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  • Recognising, rejecting and reporting tax avoidance

    This information is about good governance, recognising tax avoidance schemes, understanding how schemes operate, potential risks and how to report a tax avoidance scheme.

    Managing promoter penalty risks – good governance

    If you provide tax planning advice to clients, you need to consider what level of risk you'll accept and what processes you have in place to protect you and your practice from inadvertently breaking the promoter penalty laws.

    The guide to promoter penalty law will help you manage promoter penalty risks.

    Tax planning arrangements

    You should be cautious about any arrangement you recommend. You need to:

    • recognise when an arrangement may be a tax avoidance scheme
    • know the potential risks for facilitating a scheme.

    To avoid exposure to the promoter penalty laws, you must offer balanced and independent advice. You should not facilitate or advocate a tax avoidance scheme in any way. You should be especially careful in ensuring that you have a reasonably arguable position on an arrangement to:

    • identify accurate relevant and material facts (not just accept assumed or instructed facts without prudent questioning)
    • analyse relevant legal authorities for points of law, including ordinary provisions and anti-avoidance rules, and appropriately consider both positive and negative positions.

    The promoter penalty laws are not restricted to widely offered schemes. They can even apply where there is only one client in an arrangement.

    Practice staff

    The behaviour of your staff may increase your exposure to promoter penalty risks. It is important to ensure staff give balanced and independent advice to clients. They also need to explain the tax consequences of an arrangement.

    If you or your staff receive consideration for clients entering an arrangement you advocate, you should assess whether the benefits you receive are worth the exposure to significant risk.

    Case study

    Bob, a registered tax agent, has provided tax planning advice for many years to Carl, a plumber with his own business. This year, Bob tells Carl that he has identified an area of the law where there is room to manoeuvre. Bob states that he can design a structure for Carl, as a way to minimise his tax, for an extra fee.

    Bob has transitioned from merely providing advice to advocating an arrangement. If he is considered as having designed and sold tax exploitation schemes, we may now consider him to be a promoter and exposed to promoter penalty laws.

    Clients

    Clients who have an appetite for high-risk arrangements and tax avoidance schemes may increase the level of risk to you and your firm.

    You may need to reconsider your connection with any clients who:

    • insist on entering into arrangements where the risk is one that you are not comfortable with
    • won't take your advice and insist you make claims in their return that deliberately avoid or evade tax.

    You need to consider whether these connections are worth the potential penalties and risks to your reputation.

    If a client asks about involvement in a scheme

    Your clients may ask you about minimising tax through tax-effective schemes or structures. They may ask you to complete a tax return based on advice they obtained from another adviser or scheme promoter.

    You can help your clients avoid penalties or tax debts by explaining the difference between legitimate tax minimisation and abusive tax avoidance schemes.

    You should advise your clients that:

    • it is their responsibility to comply with the tax laws
    • if involved in a tax avoidance scheme, they will be liable for the tax they avoided, plus penalties and interest
    • as a professional registered tax agent, you have a responsibility to exclude any false or misleading claims from their return.

    If you think a client may be involved in a scheme, either inadvertently or otherwise, you should encourage them to make a voluntary disclosure to us. This may help them to avoid or minimise potential penalties for any tax shortfalls.

    See also:

    How schemes operate

    Schemes often involve a series of complex transactions. They typically move funds through several entities, such as trusts, to avoid or minimise tax otherwise payable. Schemes may also involve distorting the way funds are used to enable a taxpayer to claim deductions, tax credits or offsets that they are not entitled to.

    Some of the indicators of a tax avoidance scheme, alone or together, are where it:

    • is carried out in a contrived or artificial way
    • uses complex structures or intra-group transactions to create tax benefits that are unrelated to the commercial activity
    • involves a low level of financial risk and a large tax benefit not usual for a commercially driven transaction
    • includes any of the following
      • round robin finance
      • circular funds movement
      • non-recourse or limited recourse loans paid off by future earnings
      • use of tax exempt entities such as charities, or entities with accumulated tax losses, to wash income
      • use of a tax haven or bank secrecy country without any sound economic reason
      • not implemented as stated in any relevant product ruling.
       

    See also:

    How to report a tax avoidance scheme

    With your help, we can challenge promoters and take steps to protect your clients from participating in schemes that may lead to tax debts or penalties.

    Advising us of tax schemes and scheme promoters helps us to protect the integrity of the taxation and superannuation systems. It helps maintain a level playing field for you by preventing less reputable agents obtaining a competitive advantage through selling tax avoidance schemes.

    See Making a tip-off for information on how to report suspected tax avoidance schemes.

    If you are involved in promoting a tax scheme

    If you find yourself inadvertently involved in the promotion of a tax avoidance scheme and you let us know, we will help you.

    Depending on the conduct, we will accept a voluntary undertaking. This will be strictly confidential and contains no admission of liability or exposure to reputational risk through publicity. This excludes circumstances where we are enforcing a breach in the terms of the undertaking.

    We take a careful and considered approach to legal action. We go to court after carefully considering the seriousness and extent of the conduct.

    Last modified: 03 Mar 2020QC 33370