The opportunity to invest in a variety of schemes that have been issued with an ATO product ruling is often advertised by investment brokers. We have noted that potential participants are sometimes offered a rebate of some, or all, of the commissions the investment broker will receive from the promoter of the scheme once the participant has been accepted into the scheme.
The tax treatment of these rebates in the hands of the participant will depend on the tax treatment of participants in the ATO product ruling that was issued in relation to the scheme.
A major area of concern is where a commission rebate is directed to a taxpayer other than the participant who has claimed the initial deductions, and where the other taxpayers pays a lower rate of tax on the assessable rebate income. Consideration will be given to whether or not this feature may trigger Part IVA of the ITAA 1936.
Carrying on a business
If the product ruling indicates the participant is carrying on a business, in relation to their scheme participation, any commission rebate received will be assessable income of the participant in the year of receipt. The participant will need to include the commission rebate they receive from the investment broker as income from the business activity in their relevant income tax return. If a participant is entitled to receive a rebate or a similar payment, and the participant directs the payment of such an amount to be made to another entity, this amount will also be included in the participant's assessable income in the year the other entity receives it.
If the product ruling indicates the participant is not carrying on a business in relation to their scheme participation, any rebate, commission or similar payment the participants receives from the promoter is assessable income of the participant in the year received. Any rebate, commission or similar payment received by the participant from any other entity as a result of their participation in the scheme, will also be assessable income of the participant in the year received. Any rebate, commission or similar payment received as a result of their participation in the scheme, and which the participant directs be made to another entity, will be included in the participant’s assessable income in the year the other entity receives it.
We issued Taxpayer Alert TA 2008/11 Land Impairment Trust Arrangement on 6 June 2008. Taxpayer alerts are an 'early warning' to taxpayers and their advisers of significant tax planning issues or arrangements that we have concerns about or have under risk assessment.
The alert describes land impairment trust arrangements associated with managed investment schemes. These arrangements involve the sale of land at an impaired value by a member of a group of entities that are treated as a consolidated group for income tax purposes.
Some applications have raised issues about whether the subject scheme would result in an oversize common law partnership, which is prohibited by section 115 of the Corporations Act 2001.
Our position is that we will not rule on arrangements which are prohibited by law.