In this edition we talk to Tim Dyce, ATO Deputy Commissioner Aggressive Tax Planning about the shifting nature of tax avoidance schemes and how the ATO is keeping up with the challenge.
There was a lot of publicity around the bottom of the harbour schemes of the 1970s and the mass marketed schemes in the 1990s. Are tax avoidance schemes still a problem today?
Unfortunately, there will always be tax avoidance schemes as long as there is a tax system.
As former ATO Commissioner Trevor Boucher states in his book Blatant, artificial and contrived: Tax schemes of the 70s and 80s, 'all countries must face the prospect that some taxpayers will seek by means that they hope or believe to be legal to escape tax that the country's tax law requires to be paid'.
Our job is to decrease the supply of, and demand for, these arrangements by educating the community about the pitfalls of promoting and participating in tax avoidance.
What are the challenges for the ATO around tax avoidance schemes in 2012?
Tax avoidance schemes in the new century are much less obvious than those of earlier eras. The use of subtle marketing and the advent of social media makes it more difficult to monitor promoter activity, placing a strong reliance on intelligence from within the ATO as well as tax intermediaries and the wider community.
The participant market is also changing. The resources boom has resulted in a new generation of cashed-up investors. There are also those investors displaced by the collapse of the managed investment schemes industry who are seeking substitute investment opportunities. We need to ensure there is information and support available to help potential investors avoid getting caught up in a scheme.
While schemes are generally less overt than they used to be, there is growth in the incidence of structured loans and retail financial products with high risk features being marketed widely without the support of a product ruling. Some of these products are designed to offer significant tax benefits with little or no commercial purpose by containing artificial or contrived features such as complex dividend swap agreements, franking credit trading, synthetic investment structures and deferred purchase agreements.
Uncertainty caused by the current economic climate has provided an environment for schemes to develop, such as illegal early release of superannuation and abusive home mortgage schemes. Others exploit social conscience by promising inflated tax deductions for the donation of goods to charity.
What is the ATO doing to prevent another outbreak of tax avoidance schemes similar to what we saw during the mass marketed schemes era?
Much has changed since those types of schemes were prevalent in the 1990s. History has shaped our vigilant attitude to tax avoidance schemes. As an organisation we have made improvements to our risk analysis and intelligence activities, allowing us to better capture information on emerging risks. We also now have a range of remedies such as taxpayer alerts to provide an early warning of existing or emerging potential schemes. We encourage investors to ensure complex arrangements are covered by a product ruling and implemented as described, or to seek a private ruling to gain certainty about the tax consequences before entering into the arrangement. We also encourage investors to seek professional advice from someone not associated with the investment.
Importantly, we now have the capacity to take early and firm action against scheme promoters through application of the promoter penalty laws. These laws were introduced in 2006 and provide for tough penalties against scheme promoters, and allow for civil penalty proceedings in serious cases.
We have a number of civil investigations around tax planning arrangements in progress which are likely to proceed to litigation. Additionally we have initiated proceedings in the Federal Court on two potential contraventions of the promoter penalty laws.
By applying promoter penalty legislation as well as governance visits and early engagement with advisory firms, banks and retail financial institutions, we are sending a strong deterrent message to scheme promoters. Scheme promoters need to know that we will not tolerate the integrity of the tax system being undermined and will use these laws accordingly. The message to the community is that tax avoidance is not acceptable.
As I said earlier, schemes are constantly evolving, however we are now well placed to detect emerging schemes, deter participation and deal with promoters to avoid any future outbreaks.
How the ATO deals with tax avoidance schemes
- Prevention and early warning to taxpayers and advisers through product rulings, taxpayer alerts and marketing and education activities.
- Early detection of emerging schemes through risk management and intelligence, including early engagement with tax intermediaries.
- Fair treatment of participants.
- Firm action against promoters, including application of the promoter penalty laws.