Taxation Ruling

IT 2312

Income tax : remission of additional tax imposed in tax avoidance cases under anti-avoidance provisions or Part IVA

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FOI status:

May be releasedFOI number: I 1209849

PREAMBLE

This Ruling provides guidelines for the exercise of the Commissioner's discretion under sub-section 227(3) to remit the additional tax imposed by sections 224 and 226.

2. The guidelines take into account changes to the law following the enactment of the Taxation Laws Amendment Act 1984 which, inter alia, applies to schemes covered by sections 224 and 226 entered into on or after 14 December 1984.

3. Section 224 is concerned with schemes where the Commissioner applies an anti-avoidance provision of the Act (other than Division 13 or Part IVA) that involves or is dependent on the forming of an opinion, the attaining of a state of mind, the making of a determination or the exercise of a power by the Commissioner and the scheme is entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax. "Scheme" has the same meaning as it has in Part IVA of the Act.

4. Section 224 imposes additional tax by way of penalty equal to double the difference between the tax properly payable and the tax that would have been payable had the scheme been successful. A general power of remission is exercisable by the Commissioner under sub-section 227(3).

5. Section 226 is specifically concerned with Part IVA schemes entered into on or after 14 December 1984. Part IVA schemes entered into prior to that date were subject to the similar penalty provisions that were previously contained in the former sub-section 226(2A). Only schemes that are entered into or carried out for the sole or dominant purpose of enabling a taxpayer to pay no tax or less tax are within the scope of Part IVA.

6. Section 226 provides for the imposition of additional tax by way of penalty equal to double the difference between the tax properly payable - after cancellation under sub-section 177F(1) of a tax benefit - and the tax that would have been payable had the scheme been successful. Again, a general power of remission is exercisable by the Commissioner under sub-section 227(3).

7. In providing guidelines, there is no intention of laying down any conditions to restrict Deputy Commissioners and authorising officers in the exercise of the discretion to remit additional tax. It is essential that Deputy Commissioners and authorising officers retain the flexibility necessary to deal with each particular case on its merits. What is being attempted in this Ruling is to set out for the information of officers a guide as to the manner in which the discretion might generally be exercised.

8. It is emphasised that the guidelines do not represent a general exercise of the power of remission - they cannot. The legislation requires that the power to remit must be exercised in the light of the facts of each particular case. The guidelines are intended to assist officers in the exercise of the discretion and to help ensure that taxpayers do not receive inconsistent treatment from different Branch Offices. At all times, these remission guidelines should be administered in a common sense manner. Within the broad framework of the guidelines each case has to be determined on its own facts, i.e., the factors relevant to the remission of penalty have to be weighed up.

RULING

9. Taxation Ruling No. IT 2206, in dealing with the remission of penalty in section 223 cases (false or misleading statements), adopts the concept of a basic penalty of 40 per cent of the tax avoided (the culpability component) plus 20 per cent per annum (the interest component). This basic penalty of 40 per cent plus 20 per cent per annum is seen as the starting point for tax avoidance cases arising under sections 224 or 226 where there is reasonable co-operation with official enquiries.

10. The interest component in section 224 and 226 cases should generally be measured from the due date for lodgment of the taxpayer's return to the date when an original or amended assessment is made. However, in this calculation the taxpayer should not be penalised for delays occasioned by the ATO. Where a prepayment of tax in relation to the anticipated application of the anti-avoidance provisions is made, the interest component should be applied to the period measured from the due date for lodgment of the return until the date on which the payment was made.

11. In line with normal penalty guidelines, and subject of course to the maximum of 200 per cent additional tax by way of penalty in any one year of income, the culpability component should be increased by a further 10 per cent - 50 per cent of the tax sought to be avoided in each of the following circumstances -

(a)

deliberate steps have been taken, either before or after commencement of official enquiries, to conceal the avoidance of tax;

(b)

there has been a lack of co-operation such as to cause undue/excessive delay in the completion of official enquiries, and/or there has been obstruction or hindrance. The taxpayer under review is expected not only to assist by the provision of all relevant information in its possession but also to do all in its power to facilitate the obtaining of information from its associated entities;

(c)

there has been previous participation in tax avoidance or evasion practices by or on behalf of the taxpayer;

(d)

the taxpayer has promoted, advised or encouraged others in the practice of tax avoidance or tax evasion.

12. Over and above these four factors, it is considered that the general legislative intent apparent from the penalty provisions requires that an even further culpability factor should be imposed in all tax avoidance schemes covered by sections 224 and 226. In this connection, it is important that, unlike section 223, these provisions do not require any false or misleading statement for their operation and represent, therefore, a clear signal that taxpayers who enter into these schemes can expect higher than normal penalties (see also the penalties imposed by section 225 in Division 13 cases, discussed in Taxation Ruling No IT 2311).

13. A further culpability factor of at least 10 per cent is regarded as appropriate under this heading. This further penalty factor should also be imposed in cases where a prior advance ruling may have been sought from the ATO and the taxpayer was advised either that Part IVA would apply or that no assurance could be given that Part IVA would not apply. Indeed, there may be grounds in particular cases to support a view that a taxpayer who flaunts advice from the ATO by proceeding with a scheme may warrant an even higher penalty factor under this heading, particularly if the scheme is extremely blatant, artificial or contrived.

14. On the other hand, the basic penalty may be reduced where mitigating factors exist. For example, where there is a full complete and voluntary disclosure of all the material facts at the time of lodging all the relevant income tax returns, some further remission may be made depending on the nature, extent and timing of the disclosure and if the matter is clearly contentious. However, having regard to the general legislative intent, it is considered that the penalty generally should not be remitted to below a flat rate of 10 per cent plus 20 per cent per annum unless there are very exceptional circumstances.

15. In the past, public statements on behalf of the ATO have indicated a complete remission of penalty in Part IVA cases if there is a full and true disclosure of all the arrangements in the returns of income of all the relevant entities. To the extent that this Ruling provides that there generally should at least be a 10 per cent plus 20 per cent per annum imposition in cases where Part IVA is applied, these statements are now overruled. However, this new guideline is to be followed in respect of cases where there is a full and true disclosure, as described above, only if the return of the taxpayer concerned is lodged after the date of this Ruling.

COMMISSIONER OF TAXATION
7 August 1986

References

ATO references:
NO J209/100 P3

Date of effect:
Immediate

Related Rulings/Determinations:

IT 2121
IT 2206
IT 2311

Subject References:
REMISSION OF ADDITIONAL PENALTY TAX

Legislative References:
224
226
227(3)