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ATO issues warnings on service warrant schemes

THE Australian Taxation Office has released a tax determination TD 2003/9 on the use of service warrant schemes for tax deductions.

Tax commissioner Michael Carmody said the ATO would not allow tax deductions for pre-paid service warrant schemes currently being promoted by some lawyers and accountants.

“Like many of the mass marketed schemes disallowed by the tax office, service warrant schemes make no sense without the tax benefit and they appear to have no real underlying business activity,” Mr Carmody said.

“Investors should be very wary of the promotion of these schemes – especially past investors who are now being asked to re-invest.

“People should watch out for any scheme which boasts large tax deductions as its major selling point.”

The tax determination followed an earlier taxpayer alert, which was issued in 2002.

Under the schemes, promoters promise a large deduction for a small prepayment cash outlay for professional services such as medical, legal and accounting services.

The investor purchases a ‘service warrant’ for future professional services valued at, say, $100,000.

The investor pays a percentage of the warrant’s face value, for example, 12.5 per cent at a cost of $12,500.

The warrants are said to be redeemable for future services and may be purchased for the future provision of medical, accounting or other professional services to the value of $100,000.

The investor then claims a loss for the full value of the warrant, and receives a tax refund of $48,500.

After 12 months, the unused service warrants are bought back for an amount that offsets the investor’s outstanding liability of $87,500.

The ATO says service warrant schemes are not allowable because: investors are not in the business of trading in warrants; the full cost of the warrant is not borne by the investor; and the Part IVA anti-avoidance provision of the Tax Act would apply if it was shown that the investor entered the arrangement with the dominant purpose of avoiding tax.

CPA Australia WA director Justin Walawski said the use of the schemes by the accounting profession appeared not to be wide-spread, but he supported the ATOs early action in stamping down on the practice.

“I think the commissioner is acting fairly responsibly and the determination is consistent with discussions we had with him,” he said.

Mr Walawski said that by acting early the ATO would hopefully avoid the same situation as occurred when many investors where caught unaware by managed investment schemes.

While CPA Australia had been in discussion with the ATO about the schemes, he was unaware of any widespread use of the schemes by accountants.

“I have seen no evidence of it and to our knowledge none of our members are using them,” Mr Walawski said.

A spokesman from the ATO said the organisation had no further comment to make about the prevalence of the schemes.

In April last year the ATO issued a taxpayer alert on the schemes. The alert says it is focusing on partnerships that are set up and claiming losses by acquiring prepaid service warrants that may be redeemable for the provision of financial and wealth creation seminars.

Any taxpayer involved in acquiring and disposing of prepaid service warrants is in the sights of the ATO.

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