasing an existing business unit from another entity
• Risks in acquiring staff from another business