TAX campaigners have hailed a recent Federal Court decision as a big win for investors in mass marketed ‘tax effective’ investment schemes.
They have also played down the significance of a second court decision in favour of the Australian Taxation Office, which they said had limited application.
The two court cases are part of a long-running battle with the ATO, which retrospectively disallowed tax deductions claimed by about 60,000 investors in mass marketed schemes.
In the first case last week, Justice Robert Nicholson ruled that Kevin Sleight, an investor in the Northern Rivers Tea Tree Project in NSW, was entitled to 100 per cent of his claimed business deductions.
Justice Nicholson found that Part IVA (the general anti-avoidance provisions) of the Tax Act did not apply because Mr Sleight did not enter the project for the dominant purpose of acquiring a tax benefit.
In the second case, the Federal Court found that investor Noel Puzey was not allowed to claim a tax deduction for his investment in an Indian sandalwood plantation.
Australians for Tax Justice, which partly funded the court cases, said the rulings showed that each case would turn on its particular facts and circumstances.
“These contrary rulings clearly indicate that the commissioner should review the blanket approach he has taken to denying deductions to investors in all tax effective projects irrespective of the facts of each case,” AFTJ chairman Lawrence Henderson said.
“In Puzey’s case the commissioner’s legal approach to denying deductions to investors in that project has been largely confirmed, although the court has found that the ongoing management fees and rent are fully deductible, contrary to the commissioner’s arguments.
“However, more importantly, in Sleight’s case, Cooke’s case and Vincent’s case, the commissioner’s legal approach to denying deductions has been rejected.”
Mr Henderson argued that the sandalwood project’s unique structure and subsequent restructure meant it has limited application.
In contrast, he believes the Sleight decision has far broader potential application across some 60 other projects.
About 60,000 investors were caught up in more than 170 mass marketed schemes, and about 87 per cent accepted the ATO’s ‘take it or leave it’ settlement offer last year.
Lobby group Taxpayers Australia described the Sleight decision as “a win for taxpayers who held out but a loss for those who accepted the ATO’s settlement offer in good faith”.
“Taxpayers who accepted the ATO’s settlement offer cannot benefit from any favourable court outcome,” Taxpayers Australia said.
“This rough justice handed out by the ATO has resulted in overpayment of tax.”
Mr Henderson said the ATO’s “campaign” against investors had been based almost wholly on the Budplan court judgement.
“Budplan was a unique research and development investment and not in any way representative of the majority of some 174 other projects that have generated tax bills for investors,” he said.
Mr Henderson claimed the Northern Rivers Tea Tree Project was more typical of the majority of these projects, which were agriculturally based.
Entry into the scheme gave Mr Sleight an immediate tax deduction, which was sufficient to fund his participation in the project.
In addition, a significant proportion of the financial obligations that generated the tax deductions were funded by a limited recourse loan repayable only from the next proceeds of the scheme.
These amounts were held by the court to be deductible as business expenses incurred to derive assessable income.
The court acknowledged that the tax benefits were a significant element in proceeding with the project but were not the most influential reason.
It found that the tea tree project was commercially viable and run in a business-like manner, and that an investor in the project could reasonably expect a commercial return.
A spokesman for the ATO said it was reviewing the rulings.
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