Tax planning can be complex. It is important that you make sure your arrangement to reduce tax is legitimate and lawful.
We strongly advise that you seek independent advice from an adviser who has no connection to the seller or the arrangement before entering into any agreement.
You can also:
- Check taxpayer alerts to see whether we have concerns about the arrangement.
- If you are obtaining advice from a tax agent, check they are a registered tax agent at the Tax Practitioners BoardExternal Link.
- Ask about other qualifications your adviser holds, such as current memberships with professional associations like CPA AustraliaExternal Link or Chartered Accountants ANZExternal Link.
- Check product rulings. If we have already issued a product ruling for the arrangement it provides you with certainty, as long as the arrangement is implemented exactly as outlined in the ruling.
- Apply for a private ruling to cover your own circumstances if you are not sure about the tax consequences of an arrangement you are considering.
- Check with us through our early engagement advice service.
- Make sure you receive a product disclosure statement (PDS). A PDS sets out important information about an arrangement. You and your adviser should carefully review this before making any decisions.
- Check for a valid licence. A person who offers financial products and advice must be one of the following:
- an Australian Financial Services (AFS) licence holderExternal Link
- a director or employee of an AFS licence holder
- an authorised representative of an AFS licence holder.
If the person or organisation offering you the arrangement doesn't hold a valid licence issued by the Australian Securities & Investments Commission (ASIC), they could be operating illegally and your investment may not be protected if things go wrong. You can find out more at ASIC's Money SmartExternal Link.
What to look out for
Anyone can be a promoter of an unlawful tax planning scheme including accountants, lawyers, financial advisers, telemarketers and salespeople in shopping centres.
Be wary of promoters that:
- offer zero-risk guarantees for their product
- refer you to a particular adviser or expert (they may claim the adviser has specific knowledge about the arrangement and the promised tax benefits)
- claim to be an industry or topic expert
- ask you to maintain secrecy to protect the arrangement from rival firms
- charge a fee or commission based on tax saved
- discourage you from obtaining independent advice
- do not have a PDS or prospectus for the product
- offer advice about illegal phoenixing or liquidation of key companies.
Many tax schemes are promoted with mechanisms to meet your financing needs. The following should be considered as warning signs:
- 'Round robin' financing, where the funds are passed through various entities and usually back to the initial entity (for example, the promoter lending you the money to invest in the product).
- 'Non-recourse' loans that you don't have to repay if the investment goes bad (the lender has no recourse under the terms of the loan to pursue the debt if you fail to repay it).
- Complex financing arrangements involving limited recourse loans, where your liability is limited to your share in the investment.
- Investments that are primarily funded through tax deductions – for example, by including substantial interest prepayments in a financial year.
Structure of schemes
The way an arrangement is structured can indicate it might be a scheme. Be careful of any arrangement that involves:
- deferring income to a later tax period so the tax is paid in a later period
- not declaring income or hiding income (for example, in an offshore location such as a tax haven)
- changing the nature of the income so less tax is paid (for example, changing capital expenses into revenue expenses)
- changing private expenses into business expenses so they can be claimed against income
- creating an entitlement to a tax offset or credit that wouldn't otherwise have been available
- moving income to a trust or partnership to split it among people in a lower tax bracket so less tax is paid
- inflating or artificially creating deductions
- moving taxable income to an entity that is tax exempt or has a lower tax rate, such as a charity, company or super fund.
- setting up a business for the sole purpose of obtaining tax benefits – when there is no business purpose to the arrangement.
Don't take a promoter's guarantee that there is no risk in participating in an arrangement. Always check before you commit to an arrangement.
Media: Recognising tax schemes
https://tv.ato.gov.au/ato-tv/media?v=bd1bdiun1qgdsbExternal Link (Duration: 00:14)