Tax loophole sewn up

Commissioner of Taxation Mich-ael Carmody seems to generate a host of publicity at this time of the year, as promoters of harebrained schemes try to lull the usually unsuspecting public into parting with their money.

This year is no exception.

The commissioner has just issued a final ruling following a draft ruling late last year in regard to four basic varieties of schemes, which have been marketed fairly aggressively by accounting and law firms to their clients.

The first of these involves the investment of six and seven figure sums by employees into non-complying superannuation schemes set up in New Zealand. The superannuation fund then loans back the money to the employee in Australia.

This has the effect of avoiding income tax, fringe benefits tax, superannuation surcharge, tax on investments and tax on end benefits.

The ATO’s response to this is to deny deductions for the contribution, applying FBT to the contribution, taxing the contribution in the hands of the fund and applying Part IVA, the tax avoidance provisions of the scheme.

Additionally, the ATO will impose penalties on the participants.

In another scheme, individuals holding a 50 per cent voting right in an employer would contribute $1 million into a non-complying superannuation fund and in the process eliminate their entire income tax liability.

Mr Carmody said: “in the case of superannuation and employee share arrangements they seek to secure even more concessional treatment than supported by Parliament”.

“Far from securing the claimed benefits, it is the Tax Office’s view that in their contrivance participants are exposing themselves to possible multiple taxing points and penalties,” he said.

The interesting aspect of this ruling is that some of the schemes targeted had received rulings from the ATO in the past that were purported to be binding.

Mr Carmody concedes that while he is usually bound by previous rulings, this is not the case with these schemes because “the arrangements we have seen have not been implemented according to the facts presented”.

“In what is a highly competitive marketplace, arrangements are often hastily marketed on the basis of abbreviated summaries.

“We are bound under law to stand by our rulings. While not bound at law, administratively we adhere to our advance opinions because this is in the public interest.”

“In this case, I considered whether the balance of the public interest was in not adhering to those opinions.

“In the end event, I have not felt the need to reach a conclusion because we consider these private binding rulings and advance opinions are unlikely to have any practical application.”

Mr Carmody has, however, offered an olive branch of sorts.

If any taxpayer in this type of scheme voluntarily declares their involvement to the ATO, they will have a reduced penalty of 5 per cent apply and a single, rather than multiple, tax liability imposed on them.

The taxpayer does retain the usual rights of appeal to the High Court in order to test the ATO’s interpretation of the issues which generally involves a fairly lengthy process of appeal and counter appeal.

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