Alert_Number,Title,Date_of_Issue,Status,Overview,Description,Example,Our_Concerns,What_ATO_Is_Doing,What_You_Should_Do,Related_Documents,Is_Withdrawn,Source_URL,Unmatched_Content
TA 2026/1,Contrived property development arrangements between related parties that defer recognition of income and exploit tax losses,14 January 2026,Current,"1. We are currently reviewing certain property development arrangements between related parties involving long-term construction contracts that appear to be designed to create an artificial mismatch between the recognition of income from the property development activity and deductions claimed for the costs of development, such that tax on the profits may be indefinitely deferred. The losses generated are utilised within the group to obtain a tax advantage. | 2. In these arrangements, a special purpose developer entity (developer) is interposed between an entity that owns the land being developed (landowner) and another entity undertaking building and construction works on the land (builder). The interposition of the developer artificially separates the landownership and development activities which are, in substance, a single economic activity of property development. | 3. This Alert outlines the features of concern, and the steps taxpayers should consider if they are involved in similar arrangements.","4. The property development arrangements under review typically involve the following characteristics: • A separation of landownership and development activities is created through the interposition of an existing or newly established special purpose developer entity between the landowner and builder. • The landowner and the developer are under common ownership or control. • The landowner and the developer enter a Property Development Agreement (PDA) using a long-term construction contract that spans more than one income year. • The terms of the contract deliberately provide that the developer does not derive any income for managing and delivering the development until the project is completed. • While under the terms of the contract the developer purportedly provides development services to the landowner, in practice there is minimal or no evidence that the developer does, or has the capacity to, undertake the development. That is, the developer exists in form only, and it appears that the services provided to the landowner are all outsourced to the builder and funded by another party. • The losses (arising from the deductions claimed progressively for construction costs while the recognition of income is deferred) are then offset against other income earned by the developer or used to offset other income of the economic group. • This arrangement may be repeated in a deliberate manner to coordinate with the timing of income from the broader economic group or other development projects, resulting in minimal to no tax being paid across the economic group. • While minimal to no tax is paid, there can be significant growth in the wealth of the economic group, and in some cases this wealth is subsequently extracted by individual controllers of the group for their personal benefit. | • A separation of landownership and development activities is created through the interposition of an existing or newly established special purpose developer entity between the landowner and builder. • The landowner and the developer are under common ownership or control. • The landowner and the developer enter a Property Development Agreement (PDA) using a long-term construction contract that spans more than one income year. • The terms of the contract deliberately provide that the developer does not derive any income for managing and delivering the development until the project is completed. • While under the terms of the contract the developer purportedly provides development services to the landowner, in practice there is minimal or no evidence that the developer does, or has the capacity to, undertake the development. That is, the developer exists in form only, and it appears that the services provided to the landowner are all outsourced to the builder and funded by another party. • The losses (arising from the deductions claimed progressively for construction costs while the recognition of income is deferred) are then offset against other income earned by the developer or used to offset other income of the economic group. • This arrangement may be repeated in a deliberate manner to coordinate with the timing of income from the broader economic group or other development projects, resulting in minimal to no tax being paid across the economic group. • While minimal to no tax is paid, there can be significant growth in the wealth of the economic group, and in some cases this wealth is subsequently extracted by individual controllers of the group for their personal benefit.","5. The following example illustrates the common features of these arrangements. Diagram 1: Typical long-term construction contract arrangement – exploiting developer's losses | Diagram 1: Typical long-term construction contract arrangement – exploiting developer's losses | 6. Adam controls a number of entities (Adam's economic group). An entity in Adam's economic group, Green Acres Co, owns land that was acquired for development. Prior to the commencement of development of the land, Adam establishes a special purpose company, Develop-It Co, who will be responsible for conducting the development activity. Adam is the director of the company and he and his wife each hold 50% of the shares in the company. Develop-It Co then enters into a PDA with Green Acres Co. | 7. A contract between the parties documents the responsibilities and the payment obligations of the parties. Under the terms of the contract, Develop-It Co is entitled to invoice Green Acres Co progressively for the development services. The life of the PDA is expected to be 3 years. | 8. Develop-It Co has no employees and holds minimal assets, such that it cannot undertake the development without obtaining funding from another party. The funds are borrowed from a financial institution. Green Acres Co's land is put up as security for the loan provided to Develop-It Co. | 9. Develop-It Co contracts with Build-It-Up Co (an unrelated company) to carry out the physical construction work. Develop-It Co incurs construction costs and pays Build-It-Up Co progressively throughout the duration of the project and, in turn, claims tax deductions for the costs progressively as they are incurred. However, Develop-It Co chooses not to invoice Green Acres Co for the development services it provides on a progressive basis. | 10. This mismatch between income earned and deductions claimed on the property development activity results in Develop-It Co generating tax losses. These losses are utilised over the life of the development, offsetting distributions of income from the Adam Family Trust. | 11. In the final year of the development, Adam creates another company within the group to acquire another parcel of land for development. This company enters into a PDA with Develop-It Co so that when Develop-It Co recognises the income from the development of Green Acres Co, losses are being incurred to offset that income. Adam replicates this structure across multiple consecutive or concurrent projects, which results in the perpetual deferral of tax on group profits, potentially indefinitely.","12. We are concerned that related parties undertaking these arrangements are, in substance, undertaking a single economic activity of property development, yet have artificially separated landownership and development activities to gain a tax advantage. | 13. We are concerned that the arrangements are contrived and designed to artificially separate the landownership and development activities to: • inappropriately manipulate application of the trading stock provisions under Division 70 of the Income Tax Assessment Act 1997 by the landowner entity • inappropriately defer the recognition of income by the developer entity • generate artificial losses in the developer entity that are used to offset other income within the economic group, leading to reduced tax or no tax being paid • with repeated use of the arrangement in a deliberate manner, ensure reduced tax or no tax being paid, sometimes indefinitely and enable wealth extraction. | • inappropriately manipulate application of the trading stock provisions under Division 70 of the Income Tax Assessment Act 1997 by the landowner entity • inappropriately defer the recognition of income by the developer entity • generate artificial losses in the developer entity that are used to offset other income within the economic group, leading to reduced tax or no tax being paid • with repeated use of the arrangement in a deliberate manner, ensure reduced tax or no tax being paid, sometimes indefinitely and enable wealth extraction. | 14. These arrangements may be a scheme under section 177D to which the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 apply.","15. We are actively reviewing arrangements involving long-term construction contracts that exhibit features similar to those described in this Alert. To address the concerns identified, we will: • engage with taxpayers involved in these arrangements involving related parties that raise compliance risks • shortly publish a draft practical compliance guideline for comment to accompany this Alert. The draft Guideline will outline our proposed compliance approach, including indicators of higher-risk arrangements and illustrative examples likely to attract scrutiny, including when we are likely to undertake further compliance activity through reviews and audits. | • engage with taxpayers involved in these arrangements involving related parties that raise compliance risks • shortly publish a draft practical compliance guideline for comment to accompany this Alert. The draft Guideline will outline our proposed compliance approach, including indicators of higher-risk arrangements and illustrative examples likely to attract scrutiny, including when we are likely to undertake further compliance activity through reviews and audits. | 16. Our aim is to ensure the consistent application of tax law and to deter the use of contrived structures that compromise the integrity of the tax system and disadvantage compliant taxpayers.","17. If you are currently involved in, or considering entering into, an arrangement of this nature, you should: • Seek independent professional advice. • Ask us for our view through a private ruling . • Make a voluntary disclosure to reduce potential penalties. | • Seek independent professional advice. • Ask us for our view through a private ruling . • Make a voluntary disclosure to reduce potential penalties. | 18. Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties for promoters under Division 290 of Schedule 1 to the Taxation Administration Act 1953. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15 | ITAA 1997 Div 70 | ITAA 1936 Pt IVA | ITAA 1936 177D | TAA 1953 Sch 1 Div 290 | Tax Agent Services Act 2009,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20261/NAT/ATO/00001,Refer to Law Administration Practice Statement PS LA 2008/15 Taxpayer Alerts for more information about Alerts. See Alerts issued to date. | Commissioner of Taxation 14 January 2026
TA 2025/1,Managed investment trusts: restructures to access the managed investment trust withholding regime,7 March 2025,Current,,1. We are currently reviewing arrangements that inappropriately seek to take advantage of the managed investment trust (MIT) withholding regime through the restructure of inward investment structures.,"6. Overseas Entity (OvEn) is a non-resident entity covered by subsection 275-20(4) of the ITAA 1997. OvEn indirectly owns 100% of the shares in Australian Company (AuCo) via its single subsidiary, Overseas Company (OvCo). AuCo owns Australian commercial property assets and has derived rental income from this investment for a number of years. OvEn decides the Australian commercial property interests will be sold in the future. | 7. In advance of the eventual sale, OvEn forms a new subsidiary (New OvCo), which it capitalises by injecting share capital. New OvCo subscribes for new shares in AuCo which amount to 10% of the issued shares. | 8. OvCo and New OvCo settle an Australian Unit Trust (AuT) and undertake a restructure (utilising CGT rollover provisions and the disregarding of transactions within a tax consolidated group) which results in AuT owning the commercial property assets. | 9. As AuT has 2 unitholders, it purports to meet the requirement to be a MIS (as defined by section 9 of the Corporations Act 2001) in paragraph 275-10(3)(c) of the ITAA 1997 and meets the other requirements for being a MIT under paragraph 275-10(1)(a) of the ITAA 1997. Diagram 1: Pre-restructure and post-restructure of OvEn | Diagram 1: Pre-restructure and post-restructure of OvEn | 10. For 2 years after the restructure, the result of the restructure is that the 'fund payment' component of the 'net income' of AuT is subject to MIT withholding tax under section 840-805 of the ITAA 1997, and is: • subject to a final 15% MIT withholding tax, and • NANE income of OvCo and New OvCo (section 840-815 of the ITAA 1997). | • subject to a final 15% MIT withholding tax, and • NANE income of OvCo and New OvCo (section 840-815 of the ITAA 1997). | 11. AuT then sells its commercial property assets. As a result, CGT event A1 happens and AuT makes a capital gain (and is deemed to be a capital gain regardless of whether the asset was held on revenue account). | 12. The capital gain purportedly forms part of the fund payment to AuT's unitholders for the relevant financial year. The intended result is that this fund payment by AuT will be subject to MIT withholding tax under section 840-805 of the ITAA 1997, and will be: • subject to a final 15% MIT withholding tax, and • NANE income of OvCo and New OvCo (section 840-815 of the ITAA 1997). | • subject to a final 15% MIT withholding tax, and • NANE income of OvCo and New OvCo (section 840-815 of the ITAA 1997). | 13. If the restructure had not been implemented, AuCo would have been subject to tax on its net rental income and capital gains (or revenue gains) at 30%.","2. The MIT withholding regime was implemented to provide concessional taxation to Australian collective investment vehicles that predominantly undertake passive investment. | 3. We are concerned with arrangements that restructure an existing trust or other inward investment structure to inappropriately access the MIT withholding regime (including deemed capital gains tax (CGT) treatment), including where that restructure is connected with the disposal of trust property or assets held by entities controlled by the trust. | 4. These arrangements generally display the following features. • An Australian entity holds passive assets, but does not meet the requirements to access the MIT withholding tax regime, for example, because: – it is not a trust (for example, it is a company that is not a corporate collective investment vehicle (CCIV)) – it is a unit trust directly owned by a single unitholder (and therefore does not meet the requirements of being a managed investment scheme (MIS)), or – the management of the trust does not satisfy the requirements in section 275-35 of the Income Tax Assessment Act 1997 (ITAA 1997). • Restructure steps are undertaken to seek to satisfy the requirements to access the MIT withholding tax regime, for example, by: – unnecessarily restructuring the ownership of the entity or underlying assets so that: o the inward investment structure includes an Australian unit trust o that unit trust is wholly directly owned by 2 or more unitholders who are not all MITs, to meet the pooled investment requirements to be a MIS, and o it is wholly indirectly owned by a single foreign entity covered by subsection 275-20(4) of the ITAA 1997, or – changing arrangements such that the management of the trust is provided by an entity which meets the licencing requirements in section 275-35 of the ITAA 1997. • The restructure steps are done for the purpose of accessing the MIT withholding regime. | • An Australian entity holds passive assets, but does not meet the requirements to access the MIT withholding tax regime, for example, because: – it is not a trust (for example, it is a company that is not a corporate collective investment vehicle (CCIV)) – it is a unit trust directly owned by a single unitholder (and therefore does not meet the requirements of being a managed investment scheme (MIS)), or – the management of the trust does not satisfy the requirements in section 275-35 of the Income Tax Assessment Act 1997 (ITAA 1997). • Restructure steps are undertaken to seek to satisfy the requirements to access the MIT withholding tax regime, for example, by: – unnecessarily restructuring the ownership of the entity or underlying assets so that: o the inward investment structure includes an Australian unit trust o that unit trust is wholly directly owned by 2 or more unitholders who are not all MITs, to meet the pooled investment requirements to be a MIS, and o it is wholly indirectly owned by a single foreign entity covered by subsection 275-20(4) of the ITAA 1997, or – changing arrangements such that the management of the trust is provided by an entity which meets the licencing requirements in section 275-35 of the ITAA 1997. • The restructure steps are done for the purpose of accessing the MIT withholding regime. | – it is not a trust (for example, it is a company that is not a corporate collective investment vehicle (CCIV)) – it is a unit trust directly owned by a single unitholder (and therefore does not meet the requirements of being a managed investment scheme (MIS)), or – the management of the trust does not satisfy the requirements in section 275-35 of the Income Tax Assessment Act 1997 (ITAA 1997). | – unnecessarily restructuring the ownership of the entity or underlying assets so that: o the inward investment structure includes an Australian unit trust o that unit trust is wholly directly owned by 2 or more unitholders who are not all MITs, to meet the pooled investment requirements to be a MIS, and o it is wholly indirectly owned by a single foreign entity covered by subsection 275-20(4) of the ITAA 1997, or – changing arrangements such that the management of the trust is provided by an entity which meets the licencing requirements in section 275-35 of the ITAA 1997. | o the inward investment structure includes an Australian unit trust o that unit trust is wholly directly owned by 2 or more unitholders who are not all MITs, to meet the pooled investment requirements to be a MIS, and o it is wholly indirectly owned by a single foreign entity covered by subsection 275-20(4) of the ITAA 1997, or | 5. We are concerned that: • These arrangements may present a risk that either: – the Australian trust does not satisfy the substantive requirement to be a MIT eligible to access the MIT withholding regime (for example, a unit trust will not qualify as a MIS as defined in section 9 of the Corporations Act 2001 where the unitholders in the trust are all companies within the same corporate group and the promoter of the trust is also a member of that corporate group [1] ), or – Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies where there is no commercial rationale for the steps taken to qualify that trust as a withholding MIT. The tax benefits we are concerned about are the non-inclusion of income (including capital gains) in assessable income where the MIT withholding regime treats that income as non-assessable, non-exempt (NANE) income. • These arrangements may be accompanied by other features such as the use of multiple CGT rollovers or the introduction of related party debt into Australia, which increase risks relating to the operation of various provisions, including but not limited to Part IVA of the ITAA 1936. | • These arrangements may present a risk that either: – the Australian trust does not satisfy the substantive requirement to be a MIT eligible to access the MIT withholding regime (for example, a unit trust will not qualify as a MIS as defined in section 9 of the Corporations Act 2001 where the unitholders in the trust are all companies within the same corporate group and the promoter of the trust is also a member of that corporate group [1] ), or – Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies where there is no commercial rationale for the steps taken to qualify that trust as a withholding MIT. The tax benefits we are concerned about are the non-inclusion of income (including capital gains) in assessable income where the MIT withholding regime treats that income as non-assessable, non-exempt (NANE) income. • These arrangements may be accompanied by other features such as the use of multiple CGT rollovers or the introduction of related party debt into Australia, which increase risks relating to the operation of various provisions, including but not limited to Part IVA of the ITAA 1936. | – the Australian trust does not satisfy the substantive requirement to be a MIT eligible to access the MIT withholding regime (for example, a unit trust will not qualify as a MIS as defined in section 9 of the Corporations Act 2001 where the unitholders in the trust are all companies within the same corporate group and the promoter of the trust is also a member of that corporate group [1] ), or – Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies where there is no commercial rationale for the steps taken to qualify that trust as a withholding MIT. The tax benefits we are concerned about are the non-inclusion of income (including capital gains) in assessable income where the MIT withholding regime treats that income as non-assessable, non-exempt (NANE) income.","14. We are currently reviewing these arrangements and are engaging in discussions with taxpayers. Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny. | 15. We are also aware that there are existing MITs that were established for the making of new inbound investments into Australia (as opposed to a restructure) that are indirectly owned by a single foreign entity covered by subsection 275-20(4) of the ITAA 1997. The potential application of Part IVA of the ITAA 1936 may also be a relevant consideration for these structures. However, we will not apply our compliance resources to these structures if they were established prior to the publication of this alert unless there is material new investment or ownership change.","16. If you have entered, or are contemplating entering, into an arrangement of this type, we encourage you to email us using the contact details provided at the end of this Alert. | Commissioner of Taxation 7 March 2025 | © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | Date of Issue: 7 March 2025 | Date of Effect: N/A | [1] Schemes where the unitholders and the scheme's promoter are all companies within the same corporate group (being 'related bodies corporate' as that term is defined in the Corporations Act 2001) are excluded from being a MIS by virtue of the exclusion set out in paragraph (e) in the definition of 'managed investment scheme' in section 9 of the Corporations Act 2001 . For MIT structures where all the unitholders are part of the same corporate group, we will seek to identify the promoter (or promoters) of the unit trust to consider whether this exclusion has application. | File 1-YXXVAH6 | Related Practice Statements: PS LA 2008/15 | Legislative References: ITAA 1936 Pt IVA ITAA 1997 275-10(1)(a) ITAA 1997 275-10(3)(c) ITAA 1997 275-20(4) ITAA 1997 275-35 ITAA 1997 840-805 ITAA 1997 840-815 Corporations Act 2001 9 | Contact officer: Dean Barrie Email: PGIAdvice@ato.gov.au | ISSN: 2651-9550",PS LA 2008/15 | ITAA 1936 Pt IVA | ITAA 1997 275-10(1)(a) | ITAA 1997 275-10(3)(c) | ITAA 1997 275-20(4) | ITAA 1997 275-35 | ITAA 1997 840-805 | ITAA 1997 840-815 | Corporations Act 2001 9,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20251/NAT/ATO/00001,"Note: the Government announced on 13 March 2025 that there will be amendments to the income tax laws to ensure certain investors can continue to access concessional withholding tax rates in Australia - see Clarifying tax arrangements for managed investment trusts . We cannot provide advice on unenacted measures, and any updates to guidance will be provided once legislative amendments are made. | Example – restructure to access the managed investment trust withholding regime | Refer to PS LA 2008/15 for more information about Alerts. See Alerts issued to date."
TA 2025/2,Arrangements designed to improperly obtain goods and services tax refunds,24 July 2025,Current,"1. Following the issue in December 2024 of the Serious Financial Crime Taskforce intelligence bulletin - targeting fraud in GST refunds , we continue to observe artificial and contrived arrangements involving structuring between entities working together to improperly obtain immediate refunds of goods and services tax (GST). The corresponding GST liabilities are either indefinitely deferred or deliberately evaded. | 2. These arrangements involve false invoicing, where entities claim GST credits for acquisitions they did not make or did not make to the extent claimed and are established to obtain a benefit from the tax system to which there is no entitlement. This is tax fraud. | 3. The arrangements typically involve: • purported high-value acquisitions of goods or services at inflated prices, giving rise to large GST refund claims • the appearance of high-value transactions taking place where, in reality no transactions have occurred or, if transactions have occurred, not to the extent claimed • services often vaguely described as 'project management' or 'consultancy services', deliberately making the services difficult to verify. | • purported high-value acquisitions of goods or services at inflated prices, giving rise to large GST refund claims • the appearance of high-value transactions taking place where, in reality no transactions have occurred or, if transactions have occurred, not to the extent claimed • services often vaguely described as 'project management' or 'consultancy services', deliberately making the services difficult to verify. | 4. Entities are often using these arrangements as a form of finance to obtain an unfair competitive advantage.","5. The arrangements of concern usually include some or all of the following features: • The supplier and the recipient are not dealing at arm's length and are often related parties or associates of one another. There may be 'straw directors' installed to obscure the true nature of their connection. • The supplier and the recipient may or may not be part of a larger group of entities [1] , some or all of which undertake genuine business activities. • There is false invoicing between related entities – for example, inflating invoices or issuing invoices where nothing is actually provided or that do not include sufficient detail about what has been purportedly supplied. • There is deliberate misaligning of GST accounting methods across a group of entities – for example, one entity operating on a non-cash basis while another on a cash basis in order to contrive a GST refund before any GST becomes payable. • There are multiple entities within the group claiming a GST credit for the same acquisition. • The activity that the purported acquisition is in relation to is not undertaken, nor ever seriously contemplated. | • The supplier and the recipient are not dealing at arm's length and are often related parties or associates of one another. There may be 'straw directors' installed to obscure the true nature of their connection. • The supplier and the recipient may or may not be part of a larger group of entities [1] , some or all of which undertake genuine business activities. • There is false invoicing between related entities – for example, inflating invoices or issuing invoices where nothing is actually provided or that do not include sufficient detail about what has been purportedly supplied. • There is deliberate misaligning of GST accounting methods across a group of entities – for example, one entity operating on a non-cash basis while another on a cash basis in order to contrive a GST refund before any GST becomes payable. • There are multiple entities within the group claiming a GST credit for the same acquisition. • The activity that the purported acquisition is in relation to is not undertaken, nor ever seriously contemplated. | 6. Examples of common elements in these arrangements: • The parties enter into contractual agreements for the purported supply of services, often vaguely described as 'project management' or 'consultancy services' [2] , for a commercially unrealistic price. • The contractual agreements are designed to give the arrangement the pretence of legitimacy; however, the services described in the agreements are not supplied and key clauses are never enforced. • In some cases, the supplier contends that it procured third parties, who are also complicit, to provide the services. • Payment for the services does not occur. Either the outstanding amount remains unpaid or it is asserted that payment has been made after a round-robin movement of funds between the parties. It may be clear that the recipient does not have the capacity to pay for the purported services. • The participants may claim that consideration has been provided by way of a reduction to a previously existing loan owed to the supplier by the recipient or that payment is contingent upon an event yet to occur. • The recipient claims the GST credit on its purported acquisition from the supplier in the tax period in which it receives the tax invoice. To support the recipient's GST credit claim, the supplier will assert that it has or will have a GST liability but – does not lodge its Business activity statement (BAS) for the tax periods during which it purportedly made the supplies – lodges its BAS but fails to report the GST liability on the purported supplies – lodges its BAS and reports the GST liability but offsets all or the majority of the liability through claims for GST credits on acquisitions it did not make, or – lodges its BAS and reports the GST liability but fails to pay the liability. • Often the participants in these arrangements are related entities or associates of one another and would be eligible to elect to form a GST group under Division 48 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) but choose not to. GST grouping would normally eliminate GST on intra-group transactions and thus prevent participants obtaining some of the typical improper GST benefits from these arrangements. • Entities involved in the arrangements often liquidate to circumvent compliance or recovery action by us. | • The parties enter into contractual agreements for the purported supply of services, often vaguely described as 'project management' or 'consultancy services' [2] , for a commercially unrealistic price. • The contractual agreements are designed to give the arrangement the pretence of legitimacy; however, the services described in the agreements are not supplied and key clauses are never enforced. • In some cases, the supplier contends that it procured third parties, who are also complicit, to provide the services. • Payment for the services does not occur. Either the outstanding amount remains unpaid or it is asserted that payment has been made after a round-robin movement of funds between the parties. It may be clear that the recipient does not have the capacity to pay for the purported services. • The participants may claim that consideration has been provided by way of a reduction to a previously existing loan owed to the supplier by the recipient or that payment is contingent upon an event yet to occur. • The recipient claims the GST credit on its purported acquisition from the supplier in the tax period in which it receives the tax invoice. To support the recipient's GST credit claim, the supplier will assert that it has or will have a GST liability but – does not lodge its Business activity statement (BAS) for the tax periods during which it purportedly made the supplies – lodges its BAS but fails to report the GST liability on the purported supplies – lodges its BAS and reports the GST liability but offsets all or the majority of the liability through claims for GST credits on acquisitions it did not make, or – lodges its BAS and reports the GST liability but fails to pay the liability. • Often the participants in these arrangements are related entities or associates of one another and would be eligible to elect to form a GST group under Division 48 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) but choose not to. GST grouping would normally eliminate GST on intra-group transactions and thus prevent participants obtaining some of the typical improper GST benefits from these arrangements. • Entities involved in the arrangements often liquidate to circumvent compliance or recovery action by us. | – does not lodge its Business activity statement (BAS) for the tax periods during which it purportedly made the supplies – lodges its BAS but fails to report the GST liability on the purported supplies – lodges its BAS and reports the GST liability but offsets all or the majority of the liability through claims for GST credits on acquisitions it did not make, or – lodges its BAS and reports the GST liability but fails to pay the liability. | 7. Figure 1 of this Alert is a diagrammatic representation of the arrangement. Figure 1: Arrangement | Figure 1: Arrangement",,"8. We are concerned that entities are using these types of arrangements to commit tax fraud by improperly obtaining GST refunds and evading GST obligations. The arrangements undermine the integrity of the tax system by seeking to exploit the GST rules. | 9. Entities are often using these arrangements to obtain an unfair competitive advantage. This creates an uneven playing field for businesses doing the right thing. | 10. The purported supplies in these arrangements are artificial, contrived and improperly obtain a tax benefit for the entities involved. | 11. There is no entitlement to a GST credit where no taxable supply has been made by the supplier or where the purchaser does not provide (and is not liable to provide) consideration.","12. Each case turns on its own facts and circumstances. We are engaging with taxpayers to ensure that all parties have correctly met their GST and income tax obligations. Taxpayers and advisers who adopt these types of arrangements will be subject to increased scrutiny from us. | 13. We have sophisticated systems in place to identify high-risk GST refunds. Transactions are not viewed in isolation and we will withhold refunds pending a review to ensure compliance with the GST Act. | 14. We will consider whether any taxable supplies have been made by the supplier and whether consideration was provided and there is a genuine liability to provide consideration by the recipient. | 15. We will also examine whether the documentation for the purported transactions reflects the true intentions of the parties and whether the arrangements (or particular steps within the arrangement) are shams at general law. | 16. The anti-avoidance provisions of Division 165 of the GST Act may apply, where the arrangements are artificial and contrived in their design and execution. | 17. In appropriate cases, sanctions under criminal law may apply to fraudulent claims. | 18. Registered tax agents advising entities to incorrectly claim GST credits may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. | 19. Promoter penalty laws may also apply under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters of these types of arrangements.","20. You should consider whether our concerns apply to you. If you have entered into a similar arrangement to that described in this Alert, we encourage you to: • phone or email us using the contact details provided at the end of this Alert • seek independent advice as to the legal and tax consequences of your arrangement • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us using the contact details provided at the end of this Alert • seek independent advice as to the legal and tax consequences of your arrangement • make a voluntary disclosure to reduce penalties that may apply. | 21. Penalties may apply if you have not complied with your GST or income tax obligations in relation to such arrangements. Penalties may be significantly reduced if you contact us and make a voluntary disclosure. Generally, the reduction is greater if you make the disclosure before we notify you of an examination of your tax affairs. | 22. If you are a registered tax agent or tax adviser who has been involved in these arrangements, you are at risk of being perceived as a 'promoter' of a scheme. We encourage you to engage with us.",PS LA 2008/15 | ANTS(GST)A 1999 Div 48 | ANTS(GST)A 1999 Div 165 | TAA 1953 Sch 1 Div 290 | Tax Agent Services Act 2009,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20252/NAT/ATO/00001,"Refer to Law Administration Practice Statement PS LA 2008/15 Taxpayer Alerts for more information about Alerts. See Alerts issued to date. | Commissioner of Taxation 24 July 2025 | [1] References to a group are not necessarily references to a GST group under Division 48 of the A New Tax System (Goods and Services Tax) Act 1999 . | [2] We are aware of instances where arrangements involve the purported sale of goods, including real property, equipment or machinery, between colluding parties."
TA 2025/3,Arrangements to improperly access deductions for donations of 'barter credits',17 November 2025,Current,,"1. We are currently reviewing cases where taxpayers have entered into a non-recourse or limited recourse borrowing arrangement that is purported to access barter credits or trade dollars (described as 'barter credits' in this Alert) from a barter exchange. | 2. The barter credits acquired by the taxpayer are purportedly donated to a deductible gift recipient (DGR). The taxpayer is led to believe they can claim an income tax deduction in their tax return for the nominal face value of the donated barter credits. | 3. These arrangements typically display all or most of the following features: • The taxpayer pays a fee (including goods and services tax) to access the barter exchange (which may be described as an 'enabling' or 'establishment' fee). • In exchange for payment of the fee to the barter exchange, the taxpayer is able to enter into a non-recourse or limited recourse borrowing to access barter credits (described as a 'barter credit loan facility' in this Alert) from the barter exchange. • The nominal face value of the barter credits received by the taxpayer under the barter credit loan facility is greater than the fee paid by the taxpayer to the barter exchange. In some cases, the nominal face value of the barter credits received under the barter credit loan facility may be up to 10 times the dollar value of the fee paid. • The barter credit loan facility arrangements typically have some or all of the following characteristics - The loan is non-recourse or limited recourse and there is no security sought over assets of the 'borrower' (the taxpayer). - There are extended loan terms (in some cases, terms may be as much as 25 years), or shorter loan terms, with options for the loan arrangement to be extended or rolled over for a further period. - No interest accrues or is payable on the outstanding balance of the barter credit loan facility. - There is no obligation to make repayments or no specified consequences if the barter credit loan facility is not repaid. Alternatively, there may be a requirement to repay the barter credit loan facility which may be satisfied by way of barter credits. • The taxpayer donates the barter credits obtained under the barter loan facility to a DGR that accepts them as donations. • The DGR provides the taxpayer with a receipt for the nominal face value of the donated barter credits. • The taxpayer claims a deduction for the full nominal face value of the donated barter credits disclosed in the receipt in their tax return. • The barter credits may not provide the DGR with genuine access to goods or services through the barter exchange, or the value of goods and services that may be, in fact, accessed is significantly less than the nominal face value of the barter credits that are donated. Diagram 1 – Example of barter credit donation arrangement | • The taxpayer pays a fee (including goods and services tax) to access the barter exchange (which may be described as an 'enabling' or 'establishment' fee). • In exchange for payment of the fee to the barter exchange, the taxpayer is able to enter into a non-recourse or limited recourse borrowing to access barter credits (described as a 'barter credit loan facility' in this Alert) from the barter exchange. • The nominal face value of the barter credits received by the taxpayer under the barter credit loan facility is greater than the fee paid by the taxpayer to the barter exchange. In some cases, the nominal face value of the barter credits received under the barter credit loan facility may be up to 10 times the dollar value of the fee paid. • The barter credit loan facility arrangements typically have some or all of the following characteristics - The loan is non-recourse or limited recourse and there is no security sought over assets of the 'borrower' (the taxpayer). - There are extended loan terms (in some cases, terms may be as much as 25 years), or shorter loan terms, with options for the loan arrangement to be extended or rolled over for a further period. - No interest accrues or is payable on the outstanding balance of the barter credit loan facility. - There is no obligation to make repayments or no specified consequences if the barter credit loan facility is not repaid. Alternatively, there may be a requirement to repay the barter credit loan facility which may be satisfied by way of barter credits. • The taxpayer donates the barter credits obtained under the barter loan facility to a DGR that accepts them as donations. • The DGR provides the taxpayer with a receipt for the nominal face value of the donated barter credits. • The taxpayer claims a deduction for the full nominal face value of the donated barter credits disclosed in the receipt in their tax return. • The barter credits may not provide the DGR with genuine access to goods or services through the barter exchange, or the value of goods and services that may be, in fact, accessed is significantly less than the nominal face value of the barter credits that are donated. | - The loan is non-recourse or limited recourse and there is no security sought over assets of the 'borrower' (the taxpayer). - There are extended loan terms (in some cases, terms may be as much as 25 years), or shorter loan terms, with options for the loan arrangement to be extended or rolled over for a further period. - No interest accrues or is payable on the outstanding balance of the barter credit loan facility. - There is no obligation to make repayments or no specified consequences if the barter credit loan facility is not repaid. Alternatively, there may be a requirement to repay the barter credit loan facility which may be satisfied by way of barter credits. | Diagram 1 – Example of barter credit donation arrangement",,"4. While each case will depend on the relevant facts and circumstances, we are concerned that these arrangements are, at best, ineffective for tax purposes and may even be unlawful. | 5. We are also concerned that some taxpayers may be entering into these arrangements under the mistaken belief that they are entitled to tax deductions for the full nominal face value of barter credits donated to a DGR. | 6. We are concerned that: • In some cases, the entry into a barter credit loan facility, and the subsequent donation of those barter credits to a DGR may be a sham, or part of a larger sham arrangement including the establishment of barter exchanges which are never intended to undertake or support real commercial activities. • Some of the parties may be complicit and share an intent to participate in an unlawful (and possibly fraudulent) tax scheme. • Even where the arrangement is not a sham, the barter credit loan facility arrangements may not reflect ordinary commercial loan terms and raise questions about whether there is a genuine loan and a genuine expectation that the 'loan' will be repaid. • It is possible that the barter credits held under the terms of the loan facility cannot be effectively donated to the DGR. • The donation of the barter credits may not satisfy the requirements to be a gift (including the requirement of benefaction). • If the donation is a gift - whether taxpayers are entitled to a deduction at all or entitled to a deduction for the full nominal face value of the barter credits under section 30-15 of the Income Tax Assessment Act 1997 - that taxpayers may be incorrectly relying on paragraph 15 of Taxation Ruling IT 2668 Income tax: barter and countertrade transactions to treat the value of one donated barter credit as equivalent to one Australian dollar. IT 2668 does not support this valuation basis in arrangements of the kind described in this Alert. [1] • The following anti-avoidance provisions may apply - section 78A of the Income Tax Assessment Act 1936 (ITAA 1936) – this specific anti-avoidance provision relating to gifts to DGRs may apply to deny a deduction for the donation of the barter credits to the DGR - Part IVA of the ITAA 1936 – the arrangement may constitute a scheme under the general anti-avoidance provisions in Part IVA. | • In some cases, the entry into a barter credit loan facility, and the subsequent donation of those barter credits to a DGR may be a sham, or part of a larger sham arrangement including the establishment of barter exchanges which are never intended to undertake or support real commercial activities. • Some of the parties may be complicit and share an intent to participate in an unlawful (and possibly fraudulent) tax scheme. • Even where the arrangement is not a sham, the barter credit loan facility arrangements may not reflect ordinary commercial loan terms and raise questions about whether there is a genuine loan and a genuine expectation that the 'loan' will be repaid. • It is possible that the barter credits held under the terms of the loan facility cannot be effectively donated to the DGR. • The donation of the barter credits may not satisfy the requirements to be a gift (including the requirement of benefaction). • If the donation is a gift - whether taxpayers are entitled to a deduction at all or entitled to a deduction for the full nominal face value of the barter credits under section 30-15 of the Income Tax Assessment Act 1997 - that taxpayers may be incorrectly relying on paragraph 15 of Taxation Ruling IT 2668 Income tax: barter and countertrade transactions to treat the value of one donated barter credit as equivalent to one Australian dollar. IT 2668 does not support this valuation basis in arrangements of the kind described in this Alert. [1] • The following anti-avoidance provisions may apply - section 78A of the Income Tax Assessment Act 1936 (ITAA 1936) – this specific anti-avoidance provision relating to gifts to DGRs may apply to deny a deduction for the donation of the barter credits to the DGR - Part IVA of the ITAA 1936 – the arrangement may constitute a scheme under the general anti-avoidance provisions in Part IVA. | - whether taxpayers are entitled to a deduction at all or entitled to a deduction for the full nominal face value of the barter credits under section 30-15 of the Income Tax Assessment Act 1997 - that taxpayers may be incorrectly relying on paragraph 15 of Taxation Ruling IT 2668 Income tax: barter and countertrade transactions to treat the value of one donated barter credit as equivalent to one Australian dollar. IT 2668 does not support this valuation basis in arrangements of the kind described in this Alert. [1] | - section 78A of the Income Tax Assessment Act 1936 (ITAA 1936) – this specific anti-avoidance provision relating to gifts to DGRs may apply to deny a deduction for the donation of the barter credits to the DGR - Part IVA of the ITAA 1936 – the arrangement may constitute a scheme under the general anti-avoidance provisions in Part IVA. | 7. We are also concerned that these arrangements are being facilitated by barter exchanges and being marketed and promoted as supposedly legitimate tax arrangements to taxpayers as a means of reducing their tax payable or increasing refunds.","8. We are actively reviewing these arrangements and are engaging with relevant taxpayers, barter exchanges and DGRs to ensure that all parties have correctly met their income tax obligations. In the course of these reviews, we will also consider any related goods and services tax obligations. | 9. We are developing our technical position on the arrangements and will publish further guidance in due course. This may include clarification that the valuation principles in IT 2668 have no application to arrangements of this kind. | 10. Taxpayers and advisers who facilitate or promote these types of arrangements will be subject to increased scrutiny. | 11. We are liaising with the Australian Charities and Not-for-profits Commission in respect of participating DGRs, and the Australian Securities and Investments Commission in respect of participating barter exchanges.","12. If you have entered, or are contemplating entering, into a similar arrangement to that described in this Alert, we encourage you to: • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent advice as to the legal and tax consequences of your arrangement • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent advice as to the legal and tax consequences of your arrangement • make a voluntary disclosure to reduce penalties that may apply. | 13. Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties for promoters under Division 290 of Schedule 1 to the Taxation Administration Act 1953. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15 | IT 2668 | ITAA 1936 78A | ITAA 1936 Pt IVA | ITAA 1997 30-15 | TAA 1953 Sch 1 Div 290 | Tax Agent Services Act 2009,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20253/NAT/ATO/00001,"Refer to Law Administration Practice Statement PS LA 2008/15 Taxpayer Alerts for more information about Alerts. See Alerts issued to date. | Commissioner of Taxation 17 November 2025 | [1] Paragraph 15 of IT 2668 only applies in limited circumstances to a business-oriented countertrade organisation, to treat the fair market value of one barter credit unit to equal one Australian dollar, unless it can be shown that the barter credit units are being traded consistently at a different value. The valuation basis mentioned in paragraph 15 of IT 2668 does not apply to support a deduction in arrangements of the kind described in this Alert because there is a question as to the appropriate value (if any) of the barter credits in these circumstances."
TA 2024/1,Early stage investor tax offset claimed using circular financing arrangements,10 December 2024,Current,,"1. We are currently reviewing cases where individuals have claimed the early stage investor tax offset on shares acquired through tailored financing arrangements. These arrangements appear designed to artificially meet the conditions for claiming the maximum tax offset, allowing individuals to benefit with minimal (if any) risk on their investment. Entities promote, orchestrate, and finance these schemes primarily for the individuals to obtain the tax offset, with the refunded offset shared with those entities. | 2. These arrangements typically display all or most of the following features. • The individual becomes or is made aware of an opportunity to invest in a start-up company. • The company is held out to qualify as an early stage innovation company (ESIC) under subsection 360-40 of the Income Tax Assessment Act 1997 (ITAA 1997). • A financing arrangement is offered to fund the individual's share subscription amount, less any nominal deposit required. This enables the individual to acquire shares, typically up to an amount that qualifies for the maximum tax offset. [1] • The company places the subscription amount back on deposit with the financier who controls the use of the subscription monies by the company. This includes limiting that amount which the company can directly apply to further its stated innovation and commercialisation activities. • The individual claims the tax offset in their tax return and receives a refund. [2] This refund is typically available as the tax offset reduces the individual's tax liability on their salary and wage income, enabling a refund of PAYG withholding or other credits. • The tax offset refund is used to partially repay the finance. • The remainder of the financing is repaid by the individual within a short period out of subscription monies returned to the individual by the company. This returned amount is typically by way of selective share buy-back (or other disposal) of some or all of the individual's shares. • In substance: - the individual has paid no amount for any residual shareholding they might continue to have in the company, and - the refunded tax offset is shared between the individual, the company and the entities facilitating and financing the individual's share subscription. | • The individual becomes or is made aware of an opportunity to invest in a start-up company. • The company is held out to qualify as an early stage innovation company (ESIC) under subsection 360-40 of the Income Tax Assessment Act 1997 (ITAA 1997). • A financing arrangement is offered to fund the individual's share subscription amount, less any nominal deposit required. This enables the individual to acquire shares, typically up to an amount that qualifies for the maximum tax offset. [1] • The company places the subscription amount back on deposit with the financier who controls the use of the subscription monies by the company. This includes limiting that amount which the company can directly apply to further its stated innovation and commercialisation activities. • The individual claims the tax offset in their tax return and receives a refund. [2] This refund is typically available as the tax offset reduces the individual's tax liability on their salary and wage income, enabling a refund of PAYG withholding or other credits. • The tax offset refund is used to partially repay the finance. • The remainder of the financing is repaid by the individual within a short period out of subscription monies returned to the individual by the company. This returned amount is typically by way of selective share buy-back (or other disposal) of some or all of the individual's shares. • In substance: - the individual has paid no amount for any residual shareholding they might continue to have in the company, and - the refunded tax offset is shared between the individual, the company and the entities facilitating and financing the individual's share subscription. | - the individual has paid no amount for any residual shareholding they might continue to have in the company, and - the refunded tax offset is shared between the individual, the company and the entities facilitating and financing the individual's share subscription. | 3. For sophisticated investors [3] , the terms of the arrangement usually provide a longer period that covers the greater tax offset available to them and the longer period over which the benefit of the tax offset may be realised. | 4. This Alert does not apply to arrangements where the individual makes a genuine investment for the full amount of shares acquired in a start-up that qualifies as an ESIC and the money invested is to be genuinely used by the ESIC.","9. This example illustrates, for an unsophisticated investor, an arrangement to which this Alert applies. Our concern is not limited to the specific scenario described but, rather, can apply to variations of this scenario with its main features, as outlined in paragraphs 1 to 4 of this Alert. | 10. An adviser or other intermediary (Entity A) connects the individual (Investor) with companies said by Entity A to be start-up companies needing seed capital. Through promotional material, Entity A further states that: • The start-up company (StartupCo) satisfies the legislative requirements for it to be an ESIC. • Were the Investor to invest up to $50,000 in StartupCo, they would qualify for both - the early stage investor tax offset of up to $10,000 - capital gains tax relief on the future realisation of their investment. | • The start-up company (StartupCo) satisfies the legislative requirements for it to be an ESIC. • Were the Investor to invest up to $50,000 in StartupCo, they would qualify for both - the early stage investor tax offset of up to $10,000 - capital gains tax relief on the future realisation of their investment. | - the early stage investor tax offset of up to $10,000 - capital gains tax relief on the future realisation of their investment. | 11. At or before the matching services are provided by Entity A to StartupCo: • Entity A agrees with StartupCo for Entity A to provide to StartupCo corporate operating and management services subject to the terms of their agreement (Management Agreement). • An associate of Entity A (Entity B) agrees with StartupCo for Entity B to receive and hold monies on account of StartupCo subject to the terms of their agreement (Deposit Agreement). | • Entity A agrees with StartupCo for Entity A to provide to StartupCo corporate operating and management services subject to the terms of their agreement (Management Agreement). • An associate of Entity A (Entity B) agrees with StartupCo for Entity B to receive and hold monies on account of StartupCo subject to the terms of their agreement (Deposit Agreement). | 12. Entity A then takes the following actions: • Through Entity B, Entity A allows Investors to borrow (Loan Agreement) the share subscription amount with minimal deposit and no security other than the allotted StartupCo shares. The Investor's borrowing under the Loan Agreement is to be repaid annually in arrears with interest. • Entity A purports to Investors that interest they pay under the Loan Agreement is tax deductible. • Entity A assures Investors both as to the continued minimum value of their investment in the first year and their having the opportunity to exit the arrangement at the end of Year 1 (Investment Period). | • Through Entity B, Entity A allows Investors to borrow (Loan Agreement) the share subscription amount with minimal deposit and no security other than the allotted StartupCo shares. The Investor's borrowing under the Loan Agreement is to be repaid annually in arrears with interest. • Entity A purports to Investors that interest they pay under the Loan Agreement is tax deductible. • Entity A assures Investors both as to the continued minimum value of their investment in the first year and their having the opportunity to exit the arrangement at the end of Year 1 (Investment Period). | 13. Entity B: • on behalf of the Investor, electronically transfers the share subscription amount to StartupCo, and the Investor is issued shares in StartupCo • receives from StartupCo, the re-transferred share subscription amount as deposit to be held by Entity B subject to the terms of the Deposit Agreement. | • on behalf of the Investor, electronically transfers the share subscription amount to StartupCo, and the Investor is issued shares in StartupCo • receives from StartupCo, the re-transferred share subscription amount as deposit to be held by Entity B subject to the terms of the Deposit Agreement. | 14. Entity A, with Entity B and its controllers through the Management Agreement and Deposit Agreement: • control StartupCo's corporate, financial management, budgeting, business and operational activities for the duration of their association with StartupCo • preserve the value of the Investor's shares during the Investment Period by restricting StartupCo's access to and spending of the Investor subscription funds, even on its innovation and commercialisation activities during that period. | • control StartupCo's corporate, financial management, budgeting, business and operational activities for the duration of their association with StartupCo • preserve the value of the Investor's shares during the Investment Period by restricting StartupCo's access to and spending of the Investor subscription funds, even on its innovation and commercialisation activities during that period. | 15. Shortly after the end of the income year in which the Investor has invested in StartupCo, the Investor lodges their tax return claiming a $10,000 early stage investor tax offset (on an investment of $50,000), anticipating a refund of income tax paid of at least $10,000 (Offset Refund Amount). | 16. The Offset Refund Amount is used to partially repay the Investor's loan with Entity B. | 17. At the end of the Investment Period, StartupCo, in collaboration with Entity A and Entity B, facilitates the disposal of shares held by the Investor in StartupCo. The shares are disposed of at the same price they were originally subscribed for, and the number of shares disposed of is sufficient to repay the Investor's loan (and accrued capitalised interest) liability to Entity B. | 18. During the Investment Period, there is no objective expectation for the Investor to receive (nor actual payment of) any dividend by StartupCo with respect to their shares. | 19. On conclusion of the arrangement, the Investor's liability to Entity B is repaid and the Investor holds only a residual shareholding in StartupCo.","5. We are concerned that individual taxpayers may be entering into these arrangements under the mistaken belief that they are entitled to the tax benefits claimed. | 6. We are concerned that: • The individual investor does not qualify for an early stage investor tax offset under Division 360 of the ITAA 1997 for amounts received or entitled to be received by the issuing company, given the issuing company immediately after the time of share issue is not an ESIC under section 360-40 of the ITAA 1997. • The individual investor is not entitled to a general deduction for interest expense incurred on their borrowing under section 8-1 of the ITAA 1997. • The ESIC investment arrangement is a scheme under section 177D of the Income Tax Assessment Act 1936 (ITAA 1936) to which the general anti-avoidance provisions in Part IVA of the ITAA 1936 apply, and if the individual investor was entitled to early stage investor tax offset or general deduction, we would cancel the offset and deduction. | • The individual investor does not qualify for an early stage investor tax offset under Division 360 of the ITAA 1997 for amounts received or entitled to be received by the issuing company, given the issuing company immediately after the time of share issue is not an ESIC under section 360-40 of the ITAA 1997. • The individual investor is not entitled to a general deduction for interest expense incurred on their borrowing under section 8-1 of the ITAA 1997. • The ESIC investment arrangement is a scheme under section 177D of the Income Tax Assessment Act 1936 (ITAA 1936) to which the general anti-avoidance provisions in Part IVA of the ITAA 1936 apply, and if the individual investor was entitled to early stage investor tax offset or general deduction, we would cancel the offset and deduction. | 7. Individuals will also not be entitled to capital gains tax exemptions under section 360-50 of the ITAA 1997 when they dispose of their shares because they were not entitled to the tax offset. | 8. We are also concerned that these arrangements are being promoted by advisers as legitimate tax arrangements to both individual taxpayers and start-up companies seeking seed capital.","20. We are currently undertaking a number of activities in relation to the arrangements outlined in this Alert, including: • reviewing these types of arrangements, and engaging with taxpayers and companies in respect of historical and existing arrangements • producing a taxation determination on whether Part IVA of the ITAA 1936 can apply to the arrangements covered by this Alert. | • reviewing these types of arrangements, and engaging with taxpayers and companies in respect of historical and existing arrangements • producing a taxation determination on whether Part IVA of the ITAA 1936 can apply to the arrangements covered by this Alert. | 21. Taxpayers and advisers who facilitate or promote these types of arrangements will be subject to increased scrutiny.","22. If you have entered, or are contemplating entering, into an arrangement of this type, we encourage you to: • Phone or email us using the contact details provided at the end of this Alert. • Ask us for our view through a private ruling . • Seek independent professional advice. • Make a voluntary disclosure to reduce penalties that may apply. | • Phone or email us using the contact details provided at the end of this Alert. • Ask us for our view through a private ruling . • Seek independent professional advice. • Make a voluntary disclosure to reduce penalties that may apply. | 23. Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties for promoters under Division 290 of Schedule 1 to the Taxation Administration Act 1953. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15 | ITAA 1936 Pt IVA | ITAA 1936 177D | ITAA 1997 8-1 | ITAA 1997 Div 360 | ITAA 1997 360-40 | ITAA 1997 360-50 | TAA 1953 Sch 1 Div 290 | Corporations Act 2001 708(8) | Tax Agent Services Act 2009,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20241/NAT/ATO/00001,"Refer to PS LA 2008/15 for more information about Alerts. See Alerts issued to date. | Commissioner of Taxation 10 December 2024 | [1] Up to $50,000 for 'unsophisticated investors', and up to $2 million for 'sophisticated investors'. A sophisticated investor is one that meets the requirements of subsection 708(8) of the Corporations Act 2001 . For more information, see The sophisticated investor test . | [2] Up to certain yearly caps, the tax offset applies at 20% of the amount received or entitled to be received by the company for the shares that were issued. | [3] Refer to footnote 1 of this Alert."
TA 2024/2,Arrangements to circumvent Division 7A of the Income Tax Assessment Act 1936 through the guaranteeing by private companies of third-party loans,11 December 2024,Current,"1. We are currently reviewing arrangements under which: • A private company (the first company) guarantees a loan made by a financial institution to a related private company that has no or minimal distributable surplus. • The related company on-lends (or pays) some or all of the amount borrowed from the financial institution to the first company's shareholders (or their associates) on terms that do not comply with the requirements of Division 7A of the Income Tax Assessment Act 1936 (Division 7A). [1] | • A private company (the first company) guarantees a loan made by a financial institution to a related private company that has no or minimal distributable surplus. • The related company on-lends (or pays) some or all of the amount borrowed from the financial institution to the first company's shareholders (or their associates) on terms that do not comply with the requirements of Division 7A of the Income Tax Assessment Act 1936 (Division 7A). [1] | 2. The arrangements purportedly do not give rise to a deemed dividend under Division 7A. This is despite the fact that a deemed dividend may have arisen had the first company directly paid or on-lent the amount to its shareholders (or their associates). | 3. This Alert applies to arrangements which, when viewed objectively, involve a series of steps that are intended to circumvent the operation of Division 7A. | 4. All legislative references in this Alert are to the Income Tax Assessment Act 1936 , unless otherwise indicated.","5. The arrangements we are reviewing typically display the following features: Diagram 1: Diagram illustrating typical features of an arrangement • A private company (Trading Co.) guarantees a loan made to a related private company (Lending Co.) from a third-party financier that is not a private company, such as a bank. • Lending Co. pays or loans some or all of the amount borrowed to the shareholders of Trading Co. (or the shareholders' associates). If Lending Co. does make a loan, the loan does not comply with the requirements of section 109N. • The payment or loan made by Lending Co. is more than its distributable surplus. [2] • Trading Co. may pay the amounts required under the loan agreement with the third-party financier because Lending Co. defaults on its obligation to repay the amounts required under the loan agreement to the third-party financier and calls on the guarantee of Trading Co. [3] • Alternatively, Trading Co. may pay the amounts required under the loan agreement with the third-party financier directly or pay money to Lending Co. to enable it to repay the third-party financier, and to prevent Lending Co. from defaulting on its obligations under the loan agreement. • On an objective assessment, Trading Co.'s guarantee and Lending Co.'s loan were provided as part of the same contrived arrangement for the purpose of avoiding the Division 7A consequences that would have arisen had Trading Co. directly paid or lent the amount to its shareholders (or their associates). | Diagram 1: Diagram illustrating typical features of an arrangement • A private company (Trading Co.) guarantees a loan made to a related private company (Lending Co.) from a third-party financier that is not a private company, such as a bank. • Lending Co. pays or loans some or all of the amount borrowed to the shareholders of Trading Co. (or the shareholders' associates). If Lending Co. does make a loan, the loan does not comply with the requirements of section 109N. • The payment or loan made by Lending Co. is more than its distributable surplus. [2] • Trading Co. may pay the amounts required under the loan agreement with the third-party financier because Lending Co. defaults on its obligation to repay the amounts required under the loan agreement to the third-party financier and calls on the guarantee of Trading Co. [3] • Alternatively, Trading Co. may pay the amounts required under the loan agreement with the third-party financier directly or pay money to Lending Co. to enable it to repay the third-party financier, and to prevent Lending Co. from defaulting on its obligations under the loan agreement. • On an objective assessment, Trading Co.'s guarantee and Lending Co.'s loan were provided as part of the same contrived arrangement for the purpose of avoiding the Division 7A consequences that would have arisen had Trading Co. directly paid or lent the amount to its shareholders (or their associates). | • A private company (Trading Co.) guarantees a loan made to a related private company (Lending Co.) from a third-party financier that is not a private company, such as a bank. • Lending Co. pays or loans some or all of the amount borrowed to the shareholders of Trading Co. (or the shareholders' associates). If Lending Co. does make a loan, the loan does not comply with the requirements of section 109N. • The payment or loan made by Lending Co. is more than its distributable surplus. [2] • Trading Co. may pay the amounts required under the loan agreement with the third-party financier because Lending Co. defaults on its obligation to repay the amounts required under the loan agreement to the third-party financier and calls on the guarantee of Trading Co. [3] • Alternatively, Trading Co. may pay the amounts required under the loan agreement with the third-party financier directly or pay money to Lending Co. to enable it to repay the third-party financier, and to prevent Lending Co. from defaulting on its obligations under the loan agreement. • On an objective assessment, Trading Co.'s guarantee and Lending Co.'s loan were provided as part of the same contrived arrangement for the purpose of avoiding the Division 7A consequences that would have arisen had Trading Co. directly paid or lent the amount to its shareholders (or their associates).",,"6. We are concerned that some taxpayers are entering these arrangements to circumvent the operation of Division 7A. | 7. We are also concerned that these arrangements may be entered into on the misunderstanding that section 109U (within Division 7A) only applies if the third-party lender is a private company. This is not the case. Section 109U requires the entity which makes the payment or loan to the shareholders (in the arrangement in paragraph 5 of this Alert, Lending Co.) to be a private company, but it does not require the entity to which the guarantee is given (in the arrangement in paragraph 5 of this Alert, the third-party financier) to also be a private company. [4] Note: Ordinarily, we will only have cause to apply compliance resources to consider the application of section 109U to arrangements involving a series of steps that, when viewed objectively, are intended to circumvent the operation of Division 7A. For more detail, see Appendix 2 of Draft Taxation Determination TD 2024/D3 Income tax: Division 7A – does section 109U of the ITAA 1936 only apply to arrangements where a private company gives a guarantee to another private company? | Note: Ordinarily, we will only have cause to apply compliance resources to consider the application of section 109U to arrangements involving a series of steps that, when viewed objectively, are intended to circumvent the operation of Division 7A. For more detail, see Appendix 2 of Draft Taxation Determination TD 2024/D3 Income tax: Division 7A – does section 109U of the ITAA 1936 only apply to arrangements where a private company gives a guarantee to another private company? | 8. From our review of these arrangements, we consider that the following consequences may arise: • Division 7A may apply to deem the private company which gave the guarantee (Trading Co. in the arrangement in paragraph 5 of this Alert) to have paid an unfranked dividend to the shareholders or associates who received the loan from the related private company (Lending Co. in the arrangement). • The Commissioner may make a determination under Part IVA to cancel any tax benefit arising under the arrangement. | • Division 7A may apply to deem the private company which gave the guarantee (Trading Co. in the arrangement in paragraph 5 of this Alert) to have paid an unfranked dividend to the shareholders or associates who received the loan from the related private company (Lending Co. in the arrangement). • The Commissioner may make a determination under Part IVA to cancel any tax benefit arising under the arrangement.","9. We are currently reviewing these arrangements and are engaging with taxpayers and advisers who have entered into, or are considering entering into, these and similar arrangements.","10. If you have entered, or are contemplating entering, into an arrangement of this type, we encourage you to: • Phone or email us using the contact details provided at the end of this Alert. • Ask us for our view through a private ruling . • Seek independent professional advice. • Make a voluntary disclosure to reduce penalties that may apply. | • Phone or email us using the contact details provided at the end of this Alert. • Ask us for our view through a private ruling . • Seek independent professional advice. • Make a voluntary disclosure to reduce penalties that may apply. | 11. Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties for promoters under Division 290 of Schedule 1 to the Taxation Administration Act 1953. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15 | TD 2024/D3 | ITAA 1936 PtIII Division 7A | ITAA 1936 109U | ITAA 1936 109N | ITAA 1936 109Y | ITAA 1936 109UA | ITAA 1936 109UA(2) | ITAA 1936 Pt IVA | TAA 1953 Sch1 Div 290 | Tax Agent Services Act 2009,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20242/NAT/ATO/00001,"Refer to PS LA 2008/15 for more information about Alerts. See Alerts issued to date. | Commissioner of Taxation 11 December 2024 | [1] For example, there is no loan agreement that complies with the requirements of section 109N of the Income Tax Assessment Act 1936 . | [3] Section 109UA may also apply in the event of a default under the terms of the loan agreement. Subsection 109UA(2) operates to reduce the amount of any deemed dividend to the extent that section 109U applies. | [4] See Draft Tax Determination TD 2024/D3 Income tax: Division 7A – does section 109U only apply to arrangements where a private company gives a guarantee to another private company . | anthony.pulvirenti@ato.gov.au"
TA 2023/1,Interposition of a holding company to access company profits tax-free,8 February 2023,Current,"1. We are currently reviewing arrangements where an individual accesses the profits of a private company in tax-free form (that is, without an additional tax liability for the individual) by arranging for the profits to be passed to the individual through an interposed holding company (interposed company). | 2. In these arrangements, a company is interposed between a private company with retained profits (first company) and its shareholder, and a capital gains tax (CGT) roll-over is applied to disregard the CGT consequences. [1] | 3. The first company then pays a franked dividend to the interposed company, which uses the proceeds to fund a loan to the individual, on terms which do not comply with section 109N of the Income Tax Assessment Act 1936. All legislative references in this Alert are to that Act, unless otherwise indicated. | 4. The roll-over enables the shareholder to disregard for tax purposes the capital gain they make on disposal of their shares in the first company. [2] Further, the arrangements are structured so that Division 7A of Part III would not apply to treat the loan to the individual as an assessable dividend. That is because the interposition of the company and the subsequent dividend paid by the first company is to ensure that neither company has a distributable surplus for the purposes of Division 7A. [3] As a result, the individual seeks to access, and purports to be able to access, the retained profits of the first company in a tax-free form. | 5. This Alert applies to arrangements which, when viewed objectively, indicate that the dominant purpose of the arrangements is tax avoidance by enabling the individual to obtain a tax advantage or benefit.","6. These arrangements typically display all or most of the following features: • A private company (first company) has retained profits on which it may have paid tax at the corporate rate. Shares in the first company are held by an individual who may also be a director of the first company. • The individual disposes of their shares in the first company to a private company (interposed company), receiving shares in the interposed company in return. • The shares in the interposed company are issued at a paid-up amount being the same as, or similar to, the net assets of the first company which includes the retained profits of the first company. • The individual applies a CGT roll-over, such as the CGT roll-over in Subdivision 122-A of the ITAA 1997, to disregard for tax purposes any capital gain on the disposal of those shares in the first company. • The first company declares a franked dividend to the interposed company. • The first company discharges its liability to pay the dividend by ways such as cash, cheque or promissory note. • The interposed company provides a loan to the individual, sourced from the dividend received. The terms of the loan do not comply with section 109N. [4] For example, the loan may be interest-free and repayable at call. • Neither the interposed company nor the first company have sufficient distributable surplus [5] for Division 7A to treat the loan made to the individual as a deemed dividend (whether directly from the interposed company or indirectly from the first company). • Viewed objectively, the arrangements have the dominant purpose of tax avoidance. | • A private company (first company) has retained profits on which it may have paid tax at the corporate rate. Shares in the first company are held by an individual who may also be a director of the first company. • The individual disposes of their shares in the first company to a private company (interposed company), receiving shares in the interposed company in return. • The shares in the interposed company are issued at a paid-up amount being the same as, or similar to, the net assets of the first company which includes the retained profits of the first company. • The individual applies a CGT roll-over, such as the CGT roll-over in Subdivision 122-A of the ITAA 1997, to disregard for tax purposes any capital gain on the disposal of those shares in the first company. • The first company declares a franked dividend to the interposed company. • The first company discharges its liability to pay the dividend by ways such as cash, cheque or promissory note. • The interposed company provides a loan to the individual, sourced from the dividend received. The terms of the loan do not comply with section 109N. [4] For example, the loan may be interest-free and repayable at call. • Neither the interposed company nor the first company have sufficient distributable surplus [5] for Division 7A to treat the loan made to the individual as a deemed dividend (whether directly from the interposed company or indirectly from the first company). • Viewed objectively, the arrangements have the dominant purpose of tax avoidance.","7. The following example illustrates the broader features of these arrangements. Our concern is not limited to the specific scenario described but, rather, can apply to variations of that scenario with its main features. Variations include where shares in the first company are pre-CGT shares or a holding company is interposed between a trustee shareholder and a company. | Diagram: Interposition of a holding company to access company profits | 8. Jack is the sole shareholder and director of AustCo Pty Ltd (AustCo), an Australian private company. As at 31 May 2020, he has 10 ordinary shares in AustCo fully paid up to $1 each. AustCo has cash at bank of $1 million, consisting of the $10 paid-up share capital and accumulated profits of $999,990 from prior year trust distributions. AustCo has no other assets. Jack wants to access the retained profits for private purposes. | 9. On 4 June 2020, Jack incorporates a company, HoldCo Pty Ltd (HoldCo), for which he is the sole director and shareholder, holding one ordinary share fully paid up to $1. | 10. On 15 June 2020, Jack transfers his 10 ordinary shares in AustCo (valued at $1 million) to HoldCo and, in return, HoldCo issues Jack a million ordinary shares fully paid up to $1 each. Both Jack and HoldCo adopt the amount of $1 million as being the consideration for the transaction. | 11. Jack makes a choice for roll-over relief under Subdivision 122-A of the ITAA 1997. Accordingly, the capital gain made by Jack from the disposal of his AustCo shares to HoldCo is disregarded. | 12. On 29 June 2020, AustCo declares and pays a fully franked dividend of $999,990 to HoldCo, as its only shareholder. | 13. On 30 June 2020, HoldCo lends $999,990 to Jack on terms which are unsecured, interest-free and repayable at call. | 14. The accounting records for both HoldCo and AustCo show nil distributable surplus as at 30 June 2020. [6] Therefore, Division 7A does not operate to treat Jack as having received a dividend in the 2019-20 income year. | 15. AustCo is then wound up. The loan remains uncalled and outstanding. | 16. Putting to one side the taxation outcomes, AustCo could have provided its accumulated profits to Jack by far simpler means, such as by paying him a dividend or providing him with an interest-free, unsecured loan (which would also be assessable as a deemed dividend under Division 7A). [7] | 17. Viewed objectively, the arrangements appear to have the dominant purpose of avoiding tax.","18. We are concerned that individual taxpayers and private companies under their control may be entering into these arrangements under the misapprehension that they are effective in avoiding additional tax being paid by the individual taxpayer. We will closely examine these arrangements, including those where a holding company is interposed between a trustee shareholder and a company as similar concerns apply. | 19. More specifically, aspects of the arrangement that concern us include whether: • there is any intention for the purported 'loan' to the individual to be repaid or whether the amount may be taken to be an assessable dividend paid to the individual pursuant to section 109C of Division 7A [8] • the arrangements comprise a 'dividend stripping' scheme or operation, such that - section 177E applies to include the amount of the purported loan in the taxpayer's assessable income, and - section 207-145 of the ITAA 1997 applies to cancel the franking credit on the dividend paid to the interposed company, or • this is a scheme under section 177D to which the general anti-avoidance provisions in Part IVA apply. | • there is any intention for the purported 'loan' to the individual to be repaid or whether the amount may be taken to be an assessable dividend paid to the individual pursuant to section 109C of Division 7A [8] • the arrangements comprise a 'dividend stripping' scheme or operation, such that - section 177E applies to include the amount of the purported loan in the taxpayer's assessable income, and - section 207-145 of the ITAA 1997 applies to cancel the franking credit on the dividend paid to the interposed company, or • this is a scheme under section 177D to which the general anti-avoidance provisions in Part IVA apply. | - section 177E applies to include the amount of the purported loan in the taxpayer's assessable income, and - section 207-145 of the ITAA 1997 applies to cancel the franking credit on the dividend paid to the interposed company, or",20. We are actively reviewing these arrangements. Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny.,"21. If you have entered or are contemplating entering into an arrangement of this type, we encourage you to: • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice, or • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice, or • make a voluntary disclosure to reduce penalties that may apply. | 22. Penalties may apply to participants in and promoters of this type of arrangement. This includes serious penalties for promoters under Division 290 of Schedule 1 to the Taxation Administration Act 1953. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15 | ITAA 1936 Div 7A | ITAA 1936 109N | ITAA 1936 109Y | ITAA 1936 Pt IVA | ITAA 1936 177D | ITAA 1936 177E | ITAA 1997 Subdiv 122-A | ITAA 1997 207-145 | TAA 1953 Sch 1 Div 290 | Tax Agent Services Act 2009,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20231/NAT/ATO/00001,"Commissioner of Taxation 8 February 2023 | Updated ATO tip-off hotline number | [1] We note the concerns raised in this Alert are not limited to a particular CGT roll-over (such as the roll-over under Subdivision 122-A of the Income Tax Assessment Act 1997 ) | [2] There are generally cost base implications for both the holding company shares and the shares transferred to the holding company which could result in a future capital gain, should a subsequent CGT event occur. | [4] A loan is a section 109N complying loan if it satisfies the conditions in section 109N, being that the loan agreement is in writing, the rate of interest payable on the loan is at least equal to the benchmark interest rate and the term of the loan does not exceed 7 years for an unsecured loan or 25 years for a loan secured by a mortgage over real property. | [5] Where either the first company or the interposed company has a distributable surplus, Division 7A will operate to treat the loan as a deemed dividend to the extent of that surplus. | [6] As at 30 June 2020, the accounting records of HoldCo provide that the $1,000,001 net assets (consisting of $999,990 loan receivable, 10 shares in AustCo fully paid up to $1, and $1 cash at bank) is equal to the amount of paid-up share capital ($1,000,001). The accounting records of AustCo provide that the $10 net assets ($10 cash at bank) is equal to the amount of paid-up share capital ($10). | [7] Ordinarily, in the absence of anything more, we expect the distribution of accumulated profits from a company would be made as a dividend. | [8] Amounts the company is taken by section 109C to have paid as dividends are added back into the distributable surplus calculation at 'Division 7A amounts', resulting in the distributable surplus increasing. See subsection 109Y(2)."
TA 2023/2,"Diverting profits of a property development project to a self-managed superannuation fund, through use of a special purpose vehicle, involving non-arm's length arrangements",15 June 2023,Current,"1. We are currently reviewing arrangements under which: • one or more self-managed super funds (SMSFs) have, or acquire, direct or indirect ownership of a special purpose vehicle (SPV) that undertakes a property development project, and • because of the non-arm's length arrangements between the SPV and other entities, the SPV derives a profit that ultimately benefits the SMSFs which is more than what it would have been if all the parties had dealt with each other at arm's length. | • one or more self-managed super funds (SMSFs) have, or acquire, direct or indirect ownership of a special purpose vehicle (SPV) that undertakes a property development project, and • because of the non-arm's length arrangements between the SPV and other entities, the SPV derives a profit that ultimately benefits the SMSFs which is more than what it would have been if all the parties had dealt with each other at arm's length. | 2. The non-arm's length arrangements have the effect of shifting what would otherwise be the profits of the related entities (taxed at the corporate rate, for example) to the SMSFs, being concessionally taxed entities. If the SPV is a company, the SMSFs may also receive tax offset refunds in relation to the dividends received. [1] | 3. The Commissioner will consider whether the dividends and other income received by the SMSFs are non-arm's length income (NALI) as defined in section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997), and the application of the regulatory requirements in the Superannuation Industry (Supervision) Act 1993 (SISA) and other relevant law in respect of these arrangements. | 4. If you are a trustee of, or an adviser to, an SMSF that is looking to participate in a property development, refer to the SMSF Regulator's Bulletin Self-managed superannuation funds and property development on how SMSF trustees can ensure they meet their income tax and regulatory obligations when participating in property development activities.","5. These arrangements typically display some or all of the following features: • The controlling minds of one or more property development groups carry out a particular project by establishing an SPV for this purpose. • The controlling minds are members of their respective SMSFs. • Interests in the SPV can be directly or indirectly owned by the SMSFs and the SMSFs' interests can be acquired for either an arm's length or non-arm's length [2] price. • The SPV contracts with related entities, often within the controlling minds' property development groups (related entities), to carry out some or all of the property development project work. The price charged by the related entities is less than what would be expected in an arm's length arrangement and, as a result, the related entities derive a lower (or nil) profit than if they had dealt at arm's length. • The related entities or SPV, or both, may also enter into loans to facilitate the property development project. The terms of the loans are not consistent with those that would be expected in an arm's length dealing (for example, the interest rate may be lower). In some instances, the loan terms may appear at arm's length but those terms are not followed or fully enforced. • The SPV earns profits in respect of the property development project that are higher than what would have been expected if the SPV, SMSFs or the related entities had dealt with each other at arm's length. The SMSFs ultimately derive dividends or distributions in respect of the SPV's profits and they may also receive tax offset refunds in relation to any dividends received. | • The controlling minds of one or more property development groups carry out a particular project by establishing an SPV for this purpose. • The controlling minds are members of their respective SMSFs. • Interests in the SPV can be directly or indirectly owned by the SMSFs and the SMSFs' interests can be acquired for either an arm's length or non-arm's length [2] price. • The SPV contracts with related entities, often within the controlling minds' property development groups (related entities), to carry out some or all of the property development project work. The price charged by the related entities is less than what would be expected in an arm's length arrangement and, as a result, the related entities derive a lower (or nil) profit than if they had dealt at arm's length. • The related entities or SPV, or both, may also enter into loans to facilitate the property development project. The terms of the loans are not consistent with those that would be expected in an arm's length dealing (for example, the interest rate may be lower). In some instances, the loan terms may appear at arm's length but those terms are not followed or fully enforced. • The SPV earns profits in respect of the property development project that are higher than what would have been expected if the SPV, SMSFs or the related entities had dealt with each other at arm's length. The SMSFs ultimately derive dividends or distributions in respect of the SPV's profits and they may also receive tax offset refunds in relation to any dividends received.","Diagram: Group structure including ownership of entities, and flow of income | 6. Taxpayer 1, an individual, is a member and trustee of SMSF 1 and also a shareholder, director and controlling mind of Civil Works Tpr 1 Pty Ltd which is engaged in property construction. | 7. Taxpayer 2, an individual, is a member and trustee of SMSF 2 and a shareholder, director and controlling mind of Management Tpr 2 Pty Ltd which is engaged in the management of construction projects and providing finance. | 8. A third-party land owner is seeking to engage a property developer to construct buildings on its land, for which the property developer will be paid a fixed portion of the sale proceeds of each developed property. | 9. Taxpayer 1 and Taxpayer 2 agree to form new entities to undertake the property development project. Under the agreement: • XYZ Interposed Co is created and owned 50% each by SMSF 1 and SMSF 2. • New Interposed Co, a special purpose vehicle, is created and owned 100% by XYZ Interposed Co. • New Interposed Co contracts with the third-party land owner to undertake the property development. • New Interposed Co subcontracts all property development functions to Civil Works Tpr 1 Pty Ltd and property development project management functions to Management Tpr 2 Pty Ltd. • Management Tpr 2 Pty Ltd and Civil Works Tpr 1 Pty Ltd each provide a working capital loan of $30 million to New Interposed Co. | • XYZ Interposed Co is created and owned 50% each by SMSF 1 and SMSF 2. • New Interposed Co, a special purpose vehicle, is created and owned 100% by XYZ Interposed Co. • New Interposed Co contracts with the third-party land owner to undertake the property development. • New Interposed Co subcontracts all property development functions to Civil Works Tpr 1 Pty Ltd and property development project management functions to Management Tpr 2 Pty Ltd. • Management Tpr 2 Pty Ltd and Civil Works Tpr 1 Pty Ltd each provide a working capital loan of $30 million to New Interposed Co. | 10. Ordinary shares are issued by XYZ Interposed Co to SMSF 1 and SMSF 2 for an arm's length price. | 11. Ordinary shares in New Interposed Co are issued to XYZ Interposed Co, for a non-arm's length nominal price. | 12. New Interposed Co sub-contracts the property construction function to, and obtains a loan of $30 million from, Civil Works Tpr 1 Pty Ltd. Under the property construction function, Civil Works Tpr 1 Pty Ltd charges non-arm's length fixed fees that are below the fees that it would charge third parties for the same services. The loan by Civil Works Tpr 1 Pty Ltd to New Interposed Co is on non-arm's length terms, including no interest and no set repayments of principal and interest. | 13. New Interposed Co sub-contracts the property development project management function to, and obtains a loan of $30 million from, Management Tpr 2 Pty Ltd. Under the management contract, Management Tpr 2 Pty Ltd charges fixed fees which are at arm's length and consistent with fees it charges to third parties for the same services. The loan by Management Tpr 2 Pty Ltd to New Interposed Co is on non-arm's length terms, including no interest and no set repayments of principal and interest. | 14. New Interposed Co receives its fixed portion of the proceeds from the sale of the developed properties over the duration of the property development project. New Interposed Co pays franked dividends sourced from the proceeds of these sales to XYZ Interposed Co. In turn, XYZ Interposed Co pays franked dividends to SMSF 1 and SMSF 2. | 15. As a consequence of the arrangement, New Interposed Co earns profits in respect of the property development project that are more than what would have been expected if the New Interposed Co, the SMSFs or the other entities had dealt with each other at arm's length. | 16. As a result of the scheme, some or all of the profits of New Interposed Co. are diverted to SMSF 1 and SMSF 2 through the payment of dividends from XYZ Interposed Co. The dividends received from XYZ Interposed Co are assessed at a 15% rate of tax or are exempt from tax if the shares in XYZ Interposed Co are supporting the payment of pensions to members of SMSF 1 or SMSF 2. SMSF 1 or SMSF 2 may also receive a refund of any excess franking credits associated with the dividends. [3]","17. We are concerned that some of the arrangements lack commerciality and result in diverting profits attributable to a property development project (that would otherwise be taxed at the corporate, or other applicable, rate) to an SMSF being a concessionally taxed entity. Depending on the facts, our concern also extends to any capital gain derived from the subsequent disposal of the SPV or other entity in which the SMSF has an indirect or direct interest. | 18. A view has been expressed that as long as the SMSF is not directly involved in any non-arm's length dealing, the NALI provisions cannot apply. These views are not correct and have been addressed judicially. [4] Non-arm's length dealings by any party in respect of any step in relation to the scheme, can give rise to NALI as defined in section 295-550 of the ITAA 1997. | 19. In respect of the arrangement covered in this Alert, we are concerned that: • an examination is not being made in respect of each step in the scheme to ensure that they are all at arm's length. For example, while the SMSFs' acquisition of ordinary shares in XYZ Interposed Co are for an arm's length price, the fact that XYZ Interposed Co's acquisition of New Interposed Co shares was at a non-arm's length nominal price is one factor that may give rise to the application of the NALI provisions • shares in entities in which the SMSFs have a direct and indirect interest in (XYZ Interposed Co and New Interposed Co in the Example in this Alert) may not be purchased by the relevant entity at an arm's length price [5] and this may give rise to NALI consequences. For example, as XYZ Interposed Co's interest in New Interposed Co was acquired at less than the arm's length market value, any dividends paid to the SMSFs that are sourced from a capital gain in respect of XYZ Interposed Co's disposal of New Interposed Co may be NALI • an entity (New Interposed Co in the Example in this Alert) enters into an arrangement to sub-contract (Civil Works Tpr 1 Pty Ltd) the property construction function on non-arm's length terms to maximise the profits from the property development project, that ultimately benefits the SMSFs • an entity (New Interposed Co in the Example in this Alert) borrows monies (from Civil Works Tpr 1 Pty Ltd and Management Tpr 2 Pty Ltd in the Example) on non-arm's length terms - including charging no interest, to maximise its profits from the property development project, that ultimately benefits the SMSFs • the SMSFs may be maintained for a purpose outside those permitted by the sole purpose test under section 62 of the SISA [6] • the SMSFs may not continue to meet the relevant operating standards under the SISA, including record-keeping requirements, ensuring assets are appropriately valued and recorded at market value [7] • the SMSFs may have breached other SISA requirements, such as the in-house asset [8] and borrowing provisions [9] • other risks may arise, as mentioned in SMSFRB 2020/1. | • an examination is not being made in respect of each step in the scheme to ensure that they are all at arm's length. For example, while the SMSFs' acquisition of ordinary shares in XYZ Interposed Co are for an arm's length price, the fact that XYZ Interposed Co's acquisition of New Interposed Co shares was at a non-arm's length nominal price is one factor that may give rise to the application of the NALI provisions • shares in entities in which the SMSFs have a direct and indirect interest in (XYZ Interposed Co and New Interposed Co in the Example in this Alert) may not be purchased by the relevant entity at an arm's length price [5] and this may give rise to NALI consequences. For example, as XYZ Interposed Co's interest in New Interposed Co was acquired at less than the arm's length market value, any dividends paid to the SMSFs that are sourced from a capital gain in respect of XYZ Interposed Co's disposal of New Interposed Co may be NALI • an entity (New Interposed Co in the Example in this Alert) enters into an arrangement to sub-contract (Civil Works Tpr 1 Pty Ltd) the property construction function on non-arm's length terms to maximise the profits from the property development project, that ultimately benefits the SMSFs • an entity (New Interposed Co in the Example in this Alert) borrows monies (from Civil Works Tpr 1 Pty Ltd and Management Tpr 2 Pty Ltd in the Example) on non-arm's length terms - including charging no interest, to maximise its profits from the property development project, that ultimately benefits the SMSFs • the SMSFs may be maintained for a purpose outside those permitted by the sole purpose test under section 62 of the SISA [6] • the SMSFs may not continue to meet the relevant operating standards under the SISA, including record-keeping requirements, ensuring assets are appropriately valued and recorded at market value [7] • the SMSFs may have breached other SISA requirements, such as the in-house asset [8] and borrowing provisions [9] • other risks may arise, as mentioned in SMSFRB 2020/1. | 20. From our review of these arrangements, we consider that the following consequences may arise: • Dividends and franking credits received by the SMSFs (such as those from XYZ Interposed Co in the Example in this Alert) - that arise as a result of their direct or indirect interest in the SPV that undertakes the property development project (New Interposed Co in the Example) - are NALI, as defined in section 295-550 of the ITAA 1997, and taxed at the top marginal rate. [10] • Depending on the facts, capital gains, or income that flows to the SMSFs from those capital gains, that arise in respect of the disposal of entities in the scheme may have NALI consequences under section 295-550 of the ITAA 1997. • The Commissioner may make a determination under Part IVA of the Income Tax Assessment Act 1936 in relation to the imputation benefit or tax benefit arising under the arrangement. • The Commissioner may, under section 126A of the SISA, disqualify a person from acting as a trustee or director of a corporate trustee of the SMSFs. • The Commissioner may issue a notice of non-compliance under subsection 40(1) of the SISA to the SMSFs. | • Dividends and franking credits received by the SMSFs (such as those from XYZ Interposed Co in the Example in this Alert) - that arise as a result of their direct or indirect interest in the SPV that undertakes the property development project (New Interposed Co in the Example) - are NALI, as defined in section 295-550 of the ITAA 1997, and taxed at the top marginal rate. [10] • Depending on the facts, capital gains, or income that flows to the SMSFs from those capital gains, that arise in respect of the disposal of entities in the scheme may have NALI consequences under section 295-550 of the ITAA 1997. • The Commissioner may make a determination under Part IVA of the Income Tax Assessment Act 1936 in relation to the imputation benefit or tax benefit arising under the arrangement. • The Commissioner may, under section 126A of the SISA, disqualify a person from acting as a trustee or director of a corporate trustee of the SMSFs. • The Commissioner may issue a notice of non-compliance under subsection 40(1) of the SISA to the SMSFs.","21. We are currently reviewing these arrangements and are engaging with taxpayers who have entered into, or are considering entering into, these and similar arrangements. | 22. Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny.","23. If you have entered, or are contemplating entering, into an arrangement of this type, we encourage you to: • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice • make a voluntary disclosure to reduce penalties that may apply. | 24. Arrangements entered into by an SMSF, or other entity in which the SMSF has a direct or indirect interest, should be subject to strong governance, care and diligence. | 25. Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties for promoters under Division 290 of Schedule 1 to the Taxation Administration Act 1953. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15 | SMSFR 2008/2 | SMSFRB 2020/1 | ITAA 1936 Pt IVA | ITAA 1997 Div 63 | ITAA 1997 63-10(1) | ITAA 1997 Div 67 | ITAA 1997 207-20(2) | ITAA 1997 295-550 | ITAA 1997 295-550(1)(a) | ITAA 1997 295-550(1)(b) | ITAA 1997 295-550(1)(c) | ITAA 1997 295-550(2) | ITAA 1997 295-550(4) | ITAA 1997 295-550(5) | SISA 1993 35B(2) | SISA 1993 40(1) | SISA 1993 62 | SISA 1993 84 | SISA 1993 85 | SISA 1993 126A | SISR 1994 8.02B | TAA 1953 Sch 1 Div 290 | Tax Agent Services Act 2009 | 2011 ATC 20-277 | [1947] HCA 10 | 74 CLR 358 | 21 ALJR 210 | 2019 ATC 10-510,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20232/NAT/ATO/00001,"Example: Non-arm's length income arrangement involving the diversion of profits of a property development project to 2 self-managed superannuation funds | Commissioner of Taxation 15 June 2023 | Updated ATO tip-off hotline number | [1] Under the refundable tax offset rules in Division 67 of the Income Tax Assessment Act 1997 and the common rules for tax offsets in Division 63 of that Act. | [2] Where a non-arm's length price is paid by the SMSF to acquire the direct interest in the SPV (or other entity) such that the price is less than the arm's length price (including nil), then paragraphs 295-550(1)(b) or (c) of the ITAA 1997 can apply to make all income, including any capital gain in respect of that interest, NALI. Further, depending on the arrangement, paragraph 295-550(1)(a), and subsections 295-550(2), (4) and (5) may also be applicable. | [3] Under subsection 207-20(2) of the ITAA 1997, an SMSF will be entitled to a (refundable) tax offset on receipt of a franked distribution equal to the amount of the franking credit on the distribution. If the tax offset exceeds their basic income tax liability, the SMSF may be entitled to a refund of the excess (see table item 40 of subsection 63-10(1) of the ITAA 1997 and Division 67 of the ITAA 1997). | [4] See the Full Federal Court decision of Keane CJ, Greenwood and Middleton JJ in Allen (Trustee), in the matter of Allen's Asphalt Staff Superannuation Fund v Commissioner of Taxation [2011] FCAFC 118. | [5] See the High Court decision of Commissioner of Succession Duties (SA) v Executor Trustee and Agency Company of South Australia Limited [1947] HCA 10; (1947) 74 CLR 358 at 362 and the decision of BJ McCabe (Deputy President) and Hespe (Senior Member) in GYBW and Commissioner of Taxation [2019] AATA 4262. | [6] Self Managed Superannuation Funds Ruling SMSFR 2008/2 Self Managed Superannuation Funds: the application of the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 to the provision of benefits other than retirement, employment termination or death benefits. | [7] Subsection 35B(2) of the SISA and Regulation 8.02B of the Superannuation Industry (Supervision) Regulations 1994. | [8] Under section 84 of the SISA; see also the anti-avoidance rules in section 85 of the SISA. | [9] Footnote 33 in SMSFR 2008/2. | [10] Income Tax Rates Act 1986. | Allen (Trustee), in the matter of Allen's Asphalt Staff Superannuation Fund v Commissioner of Taxation [2011] FCAFC 118 195 FCR 416 2011 ATC 20-277 84 ATR 853 | Commissioner of Succession Duties (SA) v Executor Trustee and Agency Company of South Australia Limited [1947] HCA 10 74 CLR 358 [1947] ALR 240 21 ALJR 210 | GYBW and Commissioner of Taxation [2019] AATA 4262 2019 ATC 10-510 111 ATR 107"
TA 2023/3,Franking credit refunds - income tax exempt entities receiving franked distributions in the form of property other than money,8 December 2023,Current,,"1. We are currently reviewing arrangements involving franked distributions in the form of property other than money (in specie distributions) that are made to income tax exempt entities, including registered charities, deductible gift recipients, scientific institutions and public educational institutions. | 2. Under these arrangements: • an in specie franked distribution is made (or flows indirectly) to an income tax exempt entity, and • there are restrictions on the ordinary incidents of ownership of the distributed property that - are imposed as part of the terms and conditions for the making of the franked distribution, and - prevent the income tax exempt entity from receiving immediate custody and control of that property. | • an in specie franked distribution is made (or flows indirectly) to an income tax exempt entity, and • there are restrictions on the ordinary incidents of ownership of the distributed property that - are imposed as part of the terms and conditions for the making of the franked distribution, and - prevent the income tax exempt entity from receiving immediate custody and control of that property. | - are imposed as part of the terms and conditions for the making of the franked distribution, and - prevent the income tax exempt entity from receiving immediate custody and control of that property. | 3. We are concerned that income tax exempt entities may be entering into these arrangements without being aware that these restrictions may make them ineligible for a refund of the franking credits attached to the franked distribution. | 4. All legislative references in this Alert are to the Income Tax Assessment Act 1997. | Legislative context | 5. Pursuant to subparagraph 207-122(b)(i), an entity that receives a franked distribution in the form of property other than money will not be eligible for a refund of franking credits where the terms and conditions on which the franked distribution is made are such that the entity 'does not receive immediate custody and control of the property'. | 6. Our position is that subparagraph 207-122(b)(i) requires the recipient entity to receive, from the moment of distribution, control of the distributed property to the same extent as an absolute owner. In this context, ownership control commensurate with being the absolute owner involves having unrestricted authority over the ordinary incidents of ownership of that property. | 7. Given that the operation of subparagraph 207-122(b)(i) may result in the recipient of the in specie distribution being ineligible for a refund of any attached franking credits, it is important for taxpayers and advisers to be aware of the potential implications when entering into these types of arrangements.","8. The examples in paragraphs 9 to 15 of this Alert, while not exhaustive, are illustrative of arrangements where subparagraph 207-122(b)(i) may apply. | 9. The Distributing Entity makes an in specie distribution of shares held by it in the Company (the Company Shares) to the Recipient Entity. The distribution is fully franked. | 10. Prior to the in specie distribution being made, the Distributing Entity and the Recipient Entity enter into a formal agreement that prohibits the Recipient Entity from selling, transferring or disposing of the Company Shares to another entity for a period of time, without the consent of the Distributing Entity. | 11. The restrictions set out in the formal agreement mean the Recipient Entity does not have the required immediate custody and control of the Company Shares and is not eligible for a refund of franking credits. | 12. The Distributing Entity makes an in specie distribution of shares held by it in the Company (the Company Shares) to the Recipient Entity. The distribution is fully franked. | 13. A third party, the Consenting Entity, also holds shares in the Company. The Consenting Entity is not a related party or associate of the Distributing Entity. | 14. Prior to the in specie distribution being made, a formal agreement is entered into by the Consenting Entity, the Distributing Entity and the Recipient Entity. Under the formal agreement: • the Distributing Entity requires the consent of the Consenting Entity before making the in specie distribution of the Company Shares to the Recipient Entity, and • the Recipient Entity is prohibited from selling, transferring or disposing of the Company Shares to another entity for a period of time, without the consent of the Consenting Entity. | • the Distributing Entity requires the consent of the Consenting Entity before making the in specie distribution of the Company Shares to the Recipient Entity, and • the Recipient Entity is prohibited from selling, transferring or disposing of the Company Shares to another entity for a period of time, without the consent of the Consenting Entity. | 15. The restrictions set out in the formal agreement mean the Recipient Entity does not receive the required immediate custody and control of the Company Shares and is not eligible for a refund of franking credits.","16. In respect of the arrangements covered in this Alert, we are concerned that income tax exempt entities may be incorrectly seeking refunds of franking credits.","17. We are monitoring applications for franking credit refunds by income tax exempt entities where the claim is in respect of an in specie franked distribution. | 18. By issuing this Alert, we are making the community aware of the need to take into consideration the operation of subparagraph 207-122(b)(i) before entering into arrangements involving in specie franked distributions of shares and other property due to the potential consequences on eligibility for a refund of franking credits. | 19. We are also looking to identify an appropriate case to test our views on the application of subparagraph 207-122(b)(i).","20. If you have entered, or are contemplating entering, into an arrangement of this type, we encourage you to: • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice • make a voluntary disclosure to reduce penalties that may apply.",PS LA 2008/15 | ITAA 1997 207-122(b)(i),False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20233/NAT/ATO/00001,Example 1: Restrictions resulting in ineligibility for franking credit refund | Example 2: Variation of example 1 where restrictions are imposed by a third party | Commissioner of Taxation 8 December 2023
TA 2023/4,Research and development activities delivered by associated entities,14 December 2023,Current,"1. We are currently reviewing claims made by research and development (R&D) entities [1] for a tax offset under the R&D tax incentive (R&DTI) for expenditure incurred under an agreement with an associate [2] of the R&D entity (the Service Provider) who itself conducts the R&D activities. | 2. We are concerned with arrangements that: • incorrectly purport the R&D entity as having incurred or paid (or both) the relevant expenditure under an agreement with the Service Provider, or • have the effect of obtaining for the R&D entity a tax offset for expenditure on R&D activities purportedly conducted for the R&D entity's own benefit but are instead in substance being conducted for (or to a significant extent, for) the Service Provider. | • incorrectly purport the R&D entity as having incurred or paid (or both) the relevant expenditure under an agreement with the Service Provider, or • have the effect of obtaining for the R&D entity a tax offset for expenditure on R&D activities purportedly conducted for the R&D entity's own benefit but are instead in substance being conducted for (or to a significant extent, for) the Service Provider. | 3. The Service Provider is usually an entity that has historically conducted the group's trading and research activities. The Service Provider however is not itself an entity that would be entitled to claim an offset were it to conduct the activities for its own benefit, or if entitled, only entitled to a lesser benefit under the R&DTI. [3]","4. Arrangements of concern are commonly structured as follows. • The Service Provider or its controllers: - cause the incorporation of a special purpose company, or - repurpose an existing non-trading company within the controlled group to be the controlled group's R&D entity. • The Service Provider: - as contractor, conducts R&D activities under a service agreement with the R&D entity as principal - itself funds the R&D activities being conducted, before purportedly invoicing the R&D entity a service fee or recharge amount for having conducted the activities - in substance and effect o controls the strategic decisions regarding the R&D activities o has primary rights to commercially exploit for the purposes of its own trading business any developed intellectual property (IP), know-how or other results (including data) from the R&D activities having been conducted (the Developed IP). • The R&D entity: - conducts limited or no other activity other than the R&D-specific arrangements under the service agreement entered into with the Service Provider - purports to satisfy its service payment obligations to the Service Provider by o a loan or other financing facility between the R&D entity (as borrower) and the Service Provider or related party (as lender) o set-off against a new licence arrangement for exploitation of the Developed IP between the R&D entity (as licensor) and the Service Provider (as licensee), or o set-off against other intra-group sales or service agreements between the R&D entity and the Service Provider - has few (if any) o employees with the technical capability to itself design, conduct or supervise any R&D activities being conducted o sufficiently liquid assets of value capable of being provided as security or capable of realisation to service any indebtedness to the Service Provider - in the absence of any original and future committed funding from the Service Provider, lacks the economic capacity to either conduct the R&D activities, or commercially exploit the Developed IP. • In substance and effect, the refundable tax offset [4] is the R&D entity's only receipt and the only amount used to service the R&D entity's payment obligations to the Service Provider. • The agreements between the Service Provider and the R&D entity might not be reduced to writing, and if in writing may have a legal form that, on review, is inconsistent with the actual commercial substance of the arrangement between the entities. | • The Service Provider or its controllers: - cause the incorporation of a special purpose company, or - repurpose an existing non-trading company within the controlled group to be the controlled group's R&D entity. • The Service Provider: - as contractor, conducts R&D activities under a service agreement with the R&D entity as principal - itself funds the R&D activities being conducted, before purportedly invoicing the R&D entity a service fee or recharge amount for having conducted the activities - in substance and effect o controls the strategic decisions regarding the R&D activities o has primary rights to commercially exploit for the purposes of its own trading business any developed intellectual property (IP), know-how or other results (including data) from the R&D activities having been conducted (the Developed IP). • The R&D entity: - conducts limited or no other activity other than the R&D-specific arrangements under the service agreement entered into with the Service Provider - purports to satisfy its service payment obligations to the Service Provider by o a loan or other financing facility between the R&D entity (as borrower) and the Service Provider or related party (as lender) o set-off against a new licence arrangement for exploitation of the Developed IP between the R&D entity (as licensor) and the Service Provider (as licensee), or o set-off against other intra-group sales or service agreements between the R&D entity and the Service Provider - has few (if any) o employees with the technical capability to itself design, conduct or supervise any R&D activities being conducted o sufficiently liquid assets of value capable of being provided as security or capable of realisation to service any indebtedness to the Service Provider - in the absence of any original and future committed funding from the Service Provider, lacks the economic capacity to either conduct the R&D activities, or commercially exploit the Developed IP. • In substance and effect, the refundable tax offset [4] is the R&D entity's only receipt and the only amount used to service the R&D entity's payment obligations to the Service Provider. • The agreements between the Service Provider and the R&D entity might not be reduced to writing, and if in writing may have a legal form that, on review, is inconsistent with the actual commercial substance of the arrangement between the entities. | - cause the incorporation of a special purpose company, or - repurpose an existing non-trading company within the controlled group | - as contractor, conducts R&D activities under a service agreement with the R&D entity as principal - itself funds the R&D activities being conducted, before purportedly invoicing the R&D entity a service fee or recharge amount for having conducted the activities - in substance and effect o controls the strategic decisions regarding the R&D activities o has primary rights to commercially exploit for the purposes of its own trading business any developed intellectual property (IP), know-how or other results (including data) from the R&D activities having been conducted (the Developed IP). | o controls the strategic decisions regarding the R&D activities o has primary rights to commercially exploit for the purposes of its own trading business any developed intellectual property (IP), know-how or other results (including data) from the R&D activities having been conducted (the Developed IP). | - conducts limited or no other activity other than the R&D-specific arrangements under the service agreement entered into with the Service Provider - purports to satisfy its service payment obligations to the Service Provider by o a loan or other financing facility between the R&D entity (as borrower) and the Service Provider or related party (as lender) o set-off against a new licence arrangement for exploitation of the Developed IP between the R&D entity (as licensor) and the Service Provider (as licensee), or o set-off against other intra-group sales or service agreements between the R&D entity and the Service Provider - has few (if any) o employees with the technical capability to itself design, conduct or supervise any R&D activities being conducted o sufficiently liquid assets of value capable of being provided as security or capable of realisation to service any indebtedness to the Service Provider - in the absence of any original and future committed funding from the Service Provider, lacks the economic capacity to either conduct the R&D activities, or commercially exploit the Developed IP. | o a loan or other financing facility between the R&D entity (as borrower) and the Service Provider or related party (as lender) o set-off against a new licence arrangement for exploitation of the Developed IP between the R&D entity (as licensor) and the Service Provider (as licensee), or o set-off against other intra-group sales or service agreements between the R&D entity and the Service Provider | o employees with the technical capability to itself design, conduct or supervise any R&D activities being conducted o sufficiently liquid assets of value capable of being provided as security or capable of realisation to service any indebtedness to the Service Provider | 5. These arrangements may involve the following variations: • two or more related entities [5] , including 3-way arrangements within the group • purported satisfaction of the R&D entity's service payment obligations to the Service Provider by way of fresh share issue in the R&D entity to the Service Provider either - at the time of invoicing, or - later when the then unpaid debt owed by the R&D entity is converted to shares • service payment obligations met through various payment options in rapid succession through a circular flow of funds, or longer-term funding purporting to be general working capital. | • two or more related entities [5] , including 3-way arrangements within the group • purported satisfaction of the R&D entity's service payment obligations to the Service Provider by way of fresh share issue in the R&D entity to the Service Provider either - at the time of invoicing, or - later when the then unpaid debt owed by the R&D entity is converted to shares • service payment obligations met through various payment options in rapid succession through a circular flow of funds, or longer-term funding purporting to be general working capital. | - at the time of invoicing, or - later when the then unpaid debt owed by the R&D entity is converted to shares",,"6. Depending on the arrangement, we consider that entitlement to the R&DTI may in whole or part be affected because: • Any obligation to pay the Service Provider is so impacted by future events or contingencies that it cannot be concluded that the R&D entity is definitively committed to its obligation to pay and thereby having actually incurred the relevant expenditure such that a notional deduction arises. • Although the expenditure on R&D activities is incurred, it was neither - paid, nor - constructively paid by the R&D entity to the Service Provider in the relevant income year as required under the law. • The expenditure on R&D activities does not satisfy the conditions for R&D activities because it was either - not conducted for the R&D entity, or - conducted to a significant extent for the Service Provider and that entity does not meet the statutory conditions for eligible R&D activities. • Where a notional deduction for expenditure on R&D activities to the Service Provider does qualify for the R&DTI - that expenditure amount may be reduced to the market value of the R&D activities being conducted by the Service Provider for the R&D entity, or - that notional deduction might be reduced to reflect any mark-up on the expenditure incurred by the Service Entity and charged to the R&D entity under the agreement. • If the R&D entity is an Australian resident, it might still not qualify for an R&D tax offset for some (or all) of its expenditure, if on review, that expenditure is not 'at risk' for the purposes of the 'at risk' integrity rule in the R&D provisions. | • Any obligation to pay the Service Provider is so impacted by future events or contingencies that it cannot be concluded that the R&D entity is definitively committed to its obligation to pay and thereby having actually incurred the relevant expenditure such that a notional deduction arises. • Although the expenditure on R&D activities is incurred, it was neither - paid, nor - constructively paid by the R&D entity to the Service Provider in the relevant income year as required under the law. • The expenditure on R&D activities does not satisfy the conditions for R&D activities because it was either - not conducted for the R&D entity, or - conducted to a significant extent for the Service Provider and that entity does not meet the statutory conditions for eligible R&D activities. • Where a notional deduction for expenditure on R&D activities to the Service Provider does qualify for the R&DTI - that expenditure amount may be reduced to the market value of the R&D activities being conducted by the Service Provider for the R&D entity, or - that notional deduction might be reduced to reflect any mark-up on the expenditure incurred by the Service Entity and charged to the R&D entity under the agreement. • If the R&D entity is an Australian resident, it might still not qualify for an R&D tax offset for some (or all) of its expenditure, if on review, that expenditure is not 'at risk' for the purposes of the 'at risk' integrity rule in the R&D provisions. | - paid, nor - constructively paid | - not conducted for the R&D entity, or - conducted to a significant extent for the Service Provider and that entity does not meet the statutory conditions for eligible R&D activities. | - that expenditure amount may be reduced to the market value of the R&D activities being conducted by the Service Provider for the R&D entity, or - that notional deduction might be reduced to reflect any mark-up on the expenditure incurred by the Service Entity and charged to the R&D entity under the agreement. | 7. Even if an arrangement is effective under the substantive provisions, if viewed objectively that one or more parties to the arrangement entered into or carried out the arrangement for the purpose of obtaining a tax offset, the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 may apply to cancel that tax offset.","8. We are currently reviewing these arrangements and are engaging with taxpayers who have entered into, or are considering entering into, these and similar arrangements. | 9. Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny. | 10. We are developing further website guidance on specific technical matters in this Alert that will be published in due course. | 11. We have also issued Taxpayer Alert TA 2023/5 Research and development activities conducted overseas for foreign related entities.","12. If you have entered, or are contemplating entering, into an arrangement of this type, we encourage you to: • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice • make a voluntary disclosure to reduce penalties that may apply. | 13. Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties for promoters under Division 290 of Schedule 1 to the Taxation Administration Act 1953. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. | 14. For more information about eligible R&D activities, what can be claimed under the R&DTI and record keeping, refer to Research and development tax incentive .",PS LA 2008/15 | PS 2005/24 | ITAA 1936 Pt IVA | ITAA 1936 318 | ITAA 1997 328-125 | ITAA 1997 328-130 | ITAA 1997 355-35 | TAA 1953 Sch 1 Div 290 | Tax Agent Services Act 2009 | ANTS(GST)A 1999 Div 35 | TA 2023/5,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20234/NAT/ATO/00001,"Commissioner of Taxation 14 December 2023 | [1] As defined in section 355-35 of the Income Tax Assessment Act 1997 . | [2] As defined in section 318 of the Income Tax Assessment Act 1936 . | [3] For example, the Service Provider might be a trust and therefore ineligible itself to claim an R&D tax offset under the R&DTI. | [4] Together with possible refunds under Division 35 of the A New Tax System (Goods and Services Tax) Act 1999 for input tax credits on purported creditable acquisitions for expenditure incurred to the Service Provider. | [5] Be they associates or connected and affiliated entities under sections 328-125 and 328-130 of the Income Tax Assessment Act 1997 respectively."
TA 2023/5,Research and development activities conducted overseas for foreign related entities,14 December 2023,Current,,"1. We are currently reviewing arrangements where Australian-resident research and development (R&D) entities [1] claim a tax offset under the R&D tax incentive (R&DTI) rules for expenditure incurred on R&D activities conducted overseas. We have seen instances where an R&D entity has purported that the R&D activities were conducted for the R&D entity's own benefit, but those activities were instead being conducted for (or to a significant extent, for) a foreign entity that is 'connected with' [2] , or is an 'affiliate' [3] of the R&D entity (foreign related entity). | 2. We are concerned that R&D entities might be incorrectly claiming the R&D tax offset irrespective of whether: • the R&D entity has an overseas finding [4] covering the R&D activities being conducted, or • under the contractual arrangements between the R&D entity and the foreign related entity, the R&D entity purportedly has an interest in any developed intellectual property (IP), know-how or other results from the R&D entity's expenditure on the R&D activities. | • the R&D entity has an overseas finding [4] covering the R&D activities being conducted, or • under the contractual arrangements between the R&D entity and the foreign related entity, the R&D entity purportedly has an interest in any developed intellectual property (IP), know-how or other results from the R&D entity's expenditure on the R&D activities.","Diagram 1 | 3. The following illustrates the common features of these arrangements. • Foreign related entity (ForCo) causes R&D entity (AusCo) to be incorporated. • Under an agreement between ForCo and AusCo, ForCo: - grants to AusCo a licence (or otherwise allows) AusCo to use and develop ForCo's existing intellectual property - receives primary rights to exploit any developed intellectual property, know-how or other results (including data) from AusCo's overseas activities (the Developed IP) upon that IP's creation, and - provides funds to AusCo for AusCo to conduct its R&D activities. • AusCo has limited assets, minimal staff and negligible industry research experience or expertise, requiring AusCo to contract out the conducting of its R&D activities; whether those activities be conducted within Australia or overseas. • R&D activities that are conducted overseas purportedly for the benefit of AusCo are contracted out to a Contract Research Organisation (CRO). • AusCo has limited ability to itself commercially exploit the Developed IP. • AusCo obtains an overseas finding under paragraph 28C(1)(a) of the Industry Research and Development Act 1986. • AusCo claims a notional deduction for the expenditure incurred by it to the CRO, and thereby a tax offset under the R&DTI. • On objective review of the financing, licencing, service, corporate or other arrangements between AusCo and ForCo, it appears that ForCo is the sole or major beneficiary of AusCo's overseas activities. | • Foreign related entity (ForCo) causes R&D entity (AusCo) to be incorporated. • Under an agreement between ForCo and AusCo, ForCo: - grants to AusCo a licence (or otherwise allows) AusCo to use and develop ForCo's existing intellectual property - receives primary rights to exploit any developed intellectual property, know-how or other results (including data) from AusCo's overseas activities (the Developed IP) upon that IP's creation, and - provides funds to AusCo for AusCo to conduct its R&D activities. • AusCo has limited assets, minimal staff and negligible industry research experience or expertise, requiring AusCo to contract out the conducting of its R&D activities; whether those activities be conducted within Australia or overseas. • R&D activities that are conducted overseas purportedly for the benefit of AusCo are contracted out to a Contract Research Organisation (CRO). • AusCo has limited ability to itself commercially exploit the Developed IP. • AusCo obtains an overseas finding under paragraph 28C(1)(a) of the Industry Research and Development Act 1986. • AusCo claims a notional deduction for the expenditure incurred by it to the CRO, and thereby a tax offset under the R&DTI. • On objective review of the financing, licencing, service, corporate or other arrangements between AusCo and ForCo, it appears that ForCo is the sole or major beneficiary of AusCo's overseas activities. | - grants to AusCo a licence (or otherwise allows) AusCo to use and develop ForCo's existing intellectual property - receives primary rights to exploit any developed intellectual property, know-how or other results (including data) from AusCo's overseas activities (the Developed IP) upon that IP's creation, and - provides funds to AusCo for AusCo to conduct its R&D activities. | 4. Arrangements of concern are those where the R&D activities are for (or to a significant extent are for) the benefit of the related foreign entity and may display some or all the following features. • The agreements between the foreign related entity and the R&D entity: - are established by and under the instruction of the foreign related entity and its controllers - directly or indirectly result in the foreign related entity ultimately acquiring ownership rights in the Developed IP - for the period of the R&D entity's ownership of the Developed IP, impose restrictions on some or all of the R&D entity's right to exploit, right to alienate and right to itself manage the Developed IP - for the period of the R&D entity's ownership of the Developed IP, grant to the foreign related entity primary rights to exploit and itself manage the Developed IP - may have a legal form that is inconsistent with the actual commercial substance of the arrangement between the entities. • The foreign related entity: - owns the pre-existing intellectual property which is licensed to the R&D entity to undertake the R&D - in substance and effect o assumes the financial risk in relation to any funds committed to the R&D entity for the purposes of financing the R&D activities o sets the conditions for initial and subsequent funding of the R&D o assumes the operational risk for the conducting of the R&D activities o controls the strategic decisions regarding the R&D activities, including the instructions given to any contracted CRO as to the way the R&D activities are to be conducted - may itself be contracted by the R&D entity to conduct some (or all) of the R&D activities. • The R&D entity: - may not have a physical presence in Australia - may have one or more foreign-resident directors that are consistent with that of (or are appointed by) the foreign related entity - has an Australian-based resident director that acts in accordance with the directions and wishes of the foreign related entity or its controllers - has few (if any) employees with the technical capability to design, conduct or supervise any R&D activities being conducted - in the absence of either original and future committed funding from the foreign related entity or refundable tax offset under the R&DTI, lacks the economic capacity to either conduct the R&D activities or commercially exploit the Developed IP - may have been incorporated shortly before the end of the relevant income year in which the R&DTI is first claimed. | • The agreements between the foreign related entity and the R&D entity: - are established by and under the instruction of the foreign related entity and its controllers - directly or indirectly result in the foreign related entity ultimately acquiring ownership rights in the Developed IP - for the period of the R&D entity's ownership of the Developed IP, impose restrictions on some or all of the R&D entity's right to exploit, right to alienate and right to itself manage the Developed IP - for the period of the R&D entity's ownership of the Developed IP, grant to the foreign related entity primary rights to exploit and itself manage the Developed IP - may have a legal form that is inconsistent with the actual commercial substance of the arrangement between the entities. • The foreign related entity: - owns the pre-existing intellectual property which is licensed to the R&D entity to undertake the R&D - in substance and effect o assumes the financial risk in relation to any funds committed to the R&D entity for the purposes of financing the R&D activities o sets the conditions for initial and subsequent funding of the R&D o assumes the operational risk for the conducting of the R&D activities o controls the strategic decisions regarding the R&D activities, including the instructions given to any contracted CRO as to the way the R&D activities are to be conducted - may itself be contracted by the R&D entity to conduct some (or all) of the R&D activities. • The R&D entity: - may not have a physical presence in Australia - may have one or more foreign-resident directors that are consistent with that of (or are appointed by) the foreign related entity - has an Australian-based resident director that acts in accordance with the directions and wishes of the foreign related entity or its controllers - has few (if any) employees with the technical capability to design, conduct or supervise any R&D activities being conducted - in the absence of either original and future committed funding from the foreign related entity or refundable tax offset under the R&DTI, lacks the economic capacity to either conduct the R&D activities or commercially exploit the Developed IP - may have been incorporated shortly before the end of the relevant income year in which the R&DTI is first claimed. | - are established by and under the instruction of the foreign related entity and its controllers - directly or indirectly result in the foreign related entity ultimately acquiring ownership rights in the Developed IP - for the period of the R&D entity's ownership of the Developed IP, impose restrictions on some or all of the R&D entity's right to exploit, right to alienate and right to itself manage the Developed IP - for the period of the R&D entity's ownership of the Developed IP, grant to the foreign related entity primary rights to exploit and itself manage the Developed IP - may have a legal form that is inconsistent with the actual commercial substance of the arrangement between the entities. | - owns the pre-existing intellectual property which is licensed to the R&D entity to undertake the R&D - in substance and effect o assumes the financial risk in relation to any funds committed to the R&D entity for the purposes of financing the R&D activities o sets the conditions for initial and subsequent funding of the R&D o assumes the operational risk for the conducting of the R&D activities o controls the strategic decisions regarding the R&D activities, including the instructions given to any contracted CRO as to the way the R&D activities are to be conducted - may itself be contracted by the R&D entity to conduct some (or all) of the R&D activities. | o assumes the financial risk in relation to any funds committed to the R&D entity for the purposes of financing the R&D activities o sets the conditions for initial and subsequent funding of the R&D o assumes the operational risk for the conducting of the R&D activities o controls the strategic decisions regarding the R&D activities, including the instructions given to any contracted CRO as to the way the R&D activities are to be conducted | - may not have a physical presence in Australia - may have one or more foreign-resident directors that are consistent with that of (or are appointed by) the foreign related entity - has an Australian-based resident director that acts in accordance with the directions and wishes of the foreign related entity or its controllers - has few (if any) employees with the technical capability to design, conduct or supervise any R&D activities being conducted - in the absence of either original and future committed funding from the foreign related entity or refundable tax offset under the R&DTI, lacks the economic capacity to either conduct the R&D activities or commercially exploit the Developed IP - may have been incorporated shortly before the end of the relevant income year in which the R&DTI is first claimed.","5. In respect of the arrangements covered in this Alert, we are concerned that R&D entities do not qualify for an R&D tax offset under Division 355 of the ITAA 1997 for expenditure incurred by them on R&D activities conducted overseas as the R&D activities were: • not conducted for the R&D entity [5] , or • conducted to a significant extent for the foreign related entity, and that entity does not satisfy the statutory conditions for eligible R&D activities. [6] | • not conducted for the R&D entity [5] , or • conducted to a significant extent for the foreign related entity, and that entity does not satisfy the statutory conditions for eligible R&D activities. [6] | 6. Alternatively: • where the R&D entity is an Australian resident and the R&D activities are conducted for that R&D entity's own benefit, the R&D entity might not qualify for an R&D tax offset as the expenditure incurred by them might not be 'at risk' for the purposes of the at risk integrity rule in the R&D provisions, or • where the conditions for entitlement to an R&D tax offset are satisfied, if viewed objectively that one or more parties to the arrangement has entered into or carried out the arrangement for the purpose of obtaining either a refundable or non-refundable tax offset, the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to cancel that tax offset. [7] | • where the R&D entity is an Australian resident and the R&D activities are conducted for that R&D entity's own benefit, the R&D entity might not qualify for an R&D tax offset as the expenditure incurred by them might not be 'at risk' for the purposes of the at risk integrity rule in the R&D provisions, or • where the conditions for entitlement to an R&D tax offset are satisfied, if viewed objectively that one or more parties to the arrangement has entered into or carried out the arrangement for the purpose of obtaining either a refundable or non-refundable tax offset, the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to cancel that tax offset. [7]",7. We are currently reviewing the arrangements we have identified and we will continue to closely scrutinise these arrangements as we identify them. | 8. We are developing further website guidance on specific technical matters in this Alert that will be published in due course. | 9. We have also issued Taxpayer Alert TA 2023/4 Research and development activities delivered by associated entities.,"10. If you have entered, or are contemplating entering, into an arrangement of this type, we encourage you to: • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice • make a voluntary disclosure to reduce penalties that may apply. | 11. Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties for promoters under Division 290 of Schedule 1 to the Taxation Administration Act 1953. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. | 12. For more information about eligible R&D activities, what can be claimed under the R&DTI and recordkeeping, refer to Research and development tax incentive .",PS LA 2008/15 | PS 2005/24 | ITAA 1936 Pt IVA | ITAA 1936 177D | ITAA 1936 177F | ITAA 1997 Div 355 | ITAA 1997 355-35 | ITAA 1997 355-210(1)(a) | ITAA 1997 355-210(1)(d) | ITAA 1997 355-210(1)(e) | ITAA 1997 355-210(2) | ITAA 1997 355-405 | ITAA 1997 Subdiv 328-C | ITAA 1997 328-115 | ITAA 1997 328-125 | ITAA 1997 328-130 | TAA 1953 Sch 1 Div 290 | Tax Agent Services Act 2009 | IRD Act 28C(1)(a) | TA 2023/4,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20235/NAT/ATO/00001,"Commissioner of Taxation 14 December 2023 | [1] As defined in section 355-35 of the Income Tax Assessment Act 1997 (ITAA 1997). | [2] As defined in section 328-125 of the ITAA 1997. | [3] As defined in section 328-130 of the ITAA 1997. | [4] Issued under paragraph 28C(1)(a) of the Industry Research and Development Act 1986 . | [5] As required under paragraphs 355-210(1)(a), (d) and (e) of the ITAA 1997. | [6] Subsection 355-210(2) of the ITAA 1997. | [7] Sections 177D and 177F of the ITAA 1936. A refundable and non-refundable R&D tax offset is a tax benefit per paragraph 177C(1)(bd) of the ITAA 1936."
TA 2022/1,Parents benefitting from the trust entitlements of their children over 18 years of age,23 February 2022,Current,"1. We are currently reviewing trust arrangements where parents enjoy the economic benefit of trust income appointed to their children who are over 18 years of age (Children). The common feature of the arrangements is that trust income is appointed between members of the family group but in substance it is the parents who exercise control over and enjoy the economic benefit of the income. | 2. In some arrangements, there is an understanding that trust income appointed to the Children will be paid to their parents or otherwise dealt with at their parents' discretion. In others, the trust income appointed to the Children is recorded as applied (with or without their knowledge) to repay amounts owed by them to their parents, being amounts owed in respect of expenses that benefit the children but are properly understood as parental expenses. Examples of these expenses are the costs of their upbringing as a minor or for the kinds of ongoing financial support parents would ordinarily provide their children. | 3. The arrangements we are concerned about are those which are more properly explained by the tax outcomes obtained, including the accessing of tax-free thresholds and lower marginal tax rates of family members, rather than ordinary familial considerations. These arrangements, if effective, may have unintended tax consequences or may attract the application of specific or general anti-avoidance provisions.","4. The arrangements may display all or most of the following features: • The trustees of a discretionary trust (Trust), or the directors of a corporate trustee, are either one or two individuals who are the parents in a particular family (Parents). • Income derived by the Trust is used during the year of derivation to meet the expenses of the Parents. These may be recorded as beneficiary loans made from the trustee to the Parents throughout the year. • Resolutions of the trustee for the year show one or more of the Children presently entitled to a share of the income of the Trust. • The entitlements are for substantial amounts but do not generally result in the Children's taxable income exceeding the threshold for the top marginal tax rate ($180,000). • Amounts are not paid to the Children. Rather, at the actual or purported direction of the Children, the entitlements are satisfied by the amounts being either - paid to their Parents, or - applied against any beneficiary loans owed by the Parents. • The parties contend that the entitlements are paid or applied in this manner because - the Children are required to repay their Parents for expenses incurred in relation to their upbringing or while they were minors (for example, school fees, school uniform costs or their share of the family holidays) - the Children are required to pay or repay their Parents amounts to meet their share of family costs for the current year in excess of amounts it would reasonably be expected an adult child would meet for their personal living expenses while they remain living at home or otherwise supported to some extent by their Parents (those amounts being, for example, a reasonable rate for their board, lodgings or rent if living away from home, or car expenses), or - there is an agreement that the Parents will manage the pooled family members' entitlements from the Trust for the benefit of the family members. • There is no expectation or understanding that the Children's income they derive from sources other than the Trust distributions will be used to either repay their Parents for expenses incurred when they were a minor or pay more than their reasonable share of the household expenditures, or be placed in a pool to be managed by the Parents for the benefit of the family members. | • The trustees of a discretionary trust (Trust), or the directors of a corporate trustee, are either one or two individuals who are the parents in a particular family (Parents). • Income derived by the Trust is used during the year of derivation to meet the expenses of the Parents. These may be recorded as beneficiary loans made from the trustee to the Parents throughout the year. • Resolutions of the trustee for the year show one or more of the Children presently entitled to a share of the income of the Trust. • The entitlements are for substantial amounts but do not generally result in the Children's taxable income exceeding the threshold for the top marginal tax rate ($180,000). • Amounts are not paid to the Children. Rather, at the actual or purported direction of the Children, the entitlements are satisfied by the amounts being either - paid to their Parents, or - applied against any beneficiary loans owed by the Parents. • The parties contend that the entitlements are paid or applied in this manner because - the Children are required to repay their Parents for expenses incurred in relation to their upbringing or while they were minors (for example, school fees, school uniform costs or their share of the family holidays) - the Children are required to pay or repay their Parents amounts to meet their share of family costs for the current year in excess of amounts it would reasonably be expected an adult child would meet for their personal living expenses while they remain living at home or otherwise supported to some extent by their Parents (those amounts being, for example, a reasonable rate for their board, lodgings or rent if living away from home, or car expenses), or - there is an agreement that the Parents will manage the pooled family members' entitlements from the Trust for the benefit of the family members. • There is no expectation or understanding that the Children's income they derive from sources other than the Trust distributions will be used to either repay their Parents for expenses incurred when they were a minor or pay more than their reasonable share of the household expenditures, or be placed in a pool to be managed by the Parents for the benefit of the family members. | - paid to their Parents, or - applied against any beneficiary loans owed by the Parents. | - the Children are required to repay their Parents for expenses incurred in relation to their upbringing or while they were minors (for example, school fees, school uniform costs or their share of the family holidays) - the Children are required to pay or repay their Parents amounts to meet their share of family costs for the current year in excess of amounts it would reasonably be expected an adult child would meet for their personal living expenses while they remain living at home or otherwise supported to some extent by their Parents (those amounts being, for example, a reasonable rate for their board, lodgings or rent if living away from home, or car expenses), or - there is an agreement that the Parents will manage the pooled family members' entitlements from the Trust for the benefit of the family members. | 5. For some of the expense repayment arrangements, there will be no contemporaneous evidence of the claimed obligation of the Children to repay their Parents. In cases involving the Parents' management of the entitlements from the Trust for the benefit of the family members, there may be no documentary evidence to demonstrate how that objective will be achieved. | 6. The Children may or may not be aware of their purported entitlements, or obligations, or the application of their entitlements against relevant expenses incurred on their behalf by their Parents.","7. The ABC Trust's beneficiaries include the members of the ABC Family. David is the sole trustee of the ABC Trust. David and his wife Rani have two children, Jenny (aged 22) and Paul (aged 19), who live with them in the family home. David and Rani have an existing mortgage on the home. Jenny and Paul are both full-time students and during the 2020-21 income year, they each earned approximately $12,000 from casual employment. | 8. During the 2020-21 income year, the ABC Trust derives income of $720,000 (the trust's net income is also $720,000). | 9. A resolution of the trustee of the ABC Trust dated 30 June 2021 shows both Jenny and Paul are each presently entitled to $160,000 of the income of the ABC Trust, with David and Rani each presently entitled to $200,000. | 10. Jenny and Paul are not paid any amounts. Instead, David transfers an amount equal to their entitlements to the mortgage offset account that he and Rani maintain. Jenny and Paul's entitlements are recorded as having been fully paid in the accounts of the ABC Trust. David pays Jenny and Paul's tax liabilities in relation to their entitlements from his personal funds. | 11. David has taken these actions as Jenny and Paul have agreed that their entitlements from the ABC Trust will be managed by David for the benefit of all family members. David has determined that those entitlements should be applied to reduce the debt on the family home. | 12. This arrangement raises the concerns mentioned in this Alert. By entering into this arrangement, the purported $160,000 entitlements of both Jenny and Paul are not subject to the top marginal tax rate. David has not managed the entitlements for the benefit of all members of the family. The arrangement has the result that the post-tax amounts of Jenny and Paul's entitlements have been diverted to meet their parent's individual liabilities in circumstances where their parents would have been able to meet them. David and Rani receive the same economic benefit from that income as if it had been appointed to them directly, but without the amounts being included in their assessable income and subject to tax at a higher marginal tax rate. The arrangement involving the making of the trust distributions and use of those amounts appears to be motivated by the tax outcome achieved rather than ordinary familial objectives. | 13. The trustee of the Blue Family Trust is Azure Pty Ltd. Trevor is the sole shareholder and controller of Azure Pty Ltd. The Blue Family Trust derives assessable income in excess of $400,000 a year. Trevor's daughter, Simone, is a beneficiary of the trust. Simone has recently turned 18 years of age and works part-time. Simone expects to derive assessable income from her work of approximately $20,000 a year. | 14. Before the end of the 2020-21 income year, Simone meets with her father and agrees that any distribution resolved to be made by the Trustee will, after the payment of tax, be paid to Trevor to reimburse him for part of the fees for secondary schooling and costs of other extracurricular activities since Simone was five years old. Records maintained by the family show that these expenses amounted to $315,000. | 15. The Trustee resolves to distribute $160,000 to Simone and pays this amount into an account held in Trevor's name. Trevor pays income tax on Simone's behalf. | 16. This arrangement raises the concerns that are mentioned in this Alert. Simone is purportedly made entitled to a trust distribution and this amount is used to reimburse her parents for expenses that they would ordinarily meet. The arrangement, which results in Trevor obtaining the economic benefit of the trust income without that income being subject to tax at the top marginal tax rate he would otherwise have paid, appears to be more readily explained by the tax outcomes achieved, rather than any familial objectives. | 17. The Green Trust's beneficiaries include the members of the Green Family. Mary Green is the sole trustee of the Green Trust. Mary has an adult child, Genevieve (aged 19), who lives with her grandmother in order to be close to the university she attends. | 18. It is agreed between Mary and Genevieve that Genevieve's tuition fees of $20,000 will not have to be met by Genevieve but that they will be paid out of her trust entitlement. It is agreed between Genevieve and her grandmother that the grandmother will be paid board of $10,000 a year. | 19. During the 2020-21 income year, the Green Trust derives income of $300,000 (the trust's net income is also $300,000). | 20. On 30 June 2021, Mary as the trustee of the Green Trust resolves to make Genevieve presently entitled to $40,000 of the trust income and make Mary entitled to the remaining $260,000. | 21. $20,000 of the $40,000 that Genevieve is presently entitled to is paid to Mary, who has previously met the tuition fees of $20,000 as they fell due. $10,000 of that $40,000 is paid directly to the grandmother. The remaining $10,000 is paid to Genevieve, some of which is used to meet her tax obligations on the $40,000. | 22. Although $30,000 of the $40,000 is not received directly by Genevieve, and might appear to be within the scope of this Alert, it is important that the $30,000 is applied to repay loans for legitimate expenses that might ordinarily be borne by an adult child and were temporarily met on Genevieve's behalf (being tuition fees and arm's length board). The remaining $10,000 was actually received by Genevieve. Accordingly, the concerns raised in this Alert do not arise in arrangements of this type.","23. We are concerned that taxpayers are entering into these arrangements to avoid tax on the net income of the trust by utilising the lower marginal tax rate applying to the Children in circumstances where the benefit from these arrangements is, in substance, enjoyed by the Parents as: • the Children are paying amounts for expenses that would ordinarily be met by their Parents, or • the Children's entitlements are otherwise being applied for the benefit of the Parents either directly, or by the charging of excessive amounts, and/or • there are elements of contrivance. | • the Children are paying amounts for expenses that would ordinarily be met by their Parents, or • the Children's entitlements are otherwise being applied for the benefit of the Parents either directly, or by the charging of excessive amounts, and/or • there are elements of contrivance. | 24. From our review of these arrangements, we consider that the following consequences may arise: • the purported entitlement of the Children to trust income may be a sham or otherwise ineffective for trust law purposes • the arrangement may constitute a reimbursement agreement under section 100A of the Income Tax Assessment Act 1936 (ITAA 1936) • subsections 95A(1) and 97(1) of the ITAA 1936 may apply to treat the Parents as presently entitled where the means by which the trustee permits the use of the funds evidences the exercise of a discretion to pay or apply those amounts to the Parents (notwithstanding that the appointments are recorded as 'beneficiary loans'), or • the general anti-avoidance provisions in Part IVA of the ITAA 1936 could apply. | • the purported entitlement of the Children to trust income may be a sham or otherwise ineffective for trust law purposes • the arrangement may constitute a reimbursement agreement under section 100A of the Income Tax Assessment Act 1936 (ITAA 1936) • subsections 95A(1) and 97(1) of the ITAA 1936 may apply to treat the Parents as presently entitled where the means by which the trustee permits the use of the funds evidences the exercise of a discretion to pay or apply those amounts to the Parents (notwithstanding that the appointments are recorded as 'beneficiary loans'), or • the general anti-avoidance provisions in Part IVA of the ITAA 1936 could apply. | 25. While this Alert specifically considers arrangements involving the children of controlling individuals, we are also concerned about similar arrangements involving other family members of controlling individuals that would have lower marginal tax rates than those of the controlling individuals.","26. We are currently reviewing these arrangements and are engaging with taxpayers who have entered into, or are considering entering into, these and similar arrangements. | 27. Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny.","28. If you have entered, or are contemplating entering, into an arrangement of this type, we encourage you to: • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us using the contact details provided at the end of this Alert • ask us for our view through a private ruling • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | 29. Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties under Subdivision 290-B of Schedule 1 to the Taxation Administration Act 1953 for promoters. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15 | ITAA 1936 95A(1) | ITAA 1936 97(1) | ITAA 1936 100A | ITAA 1936 Pt IVA | TAA 1953 Sch 1 Subdiv 290-B | Tax Agent Services Act 2009,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20221/NAT/ATO/00001,Commissioner of Taxation 23 February 2022 | Updated ATO tip-off hotline number | christopher.ryan@ato.gov.au
TA 2022/2,Treaty shopping arrangements to obtain reduced withholding tax rates,20 July 2022,Current,,"1. We are currently reviewing treaty shopping arrangements designed to obtain the benefit of a reduced withholding tax (WHT) rate under a double-tax agreement (DTA) in relation to royalty or dividend payments from Australia. Typically, this benefit is sought via the interposition of one or more related entities between an Australian resident and the ultimate recipient of the royalty or dividend, where the interposed entity is a resident of a treaty partner jurisdiction. The ultimate recipient is generally located in a jurisdiction that either does not have a DTA with Australia or, where it is a treaty partner of Australia, the DTA provides a less favourable treaty benefit. | 2. A key purpose of Australia's treaty network is to eliminate double taxation without creating opportunities for tax avoidance practices, such as treaty shopping arrangements. We are concerned that some taxpayers have entered into, or are considering implementing, arrangements interposing entities in treaty jurisdictions to obtain a more favourable tax outcome under a DTA in the form of reduced WHT rates. These taxpayers may not be entitled to such benefits under our DTAs. | 3. Arrangements that pose a potential risk of treaty shopping may display some of the following features and we are likely to make further enquiries where such factors exist: • Structures and restructures involving the interposition of an existing or newly incorporated entity between Australia and the ultimate recipient of royalties or unfranked dividends. • The interposed entity may have significant existing operations and employees and the taxpayer may contend that commercial benefits and/or synergies flow to the Australian operations or the interposed entity. • Royalty or unfranked dividend payments [1] (or potential future royalty or unfranked dividend payments) to the interposed entity are (or would be) subject to WHT at reduced rates under the relevant DTA compared with Australian domestic law or the applicable WHT rate under the DTA between Australia and the country of residence of the ultimate recipient. | • Structures and restructures involving the interposition of an existing or newly incorporated entity between Australia and the ultimate recipient of royalties or unfranked dividends. • The interposed entity may have significant existing operations and employees and the taxpayer may contend that commercial benefits and/or synergies flow to the Australian operations or the interposed entity. • Royalty or unfranked dividend payments [1] (or potential future royalty or unfranked dividend payments) to the interposed entity are (or would be) subject to WHT at reduced rates under the relevant DTA compared with Australian domestic law or the applicable WHT rate under the DTA between Australia and the country of residence of the ultimate recipient. | 4. The diagrams in this Alert (for Examples 1 and 2) illustrate simplified examples of some of the higher-risk arrangements of concern that will be subject to increased scrutiny. The arrangements may also involve multiple jurisdictions with a number of interposed entities in the holding structure.","5. Aus Co is a member of the Foreign Co Group, with the ultimate parent company being For Co, a multinational corporation with a tax residence in Treaty Country A and operations through subsidiaries in numerous other jurisdictions, including Treaty Country B. Australia has concluded DTAs with each of Treaty Countries A and B. | 6. Prior to the restructure, Aus Co had an exclusive licence agreement with For Co, which granted Aus Co the rights to use various patents and trademarks to facilitate their sales and marketing activities in the Australian market. Under the terms of the arrangement, Aus Co paid a licence fee to For Co. These payments constituted royalties in accordance with the definition under the relevant treaty article. As such, Aus Co's payments to For Co were subject to royalty WHT at the reduced rate of 10% provided under the DTA between Australia and Treaty Country A, rather than the 30% rate payable under Australian domestic tax law in the absence of DTA relief. [2] | 7. In 2020, For Co undertook the following steps to restructure its Australian operations: • The exclusive licensing arrangement with Aus Co was terminated. • Another subsidiary of For Co, Treaty Co (a tax resident in Treaty Country B), was granted the rights to sub-licence the use of patents and trademarks in certain regions, including Australia. • Aus Co entered into a new exclusive licensing arrangement with Treaty Co. • The new agreement between Treaty Co and Aus Co operates in effect to grant rights that are similar in substance to the rights granted under the previous arrangement between Aus Co and For Co. • Aus Co now pays royalties to Treaty Co and payments are subsequently made by Treaty Co to For Co. • Treaty Co's activities mainly consist of the receipt and on-payment of royalties to For Co, reporting on its investment in Aus Co to For Co and complying with its corporate obligations. | • The exclusive licensing arrangement with Aus Co was terminated. • Another subsidiary of For Co, Treaty Co (a tax resident in Treaty Country B), was granted the rights to sub-licence the use of patents and trademarks in certain regions, including Australia. • Aus Co entered into a new exclusive licensing arrangement with Treaty Co. • The new agreement between Treaty Co and Aus Co operates in effect to grant rights that are similar in substance to the rights granted under the previous arrangement between Aus Co and For Co. • Aus Co now pays royalties to Treaty Co and payments are subsequently made by Treaty Co to For Co. • Treaty Co's activities mainly consist of the receipt and on-payment of royalties to For Co, reporting on its investment in Aus Co to For Co and complying with its corporate obligations. | 8. As a result of the restructure: • Treaty Co applies the reduced royalty WHT rate of 5% under the DTA between Australia and Treaty Country B in respect of the royalty paid by Aus Co to Treaty Co. • There is reduced taxation paid by Treaty Co in respect of the royalty received from Aus Co in Treaty Country B. • There is reduced taxation in respect of any payments subsequently made to For Co from Treaty Co. | • Treaty Co applies the reduced royalty WHT rate of 5% under the DTA between Australia and Treaty Country B in respect of the royalty paid by Aus Co to Treaty Co. • There is reduced taxation paid by Treaty Co in respect of the royalty received from Aus Co in Treaty Country B. • There is reduced taxation in respect of any payments subsequently made to For Co from Treaty Co. | 9. Aus Co asserts that the restructure was undertaken for a number of reasons, including that: • Treaty Country B provided a superior business environment compared with Treaty Country A for conducting its licensing operations. • The interposition of Treaty Co creates operational synergies between Aus Co and For Co's subsidiaries in Treaty Country B. | • Treaty Country B provided a superior business environment compared with Treaty Country A for conducting its licensing operations. • The interposition of Treaty Co creates operational synergies between Aus Co and For Co's subsidiaries in Treaty Country B. | 10. A lack of contemporaneous documentation and other objective evidence supporting these contentions may imply that accessing the reduced WHT rates was one of the principal or main reasons for interposing Treaty Co. | 11. Non-treaty Co is a conglomerate that invests in global infrastructure, including in Treaty Country. Non-treaty Co is located in a jurisdiction that does not have a DTA with Australia. In 2020, Non-treaty Co identified an opportunity to acquire Aus Group to grow its existing global portfolio. Prior to its successful acquisition of Aus Group, Treaty Co, Aus Co and Aus BidCo were incorporated as part of a series of transactions which resulted in Treaty Co (a non-resident for Australian tax purposes) being the holding company of Aus Co (an Australian tax resident), with Non-treaty Co indirectly holding 100% of Aus Group. Following the acquisition, Aus Group joined the Aus Co tax consolidated group. | 12. The acquisition of Aus Group had the following further characteristics: • The funding for the acquisition was primarily sourced by Non-treaty Co. • Considerable future payments of unfranked dividends by Aus Co to Treaty Co were forecast prior to the acquisition. • Dividends received by Treaty Co are to be either repatriated to Non-treaty Co or kept in passive investments and not reinvested into any substantive commercial operations of Treaty Co. • Treaty Co is controlled by Non-treaty Co directors. • There are some common directorships between Non-treaty Co, Treaty Co and Aus Co. | • The funding for the acquisition was primarily sourced by Non-treaty Co. • Considerable future payments of unfranked dividends by Aus Co to Treaty Co were forecast prior to the acquisition. • Dividends received by Treaty Co are to be either repatriated to Non-treaty Co or kept in passive investments and not reinvested into any substantive commercial operations of Treaty Co. • Treaty Co is controlled by Non-treaty Co directors. • There are some common directorships between Non-treaty Co, Treaty Co and Aus Co. | 13. As a result of the arrangement: • Treaty Co applies the reduced dividend WHT rate under the relevant DTA in respect of unfranked dividends paid by Aus Co to Treaty Co. • There is reduced taxation paid by Treaty Co in respect of the unfranked dividends received from Aus Co in Treaty Country. • There is reduced taxation in respect of any payments subsequently made to Non-treaty Co from Treaty Co. | • Treaty Co applies the reduced dividend WHT rate under the relevant DTA in respect of unfranked dividends paid by Aus Co to Treaty Co. • There is reduced taxation paid by Treaty Co in respect of the unfranked dividends received from Aus Co in Treaty Country. • There is reduced taxation in respect of any payments subsequently made to Non-treaty Co from Treaty Co. | 14. Aus Co asserts that structuring the acquisition of Aus Group through Treaty Country was undertaken for a number of reasons, including that: • Treaty Co facilitates access to the expertise that exists in Non-treaty Co's infrastructure investments in Treaty Country • operational efficiencies, synergies and cost savings, and the improved ability to share knowledge and expertise were anticipated. | • Treaty Co facilitates access to the expertise that exists in Non-treaty Co's infrastructure investments in Treaty Country • operational efficiencies, synergies and cost savings, and the improved ability to share knowledge and expertise were anticipated. | 15. A lack of contemporaneous documentation and other objective evidence supporting these contentions may imply that accessing the reduced WHT rates was one of the principal or main reasons for structuring the acquisition of Aus Group through Treaty Country.",16. We are concerned that arrangements of the kind described in this Alert may be entered into or carried out by taxpayers for a principal or main purpose of obtaining a treaty benefit to which they would not otherwise be entitled. These arrangements may attract the operation of the anti-avoidance rules provided under Australia's DTAs. The anti-avoidance rules under our DTAs that may be applicable include [3] : • a Principal Purposes Test (PPT) contained either in some of Australia's DTAs themselves or in Article 7(1) of the Organisation for Economic Co-operation and Development's Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) • a Main Purposes Test (MPT) contained under the applicable royalty and dividend articles in a number of Australia's DTAs. [4] | • a Principal Purposes Test (PPT) contained either in some of Australia's DTAs themselves or in Article 7(1) of the Organisation for Economic Co-operation and Development's Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) • a Main Purposes Test (MPT) contained under the applicable royalty and dividend articles in a number of Australia's DTAs. [4] | 17. Arrangements covered by this Alert also include those which may attract the operation of the general anti-avoidance rules and/or diverted profits tax in Part IVA of the Income Tax Assessment Act 1936 and other provisions under Australian domestic law. [5] | 18. This Alert is not directed at arrangements which facilitate bona fide investment into Australia that obtain treaty benefits in a manner consistent with the object and purpose for which the benefit is intended to be conferred.,"19. We are currently reviewing international transactions for these types of arrangements and engaging with taxpayers and advisers in respect of existing and proposed arrangements as part of our engagement and assurance activities. | 20. The publication of Law Administration Practice Statement PS LA 2020/2 Administering general anti-abuse rules, such as a principal or main purposes test, included in any of Australia's tax treaties provides transparency for the tax community on how the ATO establishes that a principal or main purposes test applies. This assists with the early detection of treaty shopping arrangements and ensures such arrangements are likely to be subject to further review where warranted. | 21. Where we identify arrangements that exhibit common treaty shopping features, such as those described in this Alert, they will be subject to increased scrutiny. We are likely to make further detailed enquiries and request contemporaneous evidence in relation to the relevant facts and circumstances of such arrangements to test the veracity of the commercial benefits that are asserted by taxpayers and/or their advisers. | 22. The consequence of the PPT applying to an arrangement is that the reduced WHT rate under the respective DTA is denied and the Australian domestic rate of WHT is imposed.","23. If you have entered into, or are contemplating entering into, an arrangement of this type we encourage you to discuss your situation with us by emailing TaxTreaties@ato.gov.au | 24. Even where your arrangement has existed for some time, we encourage you to engage with us, as the anti-avoidance rules under our DTAs may potentially apply in respect of payments in the future despite, for example, the arrangement being established prior to the MLI taking effect. | 25. Penalties may apply to participants in and promoters of these types of arrangements. | Commissioner of Taxation 20 July 2022 | © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | Date of Issue: 20 July 2022 | Date of Effect: N/A | [1] Unfranked dividends not declared as conduit foreign income under Subdivision 802-A of the Income Tax Assessment Act 1997. | [2] Under paragraph 7(c) of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974. | [3] Although this Alert focuses on the application of the MLI PPT, this is merely for ease of reference and it is intended that this Alert covers arrangements where any of these anti-avoidance rules may have application. | [4] For DTAs whose operation is affected by the MLI, the PPT does not have retrospective effect and where the DTA contains an MPT provision, the MPT applies in respect of royalties and dividends paid before the date that the MLI came into effect in respect of that DTA. | [5] The Commissioner may have other concerns in connection with the kinds of cross-border structures described in this Alert and may consider the application of other provisions including, for example, Subdivision 12-F in Schedule 1 to the Taxation Administration Act 1953, or Subdivision 815-B or Division 974 of the Income Tax Assessment Act 1997. | File n/a | Related Rulings/Determinations: TR 2001/13 | Related Practice Statements: PS LA 2008/15 PS LA 2020/2 | Other References: Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting Article 7(1) | Legislative References: Part IVA ITAA 1936 ITAA 1997 Subdiv 802-A ITAA 1997 Subdiv 815-B ITAA 1997 Div 974 TAA 1953 Sch 1 Subdiv 12-F Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 7(c) | Contact officer: Kieran Starr Email address: Kieran.Starr@ato.gov.au Telephone: (02) 9374 1487 | ISSN: 2651-9550","PS LA 2008/15 | TR 2001/13 | PS LA 2020/2 | Part IVA ITAA 1936 | ITAA 1997 Subdiv 802-A | ITAA 1997 Subdiv 815-B | ITAA 1997 Div 974 | TAA 1953 Sch 1 Subdiv 12-F | Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 7(c)",False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20222/NAT/ATO/00001,Example 1: Entity interposed to reduce Australian royalty withholding tax | Example 2: Acquisition structured through a treaty jurisdiction to reduce Australian dividend withholding tax
TA 2021/1,Retail sale of illicit alcohol,1 April 2021,Current,"We are currently reviewing a number of arrangements involving the manufacture, distribution and sale of illicit alcohol. This Alert focuses on arrangements where retailers are knowingly or recklessly purchasing illicit alcohol for the purposes of resale. 'Illicit alcohol', for the purposes of this Alert, refers to excisable alcohol on which duty has not been paid or otherwise properly acquitted. Duty is ordinarily paid by an excise licensed manufacturer or distributor and is embedded in the price of the product.","The arrangements described in this Alert all involve alcohol entering the Australian market for consumption without payment of the required amount of excise duty. | A feature common to all of these arrangements is that the alcohol can be sold in retail outlets at a much greater profit and/or for a lower price than the same or similar products on which excise duty has been properly paid. This creates an unfair competitive advantage. | Retail outlets include, but are not limited to, retail bottle shops, bars and restaurants. | Illicit alcohol may be supplied directly to the retail outlet by the alcohol manufacturer (who may be licensed or unlicensed) or by a wholesale distributor. It is usually sold or offered for sale to the retail outlet for a significantly reduced price (because the selling price does not include excise duty). | Alcohol may be illicit for any of the following reasons: • unlicensed manufacture and non-payment of duty • licensed manufacture with unreported excise duty - including not reporting all goods delivered into home consumption on an excise return, or intentional product misclassification (that is, reported as goods with a lower excise tariff rate, or as a beverage subject to the wine equalisation tax) • product diversion including - concessional spirit used for non-concessional purposes, and - goods reported as exported or sent for destruction and diverted back into the domestic market. | • unlicensed manufacture and non-payment of duty • licensed manufacture with unreported excise duty - including not reporting all goods delivered into home consumption on an excise return, or intentional product misclassification (that is, reported as goods with a lower excise tariff rate, or as a beverage subject to the wine equalisation tax) • product diversion including - concessional spirit used for non-concessional purposes, and - goods reported as exported or sent for destruction and diverted back into the domestic market. | - concessional spirit used for non-concessional purposes, and - goods reported as exported or sent for destruction and diverted back into the domestic market. | We take these illicit alcohol manufacturing and distribution behaviours very seriously and impose substantial penalties. In the most serious cases, we make referrals to the Commonwealth Director of Public Prosecutions for criminal prosecutions. | The following examples highlight the more common features of arrangements involving the retail sale of illicit alcohol.","• An entity that holds an excise manufacturer licence sells alcohol it has manufactured to a retail bottle shop and includes in the sale a significant amount of 'bonus stock'. • The manufacturer gives the retailer an invoice for the sale for a price that seemingly includes excise duty, but the quantity of alcohol on the invoice is significantly lower than what was actually supplied (that is, the invoice does not reflect the inclusion of the bonus stock). • The provision of the bonus stock to the retailer means the cost of the total supply is less than the amount of the excise duty component of the supply. • The retailer sells the product at a discount, while still making a profit. | • An entity that holds an excise manufacturer licence sells alcohol it has manufactured to a retail bottle shop and includes in the sale a significant amount of 'bonus stock'. • The manufacturer gives the retailer an invoice for the sale for a price that seemingly includes excise duty, but the quantity of alcohol on the invoice is significantly lower than what was actually supplied (that is, the invoice does not reflect the inclusion of the bonus stock). • The provision of the bonus stock to the retailer means the cost of the total supply is less than the amount of the excise duty component of the supply. • The retailer sells the product at a discount, while still making a profit. | • A person distils spirit without an excise manufacturer licence. • The spirit is bottled and labelled to give the appearance of a legitimate product. • The manufacturer details specified on the label are made up or are not those of the entity that distilled the product, and the barcode on the label belongs to an entity other than the manufacturer specified. • The manufacturer does not report or pay any excise duty on the product. • The manufacturer sells the product to an interposed wholesale distributor for a price that is significantly lower than the excise duty and goods and services tax (GST) that should be included in the selling price. • The wholesale distributor does not hold an excise storage licence and should know the purchase price should include excise duty and GST. • The wholesale distributor on-sells it to a retail outlet for a price that is less than or similar to the excise duty and GST component that should be included in the selling price. • The retailer sells the product at a much cheaper price than similar alcohol products, while still making a profit. | • A person distils spirit without an excise manufacturer licence. • The spirit is bottled and labelled to give the appearance of a legitimate product. • The manufacturer details specified on the label are made up or are not those of the entity that distilled the product, and the barcode on the label belongs to an entity other than the manufacturer specified. • The manufacturer does not report or pay any excise duty on the product. • The manufacturer sells the product to an interposed wholesale distributor for a price that is significantly lower than the excise duty and goods and services tax (GST) that should be included in the selling price. • The wholesale distributor does not hold an excise storage licence and should know the purchase price should include excise duty and GST. • The wholesale distributor on-sells it to a retail outlet for a price that is less than or similar to the excise duty and GST component that should be included in the selling price. • The retailer sells the product at a much cheaper price than similar alcohol products, while still making a profit. | • An entity stores well-known brands of beer and spirits at a licensed warehouse. The goods are stored underbond. • A small quantity of the beer is delivered for home consumption and the duty paid at the correct rate. The remaining beer is entered in the Integrated Cargo System (ICS) and duty paid at the correct rate, however it is not sold within Australia. The internal documents at the warehouse nevertheless indicate a sale has occurred in Australia and the goods removed. • The duty-paid beer that remains in the warehouse is, in fact, loaded into a container for export. Once this occurs, relevant documentation will show all beer in the warehouse can be accounted for and the beer will have been physically removed. • However, the beer that has been physically loaded for export is incorrectly declared in the ICS as spirits. It is the beer that is physically exported. Although the spirits have purportedly been exported, they have not left Australia. The spirits are instead sold into the Australian domestic market without the payment of duty. • By declaring the spirits as exported, the goods can be accounted for in the relevant documents and all documentation at the warehouse and in the ICS will therefore match. • The spirits, upon which no duty has been paid, are sold to the retailer at a price significantly below that which the brand would usually sell for. The product description on the invoice is vague (for example, the invoice is for 'alcohol' and exact quantities are not specified). • The retailer sells the product at a discount, while still making a profit. | • An entity stores well-known brands of beer and spirits at a licensed warehouse. The goods are stored underbond. • A small quantity of the beer is delivered for home consumption and the duty paid at the correct rate. The remaining beer is entered in the Integrated Cargo System (ICS) and duty paid at the correct rate, however it is not sold within Australia. The internal documents at the warehouse nevertheless indicate a sale has occurred in Australia and the goods removed. • The duty-paid beer that remains in the warehouse is, in fact, loaded into a container for export. Once this occurs, relevant documentation will show all beer in the warehouse can be accounted for and the beer will have been physically removed. • However, the beer that has been physically loaded for export is incorrectly declared in the ICS as spirits. It is the beer that is physically exported. Although the spirits have purportedly been exported, they have not left Australia. The spirits are instead sold into the Australian domestic market without the payment of duty. • By declaring the spirits as exported, the goods can be accounted for in the relevant documents and all documentation at the warehouse and in the ICS will therefore match. • The spirits, upon which no duty has been paid, are sold to the retailer at a price significantly below that which the brand would usually sell for. The product description on the invoice is vague (for example, the invoice is for 'alcohol' and exact quantities are not specified). • The retailer sells the product at a discount, while still making a profit. | • A licensed manufacturer of excisable alcohol applies to the ATO for permission to destroy a specific quantity of alcohol on which duty has not been paid, and for a remission of the excise duty, on the basis the alcohol is unfit for human consumption. • The ATO grants permission for the alcohol to be moved to a destruction facility and destroyed. • The manufacturer sends the alcohol to the destruction facility. • The alcohol is not destroyed, and is instead re-packaged or lot/batch codes are removed and supplied to a wholesale distributor, who on-sells the alcohol on which duty has not been paid to a retailer at a significantly reduced price. • The retailer sells the product at a much cheaper price than similar alcohol products, while still making a profit. | • A licensed manufacturer of excisable alcohol applies to the ATO for permission to destroy a specific quantity of alcohol on which duty has not been paid, and for a remission of the excise duty, on the basis the alcohol is unfit for human consumption. • The ATO grants permission for the alcohol to be moved to a destruction facility and destroyed. • The manufacturer sends the alcohol to the destruction facility. • The alcohol is not destroyed, and is instead re-packaged or lot/batch codes are removed and supplied to a wholesale distributor, who on-sells the alcohol on which duty has not been paid to a retailer at a significantly reduced price. • The retailer sells the product at a much cheaper price than similar alcohol products, while still making a profit.","We are concerned that, as a result of entities entering into arrangements of the type described in this Alert, excisable alcohol is being sold to consumers in Australia without duty ever being paid on it. In the arrangements described in the Examples in this Alert, the retailers should know or suspect excise duty has not been included in their purchase price. This complicit (or reckless) behaviour undermines the integrity of the excise regime, deprives the community of funds required to fund essential community services, and creates an uneven playing field for businesses that comply with the law. | Penalties apply under the Excise Act 1901 for any entity that sells (whether by wholesale or retail), offers for sale, or otherwise enters alcohol on which duty has not been paid into the Australian domestic market for consumption. These penalties include the payment of up to five times the amount of excise duty that would have been payable on the goods. | Arrangements of the type described in this Alert breach provisions in the Excise Act 1901, including: • subsection 25(1) - intentionally manufacturing without a licence • subsection 26(1) - intentionally not acting in accordance with a licence • subsection 27(1) - intentionally manufacturing at unlicensed premises • subsection 54(1) - non-payment of excise duty • section 60 - failure to keep excisable goods safely and account for them • subsection 61A(4) - move underbond excisable goods contrary to a permission • section 62 - duty not paid on the full quantity of goods • section 117 - unlawful possession of excisable goods, and • section 117B - unlawfully selling excisable goods. | • subsection 25(1) - intentionally manufacturing without a licence • subsection 26(1) - intentionally not acting in accordance with a licence • subsection 27(1) - intentionally manufacturing at unlicensed premises • subsection 54(1) - non-payment of excise duty • section 60 - failure to keep excisable goods safely and account for them • subsection 61A(4) - move underbond excisable goods contrary to a permission • section 62 - duty not paid on the full quantity of goods • section 117 - unlawful possession of excisable goods, and • section 117B - unlawfully selling excisable goods.","We are currently undertaking a number of activities in relation to the arrangements outlined in this Alert and these include: • contacting alcohol retailers about their obligations with regard to the purchase and retail sale of excisable alcohol on which duty has not been paid • auditing entities exhibiting behaviours which suggest non-compliance with the law • issuing demands for unpaid excise duty, including to individuals when appropriate • monitoring information we receive on entities that may be engaging in this conduct, or facilitating non-compliant behaviour, and taking further compliance action where required • updating our web guidance on What attracts our attention - illicit alcohol • publishing articles in industry publications, and • disseminating information through industry bodies. In addition to our retailer-focused activities, we have a strong focus on the manufacturers and distributors of illicit alcohol, thereby ensuring our activities address the whole supply chain. | • contacting alcohol retailers about their obligations with regard to the purchase and retail sale of excisable alcohol on which duty has not been paid • auditing entities exhibiting behaviours which suggest non-compliance with the law • issuing demands for unpaid excise duty, including to individuals when appropriate • monitoring information we receive on entities that may be engaging in this conduct, or facilitating non-compliant behaviour, and taking further compliance action where required • updating our web guidance on What attracts our attention - illicit alcohol • publishing articles in industry publications, and • disseminating information through industry bodies. | In addition to our retailer-focused activities, we have a strong focus on the manufacturers and distributors of illicit alcohol, thereby ensuring our activities address the whole supply chain.","If you are offered a suspiciously cheap consignment of alcohol, it might be illicit and something you should avoid. If you think you may have purchased illicit alcohol, we can help you rectify the problem. | More specifically, if you become aware of, or have entered, or are contemplating entering, into activities described of this type we encourage you to: • phone or email us via the contact details provided at the end of this Alert • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us via the contact details provided at the end of this Alert • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | To avoid the risk of becoming involved in these arrangements, we recommend retailers check our website for the excise rates on alcohol, check their internal controls (including stock controls), verify the bona fides of any new suppliers, and be alert to the following which may indicate a supplier is involved in the supply of illicit alcohol: • the supply is at a commercially-unrealistic price given the excise duty that should apply • the supplier is the manufacturer of the alcohol but does not hold an ATO-issued manufacturer or storage licence • whether the product is labelled correctly (including, but not limited to, country of origin, supplier details, lot identification, barcode, tampered lot codes) • bonus stock is offered, or received, in substantial amounts and/or on a regular basis which reduces the overall unit average price • the amount of product specified on the invoice differs to what was delivered • missing, vague, or incorrect product descriptions on invoices, and • requests by suppliers to hold or temporarily store product without purchasing it. | • the supply is at a commercially-unrealistic price given the excise duty that should apply • the supplier is the manufacturer of the alcohol but does not hold an ATO-issued manufacturer or storage licence • whether the product is labelled correctly (including, but not limited to, country of origin, supplier details, lot identification, barcode, tampered lot codes) • bonus stock is offered, or received, in substantial amounts and/or on a regular basis which reduces the overall unit average price • the amount of product specified on the invoice differs to what was delivered • missing, vague, or incorrect product descriptions on invoices, and • requests by suppliers to hold or temporarily store product without purchasing it. | Further information can be found on the internet at: What attracts our attention - illicit alcohol , or through the contact details at the end of this Alert. | Penalties may apply to participants in, and promoters of, these types of arrangements. This includes serious penalties under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters. In more serious cases, sanctions under criminal law may apply. Registered tax agents involved in the promotion of these types of arrangements may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15 | Excise Act 1901 25(1) | Excise Act 1901 26(1) | Excise Act 1901 27(1) | Excise Act 1901 54(1) | Excise Act 1901 60 | Excise Act 1901 61A(4) | Excise Act 1901 62 | Excise Act 1901 117 | Excise Act 1901 117B | Excise Tariff Act 1921 | TAA 1953 Sch 1 Div 290 | Tax Agent Services Act 2009,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20211/NAT/ATO/00001,Commissioner of Taxation 1 April 2021
TA 2021/2,Disguising undeclared foreign income as gifts or loans from related overseas entities,17 September 2021,Current,,"1. We continue to encounter instances where Australian-resident taxpayers derive income or capital gains offshore (foreign assessable income) but fail to declare it in their Australian income tax returns. | 2. In some instances, taxpayers who are not Australian citizens may fail to declare their foreign assessable income as they are unaware they may be Australian residents for tax purposes and, as such, assessable on the worldwide income they derive as well as on certain profits derived by offshore entities they control. [1] | 3. However, the arrangements with which this Alert is concerned are ones where taxpayers are aware of their residency status, as well as the tax implications that flow from it, but attempt to avoid or evade tax on their foreign assessable income by concealing the character of funds upon their repatriation to Australia by disguising the funds received as a gift, or a loan, from a related overseas entity. | 4. Taxpayers and their advisers who enter into these arrangements will face substantial penalties and may be at risk of potential sanctions under criminal law. | 5. These arrangements typically display all or most of the following features: • An Australian-resident taxpayer derives foreign assessable income and does not declare it in their Australian income tax return. The amounts derived may be - actual amounts of foreign assessable income, such as income from employment, interest, dividends, or a capital gain on the disposal of assets, such as shares in a foreign company - deemed amounts of foreign assessable income, such as amounts assessable under the controlled foreign company (CFC) provisions in Part X of the Income Tax Assessment Act 1936 [2] , or under the transferor trust provisions in Division 6AAA of Part III, or - amounts assessable as dividends as a result of section 47A or Division 7A of Part III applying, or amounts from trusts assessable under section 99B. • The foreign assessable income is repatriated to the taxpayer, or an associate of the taxpayer, in Australia. The repatriation is achieved by a related overseas entity transferring the funds directly to the taxpayer (or an associate), or by using the services of an offshore financial intermediary to transfer the funds. The related overseas entity is typically a family member, a friend or some other kind of associate (such as a related company or trust). • The foreign assessable income may be repatriated in a single lump sum or in instalments. • The repatriation of the foreign assessable income may occur in the income year in which it is derived, in a later income year or over the course of several income years. • The true character of the foreign assessable income is concealed upon its repatriation to Australia under the guise that the foreign assessable income is instead a gift or a loan from the related overseas entity. • In some cases, documentation is prepared that purports to show that the repatriated funds have the character of a gift, or an advance of funds by way of a loan, but that occurs in circumstances where the objectively ascertainable facts do not support that characterisation. Examples include where the parties may not have acted in a way that is consistent with the documented agreement or, in the case of a purported loan, where the terms of the documented agreement lack commercial explanation. In other cases, the repatriated amounts might be properly characterised as a genuine gift or loan but the objectively ascertainable facts demonstrate that the gift or loan is connected or related to foreign assessable income which has not been declared in Australian tax returns. • Where the purported loan is used by the Australian-resident taxpayer for the purposes of gaining or producing assessable income, the taxpayer claims a deduction for amounts of interest that are said to have been incurred. Although withholding tax calculated upon the amount of the claimed interest incurred may be remitted to the Commissioner, often no amount of interest or principal is ever paid to the related overseas entity. Instead, the claimed interest liability is capitalised resulting in continuously increasing claims for deductions in respect of the purported interest liability. [3] • When these transactions are identified or audited, the Australian-resident taxpayer may subsequently admit that the funds were not actually received as gifts or loans, but claim that they were instead disguised transfers of funds from other sources in offshore jurisdictions, including to avoid laws in other countries. However, no evidence is then provided as to an alternative, non-assessable, underlying source of the funds or how the purported method of fund extraction is required to successfully avoid foreign laws. Note: This Taxpayer Alert does not cover circumstances where an Australian-resident taxpayer has not derived any foreign assessable income but receives a genuine gift or loan from a related overseas entity. In this context, a genuine gift or loan is one where: (a) the characterisation of the transaction as a gift or loan is supported by appropriate documentation (b) the parties' behaviour is consistent with that characterisation, and (c) the monies provided are sourced from funds genuinely independent of the taxpayer. Appropriate documentation for a genuine gift will depend on the size of the gift and whether the nature of the relationship is one where gifts might be made in the ordinary course of that relationship. For larger gifts or where there is an atypical relationship between the donor and donee, this might require a contemporaneous Deed of Gift. We would also expect there to be evidence showing the donor's capacity to make the gift from their own resources as well as financial records reflecting the donor's transfer. Appropriate documentation for a genuine loan would typically include a properly documented loan agreement that evidences the parties to the loan, its terms and relevant conditions. We would also expect there to be financial records showing the advance of funds and repayments of principal and interest. While outside the scope of this Alert, care should still be taken in relation to genuine gifts or loans received in these circumstances as there may be Australian tax consequences - for example, section 99B may apply if the amounts are paid by or through trusts. For further information, see Gifts or loans from related overseas entities on ato.gov.au. | • An Australian-resident taxpayer derives foreign assessable income and does not declare it in their Australian income tax return. The amounts derived may be - actual amounts of foreign assessable income, such as income from employment, interest, dividends, or a capital gain on the disposal of assets, such as shares in a foreign company - deemed amounts of foreign assessable income, such as amounts assessable under the controlled foreign company (CFC) provisions in Part X of the Income Tax Assessment Act 1936 [2] , or under the transferor trust provisions in Division 6AAA of Part III, or - amounts assessable as dividends as a result of section 47A or Division 7A of Part III applying, or amounts from trusts assessable under section 99B. • The foreign assessable income is repatriated to the taxpayer, or an associate of the taxpayer, in Australia. The repatriation is achieved by a related overseas entity transferring the funds directly to the taxpayer (or an associate), or by using the services of an offshore financial intermediary to transfer the funds. The related overseas entity is typically a family member, a friend or some other kind of associate (such as a related company or trust). • The foreign assessable income may be repatriated in a single lump sum or in instalments. • The repatriation of the foreign assessable income may occur in the income year in which it is derived, in a later income year or over the course of several income years. • The true character of the foreign assessable income is concealed upon its repatriation to Australia under the guise that the foreign assessable income is instead a gift or a loan from the related overseas entity. • In some cases, documentation is prepared that purports to show that the repatriated funds have the character of a gift, or an advance of funds by way of a loan, but that occurs in circumstances where the objectively ascertainable facts do not support that characterisation. Examples include where the parties may not have acted in a way that is consistent with the documented agreement or, in the case of a purported loan, where the terms of the documented agreement lack commercial explanation. In other cases, the repatriated amounts might be properly characterised as a genuine gift or loan but the objectively ascertainable facts demonstrate that the gift or loan is connected or related to foreign assessable income which has not been declared in Australian tax returns. • Where the purported loan is used by the Australian-resident taxpayer for the purposes of gaining or producing assessable income, the taxpayer claims a deduction for amounts of interest that are said to have been incurred. Although withholding tax calculated upon the amount of the claimed interest incurred may be remitted to the Commissioner, often no amount of interest or principal is ever paid to the related overseas entity. Instead, the claimed interest liability is capitalised resulting in continuously increasing claims for deductions in respect of the purported interest liability. [3] • When these transactions are identified or audited, the Australian-resident taxpayer may subsequently admit that the funds were not actually received as gifts or loans, but claim that they were instead disguised transfers of funds from other sources in offshore jurisdictions, including to avoid laws in other countries. However, no evidence is then provided as to an alternative, non-assessable, underlying source of the funds or how the purported method of fund extraction is required to successfully avoid foreign laws. | - actual amounts of foreign assessable income, such as income from employment, interest, dividends, or a capital gain on the disposal of assets, such as shares in a foreign company - deemed amounts of foreign assessable income, such as amounts assessable under the controlled foreign company (CFC) provisions in Part X of the Income Tax Assessment Act 1936 [2] , or under the transferor trust provisions in Division 6AAA of Part III, or - amounts assessable as dividends as a result of section 47A or Division 7A of Part III applying, or amounts from trusts assessable under section 99B. | (a) the characterisation of the transaction as a gift or loan is supported by appropriate documentation (b) the parties' behaviour is consistent with that characterisation, and (c) the monies provided are sourced from funds genuinely independent of the taxpayer. | Appropriate documentation for a genuine gift will depend on the size of the gift and whether the nature of the relationship is one where gifts might be made in the ordinary course of that relationship. For larger gifts or where there is an atypical relationship between the donor and donee, this might require a contemporaneous Deed of Gift. We would also expect there to be evidence showing the donor's capacity to make the gift from their own resources as well as financial records reflecting the donor's transfer. | Appropriate documentation for a genuine loan would typically include a properly documented loan agreement that evidences the parties to the loan, its terms and relevant conditions. We would also expect there to be financial records showing the advance of funds and repayments of principal and interest. | While outside the scope of this Alert, care should still be taken in relation to genuine gifts or loans received in these circumstances as there may be Australian tax consequences - for example, section 99B may apply if the amounts are paid by or through trusts. | For further information, see Gifts or loans from related overseas entities on ato.gov.au.","6. The following examples are of arrangements where foreign assessable income is disguised as a gift or loan from a related overseas entity. These examples are illustrative of the broader features of these arrangements and our concern is not limited to the specific scenarios described. | 7. Mr X is an Australian-resident taxpayer. In the 2017 income year, Mr X sells his shares in an offshore entity, ForCo A, to a third-party purchaser. Under the terms of the sale, the sale proceeds for the shares are directed to be paid into the bank account of another offshore entity, ForCo B, the shares in which are wholly-owned by Mr X's brother, Mr Y. Mr X did not report the capital gains made on the sale of those shares in his Australian tax return for the 2017 income year. | 8. During the 2018 income year, ForCo B uses the sale proceeds to make a purported loan to AusCo, an Australian-resident company of which Mr X is the sole director and shareholder. A purported loan agreement is prepared to support the purported loan outlining the terms of the loan including the rate of interest to be charged. | 9. AusCo claims deductions for interest incurred on the purported loan in its income tax returns for the 2018 and 2019 income years and pays withholding tax on the interest to the ATO. However, no 'loan repayments' are made by AusCo to ForCo B with the interest purportedly capitalised. | 10. The actions of Mr X in directing the purchaser of the shares to pay the purchase price to ForCo B and of ForCo B in purporting to lend those funds to AusCo are not commercially explicable. | 11. By entering into this arrangement, Mr X has: • attempted to avoid or evade tax in Australia on the net capital gain from the sale of his shares in ForCo A • sought to disguise the repatriation of the sale proceeds to Australia as a loan • ensured an Australian-resident entity he controls, AusCo, has full use and enjoyment of those sale proceeds, and • sought to have AusCo claim deductions for interest purportedly incurred on the purported loan when Mr X is, in substance, accessing his own funds. | • attempted to avoid or evade tax in Australia on the net capital gain from the sale of his shares in ForCo A • sought to disguise the repatriation of the sale proceeds to Australia as a loan • ensured an Australian-resident entity he controls, AusCo, has full use and enjoyment of those sale proceeds, and • sought to have AusCo claim deductions for interest purportedly incurred on the purported loan when Mr X is, in substance, accessing his own funds. | 12. In the 2017 income year, Mr Y and his spouse migrated to Australia from Country A. Mr Y and his spouse have retained various investments in Country A. From the 2017 income year onwards, Mr Y and his spouse are Australian-resident taxpayers. | 13. During the 2017 to 2019 income years, Mr Y and his spouse continue to derive income from their investments in Country A but do not report that income in their Australian tax returns for those years. The income from their investments is paid into a bank account that Mr Y and his spouse maintain in Country A. Mr Y and his spouse then engage the services of an offshore financial intermediary in Country B to arrange for that income to be repatriated to them in Australia. Mr Y and his spouse conceal the character of the funds transferred to them in Australia from Country B by contending that the funds represent gifts from wealthy relatives living in Country B. | 14. By entering into this arrangement, Mr Y and his spouse have: • attempted to avoid or evade tax in Australia on the income from their investments while at the same time ensuring they have full use and enjoyment of that income in Australia, and • sought to disguise the repatriation of that foreign income to Australia as gifts from relatives living overseas. | • attempted to avoid or evade tax in Australia on the income from their investments while at the same time ensuring they have full use and enjoyment of that income in Australia, and • sought to disguise the repatriation of that foreign income to Australia as gifts from relatives living overseas. | 15. Mr X is an Australian-resident taxpayer married to Mrs X. Mrs X resides in Country A and is a non-resident for Australian tax purposes. ForCo is a private company incorporated in Country A [4] with Mr X and Mrs X being the two shareholders. Mrs X is the sole director of ForCo. ForCo carries on a profitable active business in Country A and all profits are retained within the company. | 16. Mr and Mrs X wish to extract profits from ForCo to fund Mr X's lifestyle in Australia. Rather than having ForCo pay a dividend, Mrs X instead undertakes the following steps in order to conceal ForCo as being the original source of the funds: • ForCo lends funds to Mrs X, and • Mrs X in turn gifts those funds to Mr X. | • ForCo lends funds to Mrs X, and • Mrs X in turn gifts those funds to Mr X. | 17. An alternative is that Mrs X simply directs ForCo to pay a dividend directly to Mrs X (contrary to the relative shareholdings), and then purports to gift Mr X's share of the dividend to him. | 18. Mr X uses the funds for private purposes. | 19. The receipt of funds by Mr X from ForCo (via Mrs X) will trigger the operation of section 47A or, alternatively, Division 7A of Part III with the result that the amount received will be assessable to him as a dividend. Despite this, Mr X does not report any of the funds received as assessable income in his tax return. | 20. Under the alternative, the dividend is simply assessable to Mr X. | 21. By Mr and Mrs X entering into this arrangement: • Mr X has attempted to avoid or evade tax in Australia on the profits extracted from ForCo and distributed (via Mrs X) to him • they have sought to disguise the repatriation of ForCo's profits as a gift from Mrs X to Mr X, and • they have ensured Mr X has the full use and enjoyment of ForCo's profits in Australia. | • Mr X has attempted to avoid or evade tax in Australia on the profits extracted from ForCo and distributed (via Mrs X) to him • they have sought to disguise the repatriation of ForCo's profits as a gift from Mrs X to Mr X, and • they have ensured Mr X has the full use and enjoyment of ForCo's profits in Australia.","22. We are concerned that Australian-resident taxpayers are entering into these arrangements to attempt to avoid or evade Australian tax on their foreign assessable income. | 23. In those cases where the funds are repatriated to Australia in the form of a purported loan, we are also concerned that taxpayers may be entering into, or taking additional advantage of, these arrangements to claim deductions for interest that was never incurred. | 24. More specifically, we are concerned that: • taxpayers are entering into these arrangements to conceal their foreign assessable income and/or interests in foreign assets • taxpayers have not declared all their ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) • taxpayers have not declared all their statutory income, such as amounts assessable under the CFC provisions in Part X, under the transferor trust provisions in Division 6AAA of Part III, under section 99B, or amounts assessable as dividends as a result of section 47A or Division 7A of Part III applying • taxpayers may not have disclosed all their offshore interests at the relevant labels of their income tax returns • in cases where the funds received are repatriated to Australia in the form of a purported loan, deductions claimed by taxpayers for purported interest under section 8-1 of the ITAA 1997 may not be allowable because a loss or outgoing was never incurred and the purported loan agreements are a sham • to the extent the arrangements are legally effective, and to the extent the taxpayers have obtained a tax benefit in connection with a scheme, the general anti-avoidance provisions in Part IVA may apply to cancel any such tax benefit, and • the conduct of taxpayers under these arrangements, when assessed objectively, may result in the Commissioner forming an opinion that there has been fraud or evasion. | • taxpayers are entering into these arrangements to conceal their foreign assessable income and/or interests in foreign assets • taxpayers have not declared all their ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) • taxpayers have not declared all their statutory income, such as amounts assessable under the CFC provisions in Part X, under the transferor trust provisions in Division 6AAA of Part III, under section 99B, or amounts assessable as dividends as a result of section 47A or Division 7A of Part III applying • taxpayers may not have disclosed all their offshore interests at the relevant labels of their income tax returns • in cases where the funds received are repatriated to Australia in the form of a purported loan, deductions claimed by taxpayers for purported interest under section 8-1 of the ITAA 1997 may not be allowable because a loss or outgoing was never incurred and the purported loan agreements are a sham • to the extent the arrangements are legally effective, and to the extent the taxpayers have obtained a tax benefit in connection with a scheme, the general anti-avoidance provisions in Part IVA may apply to cancel any such tax benefit, and • the conduct of taxpayers under these arrangements, when assessed objectively, may result in the Commissioner forming an opinion that there has been fraud or evasion.","25. We are currently undertaking reviews and audits and actively engaging with taxpayers who have entered into these arrangements. | 26. As part of that process, we are using our exchange of information powers to gather information from other countries, including the foreign assessable income derived by taxpayers in those countries. We also use other sources of information, such as data from the Australian Transaction Reports and Analysis Centre (AUSTRAC) which identifies movements of funds into Australia as well as the data we receive via the Common Reporting Standard and the Foreign Account Tax Compliance Act. | 27. Taxpayers and their advisers who enter into these arrangements will be subject to increased scrutiny and may be at risk of potential sanctions under criminal law.","28. If you have entered, or are contemplating entering, into an arrangement of this type, we encourage you to: • phone or email us using the contact details provided in this Alert • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us using the contact details provided in this Alert • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | 29. If you would like to correct something in your Australian income tax return, more information on this is available at ato.gov.au by searching for 'Correcting your tax return or activity statement'. | 30. Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters. In more serious cases, sanctions under criminal law may apply. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. | 31. If you participate in an arrangement similar to that described in this Alert, you may be liable for penalties of up to 75% of the tax shortfall (in addition to being required to pay any tax that is avoided).",PS LA 2008/15 | ITAA 1936 Pt III Div 6AAA | ITAA 1936 Pt III Div 7A | ITAA 1936 47A | ITAA 1936 99B | ITAA 1936 Pt IVA | ITAA 1936 Pt X | ITAA 1997 6-5 | ITAA 1997 8-1 | TAA 1953 Sch 1 Div 290 | Foreign Account Tax Compliance Act | Tax Agent Services Act 2009,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20212/NAT/ATO/00001,"Example 1 - disguising foreign capital gain as a loan from a related overseas entity | Example 2 - disguising foreign income as a gift from a related overseas entity | Example 3 - disguising repatriation of profits from a foreign company as a gift from a related overseas entity | Commissioner of Taxation 17 September 2021 | Updated ATO tip-off hotline number | [1] Taxpayers who are unsure of either their residency status or of the tax treatment of amounts that are derived offshore, either directly or through an offshore entity that they control, should engage with us or seek independent professional advice. | [2] All legislative references in this Alert are to the Income Tax Assessment Act 1936 unless otherwise indicated. | [3] We are equally concerned with those arrangements where purported 'loan repayments' are made to the offshore 'lender'. In such cases, the purported loan repayments often create a circular flow of funds wherein the Australian taxpayer retains effective control of those funds offshore. | [4] Country A is an unlisted country for the purposes of the CFC provisions in Part X. | barnali.banerjee@ato.gov.au"
TA 2021/3,Fuel tax credit overclaims arising from aggressive marketing and use of GPS telematics technology products,17 September 2021,Current,,"1. We are reviewing arrangements where Global Positioning System (GPS), telematics or software providers or tax professionals are marketing telematics technology products (the Product) for fuel tax credit (FTC) purposes where the analysis of GPS data, and the methods used within the Product, lead to an incorrect apportionment of FTCs. This results in client overclaims which lead to substantial audit adjustments that may attract penalties and interest. | 2. Telematics technology products gather a range of information and data that can be sourced from the Global Navigation Satellite System (GNSS), vehicle sensors and engine diagnostics. | 3. GPS and telematics technology, where supported by robust checks and appropriate levels of evidence, can be useful in identifying where and how taxable fuel is being used in vehicles and equipment to support FTC claims. While we support the use of technology for managing tax affairs, we have identified a number of problems with some Products, including poor quality or intermittent GPS data without sufficient checks and relevant adjustments to correct inaccurate outcomes.",,"4. We are aware that some marketers or tax professionals are approaching FTC clients (clients) and encouraging these clients to use their Product to claim additional FTCs. The messaging may focus on assertions that FTC clients are missing out on significant FTCs (past and current). There may also be assertions that clients will receive large FTC refunds without scrutiny or rejection of the claims by the ATO. In some instances, there have been false or misleading claims by marketers that the ATO has endorsed their Product. We are concerned that the aggressive marketing is being fuelled in some cases by commission-based fee arrangements. | 5. In particular, we have identified the following practices that can lead to incorrect apportionment of fuel and erroneous FTC claims. GPS, telematics or software providers or tax professionals need to consider whether the Product they are promoting has any of these characteristics that may distort FTC claims. Concerns Examples (not exhaustive) Incorrect classification of roads or locations Classifying roads as non-public roads when they are public roads. Using outdated road map data. Inadequate sample sizes or applying Product results that are not representative of a client's fleet Using sample sizes that do not reflect the various fuel usages for a client's fleet or the overall circumstances of their fleet operations. Applying sample results to past or future claims when those results do not reflect the business operations at that time. Use of incorrect assumptions, inputs, algorithms, fuel consumption rates or results within the Product The Product is built on assumptions which cannot be validated or are misleading. Treating ignition 'on' status as idling when the vehicle engine is not actually idling. The Product uses algorithms that distort results (for example, the Product results show that a vehicle was travelling between two direct points when the vehicle actually travelled along a curved road, understating the distance travelled on the public road). Using fuel consumption rates (including industry averages) that do not reflect the client's fleet (models, types, etcetera) or business operations or conditions (for example, terrain; climatic conditions; age, design, service and maintenance history of vehicle; weight and cargo of vehicle and driver influence). Using incorrect results containing errors and anomalies and applying across multiple tax periods (past and future). Failure to reconcile source documentation and business records with these new FTC claims Data and results are not reconciled with original source documentation, events and fuel usage. Inadequate reconciliation process or analysis to ensure the Product results are reasonable (for example, the apportionment of fuel within the Product may be based on locations, travel, time or consumption rates that are unreasonable given the client's actual business operations). Failure of the software or business processes to account for inherent limitations of data derived from the Product Known issues with GPS accuracy including obstructions (for example, buildings) and poor quality or intermittent GPS data. Event recognition and location data relying on intermittent GPS information or being impacted by 'ping' rates or drift affecting reported locations. Incorrect use of ATO simplified methods (safe harbours) Some Products seek to combine ATO simplified methods (safe harbours) with a GPS-based Product which can result in overstated claims. An ATO simplified method (for example, accepted percentages) is intended to be comprehensive and cannot be used in combination with other methodologies. | Using outdated road map data. | Applying sample results to past or future claims when those results do not reflect the business operations at that time. | Treating ignition 'on' status as idling when the vehicle engine is not actually idling. | The Product uses algorithms that distort results (for example, the Product results show that a vehicle was travelling between two direct points when the vehicle actually travelled along a curved road, understating the distance travelled on the public road). | Using fuel consumption rates (including industry averages) that do not reflect the client's fleet (models, types, etcetera) or business operations or conditions (for example, terrain; climatic conditions; age, design, service and maintenance history of vehicle; weight and cargo of vehicle and driver influence). | Using incorrect results containing errors and anomalies and applying across multiple tax periods (past and future). | Inadequate reconciliation process or analysis to ensure the Product results are reasonable (for example, the apportionment of fuel within the Product may be based on locations, travel, time or consumption rates that are unreasonable given the client's actual business operations). | Event recognition and location data relying on intermittent GPS information or being impacted by 'ping' rates or drift affecting reported locations. | 6. We are scrutinising FTC claims which have been prepared using a GPS or telematics technology product that exhibits the types of issues and practices contained in the table in this Alert that lead to overclaimed credits. Where necessary, we will adjust FTC claims and may impose penalties and interest for the FTC clients.","4. We are aware that some marketers or tax professionals are approaching FTC clients (clients) and encouraging these clients to use their Product to claim additional FTCs. The messaging may focus on assertions that FTC clients are missing out on significant FTCs (past and current). There may also be assertions that clients will receive large FTC refunds without scrutiny or rejection of the claims by the ATO. In some instances, there have been false or misleading claims by marketers that the ATO has endorsed their Product. We are concerned that the aggressive marketing is being fuelled in some cases by commission-based fee arrangements. | 5. In particular, we have identified the following practices that can lead to incorrect apportionment of fuel and erroneous FTC claims. GPS, telematics or software providers or tax professionals need to consider whether the Product they are promoting has any of these characteristics that may distort FTC claims. Concerns Examples (not exhaustive) Incorrect classification of roads or locations Classifying roads as non-public roads when they are public roads. Using outdated road map data. Inadequate sample sizes or applying Product results that are not representative of a client's fleet Using sample sizes that do not reflect the various fuel usages for a client's fleet or the overall circumstances of their fleet operations. Applying sample results to past or future claims when those results do not reflect the business operations at that time. Use of incorrect assumptions, inputs, algorithms, fuel consumption rates or results within the Product The Product is built on assumptions which cannot be validated or are misleading. Treating ignition 'on' status as idling when the vehicle engine is not actually idling. The Product uses algorithms that distort results (for example, the Product results show that a vehicle was travelling between two direct points when the vehicle actually travelled along a curved road, understating the distance travelled on the public road). Using fuel consumption rates (including industry averages) that do not reflect the client's fleet (models, types, etcetera) or business operations or conditions (for example, terrain; climatic conditions; age, design, service and maintenance history of vehicle; weight and cargo of vehicle and driver influence). Using incorrect results containing errors and anomalies and applying across multiple tax periods (past and future). Failure to reconcile source documentation and business records with these new FTC claims Data and results are not reconciled with original source documentation, events and fuel usage. Inadequate reconciliation process or analysis to ensure the Product results are reasonable (for example, the apportionment of fuel within the Product may be based on locations, travel, time or consumption rates that are unreasonable given the client's actual business operations). Failure of the software or business processes to account for inherent limitations of data derived from the Product Known issues with GPS accuracy including obstructions (for example, buildings) and poor quality or intermittent GPS data. Event recognition and location data relying on intermittent GPS information or being impacted by 'ping' rates or drift affecting reported locations. Incorrect use of ATO simplified methods (safe harbours) Some Products seek to combine ATO simplified methods (safe harbours) with a GPS-based Product which can result in overstated claims. An ATO simplified method (for example, accepted percentages) is intended to be comprehensive and cannot be used in combination with other methodologies. | Using outdated road map data. | Applying sample results to past or future claims when those results do not reflect the business operations at that time. | Treating ignition 'on' status as idling when the vehicle engine is not actually idling. | The Product uses algorithms that distort results (for example, the Product results show that a vehicle was travelling between two direct points when the vehicle actually travelled along a curved road, understating the distance travelled on the public road). | Using fuel consumption rates (including industry averages) that do not reflect the client's fleet (models, types, etcetera) or business operations or conditions (for example, terrain; climatic conditions; age, design, service and maintenance history of vehicle; weight and cargo of vehicle and driver influence). | Using incorrect results containing errors and anomalies and applying across multiple tax periods (past and future). | Inadequate reconciliation process or analysis to ensure the Product results are reasonable (for example, the apportionment of fuel within the Product may be based on locations, travel, time or consumption rates that are unreasonable given the client's actual business operations). | Event recognition and location data relying on intermittent GPS information or being impacted by 'ping' rates or drift affecting reported locations. | 6. We are scrutinising FTC claims which have been prepared using a GPS or telematics technology product that exhibits the types of issues and practices contained in the table in this Alert that lead to overclaimed credits. Where necessary, we will adjust FTC claims and may impose penalties and interest for the FTC clients.","7. Penalties may apply to participants in, and promoters of, the types of arrangements described in this Alert. This includes serious penalties under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. | 8. As a tax professional, provider or a marketer of a Product you should ensure that the Product generates correct results as represented and undertake any corrective actions if any practices identified in this Alert apply to the Product. | 9. You should take prudential steps to ensure that the Product and its results lead to correct FTC claims by: • having sufficient internal controls and governance in place • keeping supporting evidence to justify classification of roads, sample sizes, fuel measurement or estimates, algorithms used and any other variable or input • testing the reasonableness of results with the actual use of fuel (for example, the data is checked against contemporaneous business records, comparing the distance computed by the product to similar paths or distances with odometer readings and/or reputable mapping data sources, etcetera), and • reconciling Product results with original and other supporting documentation. [1] | • having sufficient internal controls and governance in place • keeping supporting evidence to justify classification of roads, sample sizes, fuel measurement or estimates, algorithms used and any other variable or input • testing the reasonableness of results with the actual use of fuel (for example, the data is checked against contemporaneous business records, comparing the distance computed by the product to similar paths or distances with odometer readings and/or reputable mapping data sources, etcetera), and • reconciling Product results with original and other supporting documentation. [1] | 10. If your Product is not suitable or it requires time to update so that FTC clients can easily rely on the product with confidence, you should: • stop offering the Product immediately and limit your advertising • correct functionalities and rectify issues that are misleading, incorrect or lead to erroneous results • advise clients that have used your Product of the issues, and • contact the ATO to work with us on correcting FTC claims for your clients, for example, by voluntary disclosure. | • stop offering the Product immediately and limit your advertising • correct functionalities and rectify issues that are misleading, incorrect or lead to erroneous results • advise clients that have used your Product of the issues, and • contact the ATO to work with us on correcting FTC claims for your clients, for example, by voluntary disclosure. | 11. We encourage you as a marketer or tax professional to engage with the ATO early by seeking guidance on the Product for FTC purposes. We encourage you to apply for a Product Ruling or Class Ruling to obtain tax certainty about how the Product applies to clients / the class of entities using the product. | 12. As a marketer or tax professional, you should consider our Fuel tax credits - telematics technology providers checklist, which will help you manage your telematics data for FTC-apportionment purposes and understand the minimum verification and evidence required.",PS LA 2008/15 | TAA 1953 Sch 1 Div 290 | Tax Agent Services Act 2009,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20213/NAT/ATO/00001,"What are our concerns and what are we doing? | What should marketers and tax professionals do? | What should fuel tax credit clients do? | What should fuel tax credit clients do?: 13. We are checking FTC claims which appear to have been prepared using a GPS or telematics technology product and which exhibit the types of issues set out in this Alert. Where necessary, we will make adjustments to those claims and may impose penalties and interest. As an FTC client, you should consider whether our concerns apply to you. You should check your FTC claims to ensure they are correct, otherwise you may be subject to penalties and interest. | 14. If you find any errors or have overclaimed FTCs, you should make a voluntary disclosure to reduce the penalties that may apply. | 15. If you are concerned with the behaviours of marketers described in this Alert, you can report schemes and promoters . | 16. You should consider whether the telematics technology product you are using is covered by a Product Ruling or a Class Ruling. | • your daily trip data does not contain anomalies such as high idling and distance on non-public roads (for example, two kilometres in a warehouse); if it does, it is likely that this data is not reliable to calculate correct FTC • daily excessive distances and idle times contained in the data can be supported by other records, such as warehouse entries and normal idle times • you have not claimed more than the amount of fuel you purchased • the fuel consumption rate you used, or your advisor is using to calculate idling fuel used, is supported by your engine diagnostic reports from relevant sampling or testing • you have not used an ATO-accepted percentage (safe harbour) method in addition to topping up the claim for the same fuel using a separate calculation. | 18. For future claims, you should consider the guidance on our website ato.gov.au . | 19. You may request a Private Ruling if you wish to obtain tax certainty about how a software product applies in your situation. You will need to provide specific details of your circumstances including details of data sources and how the product operates. | Commissioner of Taxation 17 September 2021 | [1] Fuel tax credits - telematics technology providers provides guidance to assist telematics technology providers when updating or developing telematics products."
TA 2021/4,Structured arrangements that avoid luxury car tax,2 November 2021,Current,,"1. We are reviewing arrangements involving sales of both new and second-hand luxury cars between participating entities designed to improperly obtain refunds of luxury car tax (LCT) and evade LCT on the retail sale of the cars. | 2. LCT is ordinarily imposed on the sale or importation of cars that exceed the LCT threshold. [1] LCT can be effectively deferred until the retail sale of a car or a change in use of that car, utilising decreasing adjustments and quoting provisions. These provisions can be exploited, particularly when coupled with illegal phoenixing behaviours. | 3. The arrangements of concern typically involve the following features: • the supply of a luxury car to a pre-determined recipient identified by the controlling mind of the arrangement • a number of wholesale sales of the car are purportedly made, along a chain of participating entities often acting in collusion, prior to the final retail sale to the pre-determined recipient [2] • one of the entities claims a refund of LCT while creating a consequential liability to another entity in the supply chain • one or more of the participating entities (described as a 'missing trader') does not correctly report and pay their purported LCT liabilities to the Commissioner. | • the supply of a luxury car to a pre-determined recipient identified by the controlling mind of the arrangement • a number of wholesale sales of the car are purportedly made, along a chain of participating entities often acting in collusion, prior to the final retail sale to the pre-determined recipient [2] • one of the entities claims a refund of LCT while creating a consequential liability to another entity in the supply chain • one or more of the participating entities (described as a 'missing trader') does not correctly report and pay their purported LCT liabilities to the Commissioner. | 4. The arrangements may also involve artificially embedding LCT in the price of the car that is not otherwise subject to LCT. One of the participating entities will then seek to recoup this LCT as a refund. The corresponding and artificially-created LCT liability is never reported and paid.","5. The Brand Dealer, being aware of compliance shortfalls in the industry, does not accept an Australian business number (ABN) quotation when selling a luxury car to Entity A, resulting in LCT being embedded in the sale price. The Brand Dealer is generally at arm's length and correctly reports and pays LCT to the Commissioner on its sale of the luxury car. | 6. Entity A claims a decreasing LCT adjustment (resulting in a refund) on the basis that it intended to use, and has only used, the car for a quotable [3] purpose (for example, as trading stock). | 7. Entity A sells the luxury car to Entity B. It is the intention from the outset that Entity B (the missing trader) will not comply with its taxation obligations on its sale of the luxury car. | 8. Entity B has few, if any, assets. It does not report any of its transactions in its tax returns or business activity statements (BAS) and does not pay any taxes to the Commissioner. Entity B sells the luxury car to an ultimate buyer who may be unaware of any wrongdoing. | 9. The improperly-obtained LCT refund is shared among various parties to the arrangement. | 10. Entity A acquires the car from an unregistered individual and sells the car to Entity B for an amount below the unregistered individual's original acquisition price. The participating entities are aware that the sale to Entity B would not attract LCT, however LCT is artificially included in the invoice/sale. Entity A does not report the sale on any tax return or BAS and will usually liquidate so as to not pay any amounts owing to the Commissioner. By artificially implanting LCT into the sales price of the car, Entity A creates an LCT refund opportunity for Entity B. | 11. Entity B does not quote its ABN for its acquisition of the car; however, Entity B contends this acquisition was for a quotable purpose and claims a refund by way of a decreasing LCT adjustment in its BAS. | 12. Entity C quotes its ABN, contending that it has acquired the car for a quotable purpose, and sells the car to a buyer without charging, reporting and remitting LCT. | 13. The improperly-obtained LCT refund is shared among various parties to the arrangement. | 14. A variation to this Example could be that Entity A sells the car for an amount above that for which it was originally acquired by the unregistered individual. In this case, the amount of LCT legally payable would be limited to the increase in the car's LCT value. However, Entity A would include LCT on the full sale price to artificially inflate Entity B's decreasing LCT adjustment.","15. We are concerned that entities are using these types of arrangements to improperly obtain LCT refunds and to evade LCT. These arrangements can also result in luxury cars being sold without income tax and goods and services tax (GST) obligations being met. Cars are sold to end users at more competitive prices, with generally greater profit margins, due to those involved intentionally avoiding their taxation obligations and falsely claiming refunds. These practices undermine the business of compliant car dealers. Entities in the supply chains liquidate to circumvent ATO compliance or recovery action. | 16. The arrangements are contrived and the sales between participating entities appear to be designed to improperly procure a tax benefit for the financial betterment of those entities.","17. We are engaging with taxpayers to ensure that all parties have correctly met their LCT, GST and income tax obligations. Taxpayers who adopt these types of arrangements, and their advisers, will be subject to increased scrutiny from the ATO. | 18. We have sophisticated systems in place to identify high risk LCT refunds, which we withhold pending adequate reviews. Contractual obligations that arise under each sale in the supply chain are reviewed in high risk refund cases pending release to ensure compliance with the LCT Act, the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and the Income Tax Assessment Act 1997. Transactions are not viewed in isolation and all sales of the cars, including their ultimate sale to end users, will be examined to ascertain the purpose of the entities involved in the arrangements. | 19. While each case turns on its own unique set of facts and circumstances, the anti-avoidance provisions in Division 165 of the GST Act may apply to these arrangements, and parties who obtain a benefit from these arrangements will be liable for LCT and penalties where: • transactions in the supply chain are artificial, contrived and not commercial in their design and execution • in the absence of the scheme, the end user would have purchased the car directly from the compliant car dealer. | • transactions in the supply chain are artificial, contrived and not commercial in their design and execution • in the absence of the scheme, the end user would have purchased the car directly from the compliant car dealer. | 20. We will also consider whether the documentation underpinning the purported transactions reflects the true intentions of the parties to determine if the arrangements or certain steps within them are shams at general law. | 21. In appropriate cases, sanctions under criminal law may apply to fraudulent claims. | 22. Registered tax agents advising entities to incorrectly claim LCT decreasing adjustments (and GST input tax credits) may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. Promoter penalty laws may also apply under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters of these types of arrangements.","23. You should consider whether our concerns apply to you. If you have entered into a similar arrangement to that described in this Alert, we encourage you to: • phone or email us using the contact details provided at the end of this Alert • seek tailored technical assistance • seek independent advice as to the legal and tax consequences of your arrangement, and/or • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us using the contact details provided at the end of this Alert • seek tailored technical assistance • seek independent advice as to the legal and tax consequences of your arrangement, and/or • make a voluntary disclosure to reduce penalties that may apply. | 24. Penalties may apply if you have not complied with your LCT, GST or income tax obligations in relation to such arrangements. Penalties may be significantly reduced if you contact us and make a voluntary disclosure. Generally, the reduction is greater if you make the disclosure before we notify you of an examination of your tax affairs. | 25. If you are a registered tax agent or tax adviser who has been involved in these arrangements, you are at risk of being perceived as a 'promoter' of a scheme. We encourage you to engage with us. | 26. Legitimate car dealers can avoid getting inadvertently caught up in these arrangements by not accepting LCT quotes from purchasers.",PS LA 2008/15 | GST Act | GST Act Div 165 | ITAA 1997 | LCT Act | LCT Act 9-5 | TAA 1953 Sch 1 Div 290 | Tax Agent Services Act 2009,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20214/NAT/ATO/00001,"Example 2 - second-hand cars (less than two years old and sold for less than original retail price) | Commissioner of Taxation 2 November 2021 | Updated ATO tip-off hotline number | [1] The threshold for the 2021-22 financial year is $69,152, or $79,659 for certain fuel-efficient cars - refer to https://www.ato.gov.au/rates/luxury-car-tax-rate-and-thresholds/ | [2] The effect of the arrangements can be achieved irrespective of the number of interposed entities in the supply chain. | [3] Quoting of an ABN allows LCT to be deferred to a later assessable dealing or to give effect to exemption from LCT for a particular type of vehicle. Section 9-5 of the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) outlines when you are entitled to quote."
TA 2020/1,"Non-arm's length arrangements and schemes connected with the development, enhancement, maintenance, protection and exploitation of intangible assets",22 January 2020,Current,,"We are currently reviewing international arrangements that mischaracterise Australian activities connected with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets. [1] We are concerned that these arrangements may be non-arm's length or structured to avoid tax obligations, resulting in inappropriate outcomes for Australian tax purposes. | Our concerns include whether functions performed, assets used and risks assumed by Australian entities in connection with the DEMPE of intangible assets are properly recognised and remunerated in accordance with the arm's length requirements of the transfer pricing provisions in the taxation law. [2] | We are also concerned that parties to these arrangements may fail to properly comply with Australian income tax obligations such as those imposed by the capital gains tax [3] (CGT) and capital allowances [4] provisions. We are particularly concerned where intangible assets and/or associated rights are migrated [5] to international related parties as part of non-arm's length arrangements and/or in a manner intended to avoid Australian tax. | In circumstances where these arrangements lack evidence of commercial rationale and/or substance, our concerns will extend to the application of the exceptions in the transfer pricing provisions [6] and anti-avoidance rules. [7] The general anti-avoidance rule (GAAR) [8] or diverted profits tax (DPT) provisions [9] may apply where a tax benefit or DPT tax benefit is obtained in connection with these arrangements. | Arrangements of particular concern include, but are not limited to, those described in this Alert. | Arrangement 1 - arrangements involving the bifurcation of intangible assets and mischaracterisation of Australian DEMPE activities | We are concerned that entities may enter into arrangements which inappropriately bifurcate intangible assets and mischaracterise DEMPE activities associated with those assets. An example of such an arrangement is depicted below. | Arrangement 1 example | An Australian company (AusCo) manages, performs and controls activities and risks associated with the DEMPE of valuable patents, trade marks, know-how, copyright and like assets (Existing Intangibles). AusCo owns the Existing Intangibles and derives income from their exploitation. | AusCo enters into a contract research and development (R&D) arrangement with a foreign related company (ForCo). Pursuant to this arrangement, AusCo provides services to ForCo associated with the DEMPE of potentially new or future intangible assets (New Intangibles). AusCo is remunerated by ForCo on a cost plus basis. All New Intangibles produced under the arrangement are owned by ForCo. ForCo derives all income generated from the exploitation of the New Intangibles. | AusCo continues to receive income derived from the exploitation of the Existing Intangibles but reduces or ceases its DEMPE activities associated with the Existing Intangibles. | The New Intangibles are intrinsically linked to AusCo's Existing Intangibles comprising updated versions and enhancements of the patents, trade marks, know-how, copyright and like assets, which form part of, and are connected to, AusCo's Existing Intangibles. | The functions performed, assets used and risks assumed by AusCo do not materially change in substance following the execution of the contract R&D arrangement. AusCo continues to employ the same specialised staff and use its expertise and assets associated with the Existing Intangibles to manage, perform and control DEMPE activities associated with the New Intangibles. | ForCo manages and performs limited activities and assumes limited risks in connection with the New Intangibles. At the time the contract R&D arrangement commences, ForCo does not have sufficient assets or employ sufficient suitably qualified staff to properly or primarily manage, perform or control the DEMPE of the New Intangibles. AusCo continues to be best placed to manage, perform and control DEMPE activities given the functions performed, assets used and risks assumed by AusCo. | The value of the Existing Intangibles and income derived by AusCo from their exploitation declines due to the reduction in or cessation of DEMPE activities in connection with the Existing Intangibles. The value of the New Intangibles and associated income streams derived by ForCo increases as a result of the DEMPE activities performed by AusCo. | AusCo's remuneration under the contract R&D arrangement with ForCo does not reflect the extent or character of functions performed, assets used and risks assumed by AusCo in connection with the New Intangibles or the connection between the New Intangibles and AusCo's Existing Intangibles, which are intrinsically linked. In these circumstances, the conditions operating in connection with the arrangement may not be consistent with arm's length conditions for the purposes of Australia's transfer pricing laws. Additionally, AusCo may not have properly complied with Australian CGT and capital allowances obligations, including where intangible assets have been migrated to ForCo as a result of the arrangement. | Where AusCo's entry into the arrangement exhibits a lack of commercial rationale or is not consistent with its best economic interests having regard to the commercial options realistically available, the exceptions in the transfer pricing provisions and the GAAR or DPT provisions may apply. In these circumstances, the arrangement may have been entered into or carried out for the sole, dominant or principal purpose, or for more than one principal purpose that includes a purpose of obtaining a tax benefit or DPT tax benefit [10] , within the meaning of Australia's GAAR and DPT provisions. | Arrangement 2 - arrangements involving the non-recognition of Australian DEMPE activities | We are concerned that entities may enter into arrangements connected with the DEMPE of intangible assets that do not appropriately recognise Australian contributions to DEMPE functions for tax purposes. Our concerns, whilst not confined to a specific form of arrangement, include that the benefits obtained by Australian entities under such arrangements may not reflect the value of Australian contributions in the form of DEMPE activities and/or pre-existing intangible assets. This is of particular concern where the division of the right(s) to exploit intangible assets associated with these arrangements does not result in Australian entities receiving an appropriate or proportionate share of global income from the exploitation of such assets. Two examples of such arrangements are depicted below. | Arrangement 2 - example 1 | An Australian company (AusCo) is party to a cost contribution arrangement [11] (CCA) with a number of related foreign companies. The CCA agreements (CCA Agreement) provide that the participants will contribute resources and perform activities associated with the DEMPE of intangible assets (CCA Contributions) for the mutual benefit of all participants. | The CCA Agreement states that one of the foreign related companies (ForCo): • manages, directs and controls activities associated with the DEMPE of intangible assets, including allocating R&D activities to the CCA participants, managing and directing such R&D activities and assuming associated risks • determines and receives CCA Contributions from the participants according to an allocation key • obtains the worldwide rights to exploit all intangible assets developed under, and associated with, the CCA, subject to rights granted to the other CCA participants in their respective jurisdictions • registers and protects all intangible assets developed under, and associated with, the CCA. | • manages, directs and controls activities associated with the DEMPE of intangible assets, including allocating R&D activities to the CCA participants, managing and directing such R&D activities and assuming associated risks • determines and receives CCA Contributions from the participants according to an allocation key • obtains the worldwide rights to exploit all intangible assets developed under, and associated with, the CCA, subject to rights granted to the other CCA participants in their respective jurisdictions • registers and protects all intangible assets developed under, and associated with, the CCA. | In exchange for the CCA Contributions, the participants, including AusCo, each obtain from ForCo the right to exploit all intangible assets associated with the CCA in their respective jurisdictions. The intangible assets covered by the CCA Agreement include patents, trade marks, copyright, know-how, and like assets. | The form of the CCA Agreement states that AusCo: • provides funds to, and/or receives funds from, ForCo (as CCA Contributions) • contributes intangible assets developed by AusCo (as CCA Contributions) • incurs costs in undertaking and managing R&D activities to develop, enhance and/or commercialise patents, trade marks, copyright, know-how, and like assets as directed by ForCo • uses intangible assets subject to the CCA to derive income in the Australian market. | • provides funds to, and/or receives funds from, ForCo (as CCA Contributions) • contributes intangible assets developed by AusCo (as CCA Contributions) • incurs costs in undertaking and managing R&D activities to develop, enhance and/or commercialise patents, trade marks, copyright, know-how, and like assets as directed by ForCo • uses intangible assets subject to the CCA to derive income in the Australian market. | In substance, AusCo undertakes and manages extensive R&D activities relative to the other participants in the CCA, assumes associated risks, and develops and commercialises new patents, trade marks, copyright, know-how and like assets. To do this, AusCo uses assets and employs specialised staff. AusCo applies its specialist expertise to manage risks and is subject to minimal direction and oversight from ForCo. This results in the development and enhancement of valuable intangible assets that are exploited by ForCo and the other related foreign companies party to the CCA Agreement (IRP Cos) in other jurisdictions to derive income. | ForCo employs limited staff and contributes limited funds and/or assets under the CCA arrangement. Limited contributions are also made by the IRP Cos to the DEMPE of intangible assets under the CCA. | The expected benefits received by AusCo under the CCA Agreement do not reflect the value of AusCo's contributions to the CCA including the extent or character of functions performed, assets used and risks assumed by AusCo in connection with the intangible assets covered by the CCA. AusCo's proportionate share of overall contributions to the CCA is not consistent with the expected benefits received. Specifically, AusCo does not obtain benefits proportionate with its contributions to the derivation of global income from the exploitation of the intangible assets covered by the CCA, where those intangible assets are used and exploited by ForCo and the IRP Cos in other jurisdictions. | In these circumstances, AusCo's entry into the CCA Agreement may not be commercially rational or consistent with its best economic interests having regard to the commercial options realistically available. The arrangement may therefore be inconsistent with that which might reasonably be expected to be agreed between independent parties dealing at arm's length for the purposes of Australia's transfer pricing laws. Additionally, in such circumstances the arrangement may have been entered into for the sole, dominant or principal purpose, or for more than one principal purpose that includes a purpose of obtaining a tax benefit or DPT tax benefit [12] , within the meaning of Australia's GAAR and DPT provisions. | Arrangement 2 - example 2 | An Australian company (AusCo) is party to an arrangement with a related foreign company (ForCo) which provides that AusCo: • pays royalties to ForCo for the use of patents, trade marks and know-how stored in an online database (Intangibles) • is obliged to record in the database all know-how developed and obtained by AusCo in the course of its Australian operations including all commercial, scientific and industrial information and data • performs contract R&D services for, or on behalf of, ForCo and is remunerated on a cost plus basis. | • pays royalties to ForCo for the use of patents, trade marks and know-how stored in an online database (Intangibles) • is obliged to record in the database all know-how developed and obtained by AusCo in the course of its Australian operations including all commercial, scientific and industrial information and data • performs contract R&D services for, or on behalf of, ForCo and is remunerated on a cost plus basis. | Under the arrangement the Intangibles are stated to be principally developed, enhanced, maintained and protected by ForCo. ForCo is said to derive income from the global exploitation of the Intangibles. | AusCo has material business operations and employs specialised staff. AusCo uses the Intangibles in its Australian operations and records and stores in the database all know-how including know-how developed in the course of AusCo's operations for a number of significant Australian projects. | AusCo performs DEMPE activities and assumes associated risks as part of the R&D activities said to be performed on behalf of ForCo including developing and commercialising new know-how, patents and like assets. AusCo performs these functions, uses assets and assumes risks with minimal direction and oversight from ForCo. The income derived by ForCo from the global exploitation of the Intangibles, and the value of the Intangibles, increases as a result of the DEMPE activities performed by AusCo. | ForCo does not have substantial business operations and it employs a limited number of suitably qualified staff. AusCo frequently performs the R&D and commercialisation activities said to be performed on behalf of, or at the request of, ForCo. ForCo does not possess sufficient assets or employ sufficient suitably qualified staff to primarily manage, perform and control the DEMPE of the Intangibles. | AusCo's remuneration under the arrangement with ForCo does not reflect the extent or character of functions performed, assets used and risks assumed by AusCo in connection with the arrangement. In these circumstances, the conditions operating in connection with the arrangement may not be consistent with arm's length conditions for the purposes of Australia's transfer pricing laws. | AusCo's entry into the arrangement may not be commercially rational or consistent with its best economic interests having regard to the commercial options realistically available. The arrangement may therefore be inconsistent with that which might reasonably be expected to be agreed between independent parties dealing at arm's length for the purposes of Australia's transfer pricing laws. Additionally, in such circumstances the arrangement may have been entered into for the sole, dominant or principal purpose, or for more than one principal purpose that includes a purpose of obtaining a tax benefit or DPT tax benefit [13] , within the meaning of Australia's GAAR and DPT provisions.",,"We are concerned that arrangements of the type considered in this Alert are not arm's length for the purposes of determining if an entity obtained a transfer pricing benefit [14] under Australia's transfer pricing laws, having regard to the functions performed, assets used and risks assumed by Australian entities. In these circumstances, Division 815 of the ITAA 1997 may apply. | We are also concerned that these arrangements may fail to properly comply with Australian CGT and capital allowances laws where intangible assets, which are CGT assets or depreciating assets, have migrated as a result of the arrangement. [15] The CGT or capital allowances provisions may apply where an entity acquires, creates, disposes of, recognises, loses, or surrenders intangible assets and/or associated rights. In these circumstances, Part 3-1, Part 3-3 or Division 40 of the ITAA 1997 may apply. | We are also concerned that arrangements of the type considered in this Taxpayer Alert may be entered into or carried out for the sole, dominant or principal purpose, or for more than one principal purpose that includes a purpose of obtaining a tax benefit or DPT tax benefit. This may attract the application of the GAAR [16] or the DPT provisions. [17]","We are currently reviewing these arrangements and engaging with taxpayers who have entered into, or are considering entering into, these arrangements. Our engagement and assurance activities will continue as we develop our technical position on these arrangements. | Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny.","If you have entered into, or are contemplating entering into, an arrangement of this type we encourage you to discuss your situation with us by emailing PGIIntangiblesMigration@ato.gov.au . | Penalties may apply to participants in and promoters of this type of arrangement. | Commissioner of Taxation 22 January 2020 | © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | Date of Issue: 22 January 2020 | Date of Effect: N/A | [1] Intangible assets being property, assets and rights that are not physical assets or financial assets, which are capable of being controlled for use in commercial activities as defined in paragraph 6.6 of Revisions to Chapter VI of the Transfer Pricing Guidelines (OECD, 2015, Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 - 2015 Final Reports , OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris), see section 815-135 of the Income Tax Assessment Act 1997 (ITAA 1997). It is noted that, at the time of publication of this Alert, the Treasury has completed a consultation process (Miscellaneous amendments to Treasury portfolio laws 2019) containing in part a Miscellaneous Amendments Bill Exposure Draft which includes amendments to section 815-135 of the ITAA 1997. The Exposure Draft includes amendments which, if enacted, repeal section 815-135(2)(aa) of the ITAA 1997 regarding the OECD's Actions 8-10 - 2015 Final Reports and revise section 815-135(2)(a) of the ITAA 1997 to incorporate the OECD, 2017, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations , OECD Publishing, Paris, as approved by the Council of the OECD and last amended on 19 May 2017. | [2] As outlined in Division 815 of the ITAA 1997. 'Taxation law' is defined in subsection 995-1(1) of the ITAA 1997. | [3] As outlined in Parts 3-1 and 3-3 of the ITAA 1997. | [4] As outlined in Division 40 of the ITAA 1997. | [5] A 'migration' refers to any transaction(s) that allows an entity to access, hold, use, transfer, or obtain benefits in connection with, intangible assets and/or associated rights. | [6] See subsections 815-130(2) to (4) of the ITAA 1997. | [7] As outlined in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936). | [8] As outlined in Part IVA of the ITAA 1936. | [9] As outlined in Part IVA of the ITAA 1936. Further information concerning the application of the DPT to cross border arrangements in connection with intangible assets is available in Practical Compliance Guideline PCG 2018/5 Diverted profits tax and Law Companion Ruling LCR 2018/6 Diverted profits tax . | [10] Or both to obtain a tax benefit and to reduce one or more of the parties' liabilities to tax under a foreign law, see Part IVA of the ITAA 1936. | [11] A cost contribution arrangement is a contractual arrangement among business enterprises to share the contributions and risks involved in the joint development, production or the obtaining of intangibles, tangible assets or services with the understanding that such intangibles, tangible assets or services are expected to create direct benefits for the businesses of each of the participants, as defined at paragraph 8.3 of Cost Contribution Arrangements - Revisions to Chapter VIII of the Transfer Pricing Guidelines (OECD, 2015, Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 - 2015 Final Reports , OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris). See also section 815-135 of the ITAA 1997 and footnote 1 of this Alert regarding potential amendments to subsection 815-135 of the ITAA 1997. | [12] Or both to obtain a tax benefit and to reduce one or more of the parties' liabilities to tax under a foreign law, see Part IVA of the ITAA 1936. | [13] Or both to obtain a tax benefit and to reduce one or more of the parties' liabilities to tax under a foreign law, see Part IVA of the ITAA 1936. | [14] As defined in section 815-120 of the ITAA 1997. | [15] As outlined in Part 3-1, Part 3-3 and Division 40 of the ITAA 1997. It is noted that Division 40 of the ITAA 1997 applies to items of intellectual property including patents, registered designs, copyright and associated rights as identified in the definition of 'intellectual property' provided in subsection 995-1(1) of the ITAA 1997, see subsection 40-30(2) of the ITAA 1997. | [16] As outlined in Part IVA of the ITAA 1936. | [17] As outlined in Part IVA of the ITAA 1936. Further information concerning the application of the DPT to cross border arrangements in connection with intangible assets is available in PCG 2018/5 and LCR 2018/6. | Related Rulings/Determinations: TR 2004/1 LCR 2018/6 | Related Practice Statements: PS LA 2005/24 | Other References: OECD, 2015, Aligning Transfer Pricing Outcomes with Value Creation, Actions 8 10 - 2015 Final Reports, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, ParisOECD, 2017, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, OECD Publishing, Paris Treasury consultation, Miscellaneous amendments to Treasury Portfolio laws PCG 2018/5 | Legislative References: Pt IVA ITAA 1997 Pt 3-1 ITAA 1997 Pt 3-3 ITAA 1997 Div 40 ITAA 1997 40-30(2) ITAA 1997 815-120 ITAA 1997 815-130 ITAA 1997 815-130(2) ITAA 1997 815-130(3) ITAA 1997 815-130(4) ITAA 1997 Div 815 ITAA 1997 815-135 ITAA 1997 815-135(2)(a) ITAA 1997 815-135(2)(aa) ITAA 1997 995-1(1) | Contact officer: Christopher Ferguson Email address: PGIIntangiblesMigration@ato.gov.au",PS LA 2008/15 | TR 2004/1 | LCR 2018/6 | PS LA 2005/24 | PCG 2018/5 | Pt IVA | ITAA 1997 Pt 3-1 | ITAA 1997 Pt 3-3 | ITAA 1997 Div 40 | ITAA 1997 40-30(2) | ITAA 1997 815-120 | ITAA 1997 815-130 | ITAA 1997 815-130(2) | ITAA 1997 815-130(3) | ITAA 1997 815-130(4) | ITAA 1997 Div 815 | ITAA 1997 815-135 | ITAA 1997 815-135(2)(a) | ITAA 1997 995-1(1),False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20201/NAT/ATO/00001,
TA 2020/2,Mischaracterised arrangements and schemes connected with foreign investment into Australian entities,25 May 2020,Current,,"We are reviewing cross-border arrangements that mischaracterise the structure used by foreign investors to invest directly into Australian businesses. | Relevant arrangements typically display one or more of the following features: • The Australian resident entities are unable to obtain capital from traditional external debt finance sources on normal terms. • The foreign investor either already participates in the management, control or capital of the Australian entity at the time of investment, or starts to participate in the management, control or capital as part of the investment. • The investment has features not consistent with vanilla debt or equity investments. • The investment may provide the foreign investor with direct exposure to the economic return from a particular business or assets exploited therein (whether ongoing profit or a gain on disposal). | • The Australian resident entities are unable to obtain capital from traditional external debt finance sources on normal terms. • The foreign investor either already participates in the management, control or capital of the Australian entity at the time of investment, or starts to participate in the management, control or capital as part of the investment. • The investment has features not consistent with vanilla debt or equity investments. • The investment may provide the foreign investor with direct exposure to the economic return from a particular business or assets exploited therein (whether ongoing profit or a gain on disposal). | We will review the tax characterisation adopted by the taxpayer and test its appropriateness having regard to the factual circumstances, relevant tax laws and applicable tax treaties. | We will consider applying the general anti-avoidance rules [1] in circumstances where arrangements are contrived (including, in the case of significant global entities, by diverting profits) to reduce the amount of taxable income, or the amount of withholding tax payable by a taxpayer. The general anti-avoidance rules may apply where a tax benefit or a diverted profits tax benefit is obtained in connection with these arrangements. | We will consider applying the transfer pricing provisions [2] in the taxation law where parties are not dealing wholly independently in relation to the terms or conditions of the arrangements, including as it affects amounts deducted by the Australian entity in connection with the arrangements. | Arrangements of particular concern include, but are not limited to, those described in the examples in this Alert.","• An Australian resident entity raises capital from an offshore third-party investor (whether directly, or through a subsidiary incorporated in a jurisdiction which has a favourable tax treaty with Australia). • The investment is ostensibly made in the form of debt finance, and the return payable by the Australian entity to the offshore investor is calculated at interest rates exceeding those obtainable from traditional debt investors. • There is a contingent additional return payable to the offshore investor in the event the Australian entity sells or divests its assets, with the amount of the return reflecting a share of the sale or divestment proceeds. • The additional return payable to the offshore investor on sale or divestment is treated as not subject to Australian withholding tax or not otherwise subject to Australian tax. • Payment of interest may be deferred until the Australian entity sells its assets. • The Australian entity treats its Australian taxable profit on sale of its assets as reduced by the amount payable to the offshore investor, either in the computation of the capital gain or capital loss, or by deduction of the amount from the entity's assessable income. | In considering the concerns in this Alert, we will examine the overall facts and circumstances, and the manner in which each party's rights and obligations are protected under the arrangement, in order to determine whether the arrangement is appropriately characterised as debt for various tax purposes. | • An Australian resident entity that holds a mining right raises capital from an offshore third-party investor. • The offshore investor provides capital funding to the Australian entity in the form of acquisition of a newly created right to receive payments calculated as a percentage of gross revenue from the sale and disposal of natural resources. • A United States resident subsidiary of the offshore investor's parent entity is used to acquire the rights and receive the payments from the Australian entity, taking advantage of particular articles in the double-tax convention between the United States and Australia. [3] • The offshore investor's entity does not in terms obtain a legal interest in the Australian entity's mining right. • The return payable to the offshore investor's entity is treated as not subject to Australian income tax or withholding tax, including pursuant to - section 6CA of the ITAA 1936, which deems natural resource income to have an Australian source and results in an associated withholding obligation, or - Australian dividend or interest withholding tax. | - section 6CA of the ITAA 1936, which deems natural resource income to have an Australian source and results in an associated withholding obligation, or - Australian dividend or interest withholding tax. | In considering the concerns in this Alert, we will examine whether the Australian resident entity may be subject to: • CGT event D3 in section 104-45 of the ITAA 1997 • an obligation to withhold from payments to the offshore investor under Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953 (TAA) • section 26-25 of the ITAA 1997 where the entity has failed to withhold from interest or royalties paid to foreign residents as required by Subdivision 12-F of Schedule 1 to the TAA. | • CGT event D3 in section 104-45 of the ITAA 1997 • an obligation to withhold from payments to the offshore investor under Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953 (TAA) • section 26-25 of the ITAA 1997 where the entity has failed to withhold from interest or royalties paid to foreign residents as required by Subdivision 12-F of Schedule 1 to the TAA.","We are concerned that arrangements of the type considered in this Alert: • may be deliberately structured to avoid Australian tax otherwise payable on the return to the foreign investor from the investment and/or to obtain a tax deduction for the Australian entity • may fail to comply with interest or dividend withholding tax obligations under Subdivision 12-F of Schedule 1 to the TAA with consequential implications for denial of deductions under section 26-25 of the ITAA 1997 • may give rise to CGT event D3 under section 104-45 of the ITAA 1997 • may not be properly characterised as debt interests for the purposes of Division 974 of the ITAA 1997 and not taken into account in calculating the average value of debt capital for the purposes of the thin capitalisation provisions • in cases where the offshore investment arrangement is treated as giving rise to debt interests under Division 974 of the ITAA 1997, that the arrangements may give rise to an equity interest and not a debt interest within the meaning of Division 974 • involve dealings following the initial investment between the offshore investor (or its associates) and the Australian entity (or its associates) - not being reported as related-party dealings as required in tax return schedules or reporting requirements under Division 815-E of the ITAA 1997 - that do not reflect arm's length conditions for the purposes of determining if an entity obtained a transfer pricing benefit under Australia's transfer pricing laws in Subdivision 815-B of the ITAA 1997 [4] • may be entered into or carried out for the sole, dominant or principal purpose, or for more than one principal purpose that includes a purpose of obtaining a tax benefit, or a diverted profits tax benefit, under Part IVA of the ITAA 1936 • may not satisfy the requirements to claim the benefits of a relevant tax treaty • may also be argued to avoid a requirement to disclose to the Foreign Investment Review Board under the Foreign Acquisitions and Takeovers Act 1975, when an equivalent ordinary equity interest or option to acquire the asset would be required to be disclosed. | • may be deliberately structured to avoid Australian tax otherwise payable on the return to the foreign investor from the investment and/or to obtain a tax deduction for the Australian entity • may fail to comply with interest or dividend withholding tax obligations under Subdivision 12-F of Schedule 1 to the TAA with consequential implications for denial of deductions under section 26-25 of the ITAA 1997 • may give rise to CGT event D3 under section 104-45 of the ITAA 1997 • may not be properly characterised as debt interests for the purposes of Division 974 of the ITAA 1997 and not taken into account in calculating the average value of debt capital for the purposes of the thin capitalisation provisions • in cases where the offshore investment arrangement is treated as giving rise to debt interests under Division 974 of the ITAA 1997, that the arrangements may give rise to an equity interest and not a debt interest within the meaning of Division 974 • involve dealings following the initial investment between the offshore investor (or its associates) and the Australian entity (or its associates) - not being reported as related-party dealings as required in tax return schedules or reporting requirements under Division 815-E of the ITAA 1997 - that do not reflect arm's length conditions for the purposes of determining if an entity obtained a transfer pricing benefit under Australia's transfer pricing laws in Subdivision 815-B of the ITAA 1997 [4] • may be entered into or carried out for the sole, dominant or principal purpose, or for more than one principal purpose that includes a purpose of obtaining a tax benefit, or a diverted profits tax benefit, under Part IVA of the ITAA 1936 • may not satisfy the requirements to claim the benefits of a relevant tax treaty • may also be argued to avoid a requirement to disclose to the Foreign Investment Review Board under the Foreign Acquisitions and Takeovers Act 1975, when an equivalent ordinary equity interest or option to acquire the asset would be required to be disclosed. | - not being reported as related-party dealings as required in tax return schedules or reporting requirements under Division 815-E of the ITAA 1997 - that do not reflect arm's length conditions for the purposes of determining if an entity obtained a transfer pricing benefit under Australia's transfer pricing laws in Subdivision 815-B of the ITAA 1997 [4]","We are currently reviewing these arrangements and engaging with taxpayers who have entered into, or are considering entering into, these arrangements. Our engagement and assurance activities will continue as we develop our technical position on these arrangements. Taxpayers can expect that any cases of this nature that are detected will be considered for their potential to have avoided the requirements under the Foreign Acquisitions and Takeovers Act 1975. Cases where this may have occurred will be referred to the Foreign Investment Review Board for further consideration. | Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny.","If you have entered, or are contemplating entering, into an arrangement of this type we encourage you to: • phone or email us at the contact details provided below • ask us for our view through a private ruling • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us at the contact details provided below • ask us for our view through a private ruling • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties under Division 290 of Schedule 1 to the TAA for promoters. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. | Commissioner of Taxation 25 May 2020 | © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | Date of Issue: 25 May 2020 | Date of Effect: N/A | [1] As outlined in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936). | [2] Subdivision 815-B of the Income Tax Assessment Act 1997 (ITAA 1997). | [3] Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1983] ATS 16. | [4] As modified by the exceptions in subsections 815-130(2) to (4) of the ITAA 1997, where applicable. | Related Rulings/Determinations: TR 2020/5 | Related Practice Statements: PS LA 2008/15 | Other References: Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on income [1983] ATS 16 Protocol Amending the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [2003] ATS 14 | Legislative References: ITAA 1936 6CA ITAA 1936 Pt III Div 11A ITAA 1936 Pt IVA ITAA 1997 26-25 ITAA 1997 104-45 ITAA 1997 Subdiv 815-B ITAA 1997 Subdiv 815-E ITAA 1997 815-130(2) ITAA 1997 815-130(3) ITAA 1997 815-130(4) ITAA 1997 Div 974 TAA 1953 Sch 1 Subdiv 12-F TAA 1953 Sch1 Div 290 Tax Agent Services Act 2009 Foreign Acquisitions and Takeovers Act 1975 | Contact officer: Stephanie Long Email address: Stephanie.Long@ato.gov.au Telephone: 02 9374 2040",PS LA 2008/15 | TR 2020/5 | Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on income [1983] ATS 16 | ITAA 1936 6CA | ITAA 1936 Pt III Div 11A | ITAA 1936 Pt IVA | ITAA 1997 26-25 | ITAA 1997 104-45 | ITAA 1997 Subdiv 815-B | ITAA 1997 Subdiv 815-E | ITAA 1997 815-130(2) | ITAA 1997 815-130(3) | ITAA 1997 815-130(4) | ITAA 1997 Div 974 | TAA 1953 Sch 1 Subdiv 12-F | TAA 1953 Sch1 Div 290 | Tax Agent Services Act 2009 | Foreign Acquisitions and Takeovers Act 1975,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20202/NAT/ATO/00001,
TA 2020/3,Arrangements involving interposed offshore entities to avoid interest withholding tax,14 August 2020,Current,,"We are reviewing arrangements which use offshore related entities to facilitate the avoidance of a withholding tax liability in relation to interest expenses deducted against Australian-sourced income and paid to non-residents. | The arrangements involve a non-resident deriving Australian-sourced income and incurring interest expenses (commonly from debt sourced from a related party) deductible against that income. | Relevant arrangements typically display some or all of the following features: • an Australian resident flow-through trust with one or more non-resident investors • the non-resident investor holds its interest in the resident trust through an interposed offshore entity (usually in a third jurisdiction which is a low or no tax jurisdiction and which is not part of the Australian tax treaty framework) • the interposed beneficiary is financed in part or in whole by (usually, related-party) debt • the interest rate on the debt is at a significant premium to referrable third-party debt, or the lending entity's cost of funds (and the arrangement would usually fall outside the 'green zone' referred to in PCG 2017/4 [1] ) • the resident trust derives Australian-sourced income and makes distributions to the interposed beneficiary • the interposed beneficiary deducts the interest expense against the Australian income it receives from the trust. | • an Australian resident flow-through trust with one or more non-resident investors • the non-resident investor holds its interest in the resident trust through an interposed offshore entity (usually in a third jurisdiction which is a low or no tax jurisdiction and which is not part of the Australian tax treaty framework) • the interposed beneficiary is financed in part or in whole by (usually, related-party) debt • the interest rate on the debt is at a significant premium to referrable third-party debt, or the lending entity's cost of funds (and the arrangement would usually fall outside the 'green zone' referred to in PCG 2017/4 [1] ) • the resident trust derives Australian-sourced income and makes distributions to the interposed beneficiary • the interposed beneficiary deducts the interest expense against the Australian income it receives from the trust. | We are not concerned with structures where deductible interest payments by a non-resident are merely incidental to what can be evidenced as ordinary and commercially appropriate business decisions.",,"We are concerned that these arrangements may be entered into to avoid interest withholding tax liability. | We are particularly concerned about arrangements displaying some or all of the following features: • There appears to be no commercial rationale other than tax reasons to support the interposition of a non-resident beneficiary and/or the jurisdiction of that beneficiary. • There appears to be no commercial rationale other than tax reasons why the debt used for Australian business purposes should be borne by the non-resident beneficiary. • The effective tax rate on Australian-sourced income is minimal or zero. • The related-party debt is at a significant premium to referrable third-party debt, or the lending entity's cost of funds and the arrangement usually falls outside the 'green zone' referred to in PCG 2017/4. • The beneficiary's capital structure maximises debt deductions under the thin capitalisation rules in Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997). • The beneficiary is resident of a low- or no-tax jurisdiction and/or a non-treaty jurisdiction. | • There appears to be no commercial rationale other than tax reasons to support the interposition of a non-resident beneficiary and/or the jurisdiction of that beneficiary. • There appears to be no commercial rationale other than tax reasons why the debt used for Australian business purposes should be borne by the non-resident beneficiary. • The effective tax rate on Australian-sourced income is minimal or zero. • The related-party debt is at a significant premium to referrable third-party debt, or the lending entity's cost of funds and the arrangement usually falls outside the 'green zone' referred to in PCG 2017/4. • The beneficiary's capital structure maximises debt deductions under the thin capitalisation rules in Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997). • The beneficiary is resident of a low- or no-tax jurisdiction and/or a non-treaty jurisdiction. | We believe that the arrangements may raise the following tax issues: • The anti-avoidance provisions may apply in respect of structures if the particular facts and circumstances suggest that they are contrived to avoid payment of: • interest withholding tax • any Australian tax. • Related-party interest deductions may be reduced due to the operation of Australia's transfer pricing rules contained in Division 815 of the ITAA 1997 and former Division 13 of the ITAA 1936. • The thin capitalisation provisions in Division 820 of the ITAA 1997 may operate to deny interest deductions where the beneficiary is excessively leveraged. • The ultimate distributions made by the interposed beneficiary to its shareholders may be assessable income under subsection 44(1) of the ITAA 1936 in certain circumstances. | • The anti-avoidance provisions may apply in respect of structures if the particular facts and circumstances suggest that they are contrived to avoid payment of: • interest withholding tax • any Australian tax. • Related-party interest deductions may be reduced due to the operation of Australia's transfer pricing rules contained in Division 815 of the ITAA 1997 and former Division 13 of the ITAA 1936. • The thin capitalisation provisions in Division 820 of the ITAA 1997 may operate to deny interest deductions where the beneficiary is excessively leveraged. • The ultimate distributions made by the interposed beneficiary to its shareholders may be assessable income under subsection 44(1) of the ITAA 1936 in certain circumstances. | • interest withholding tax • any Australian tax. | Arrangements may involve other features beyond those described in this Alert. For example, where, by reason of the interlinked rights and obligations in the related-party debt and other related schemes effecting what is economically similar to an equity interest, then, under certain circumstances, the related schemes provisions in Division 974 of the ITAA 1997 can operate so that related-party interest deductions may be denied.","We are currently reviewing these arrangements and engaging with taxpayers who have entered into or are considering entering into these arrangements. | Taxpayers and advisors who enter into these types of arrangements will be subject to increased scrutiny, and refunds claimed by taxpayers may be withheld until assurance is obtained concerning the relevant structures.","If you have entered into, or are contemplating entering into, an arrangement of this type we encourage you to: • seek independent professional advice • review your arrangements, and • email us at International@ato.gov.au | • seek independent professional advice • review your arrangements, and • email us at International@ato.gov.au | Commissioner of Taxation 14 August 2020 | © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | Date Part Comment 17 March 2022 What should you do? Removed contact officer name and phone number. | Date of Issue: 14 August 2020 | Date of Effect: N/A | [1] Further information regarding risk assessment of related party financing arrangements is available in Practical Compliance Guideline PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions. | Related Practice Statements: PS LA 2008/15 | Other References: PCG 2017/4 | Legislative References: ITAA 1936 Pt III former Div 13 ITAA 1936 Pt IVA ITAA 1936 44(1) ITAA 1936 98(3) ITAA 1997 Div 815 ITAA 1997 Div 820 ITAA 1997 Div 974 | ISSN: 2651-9550",PS LA 2008/15 | PCG 2017/4 | ITAA 1936 Pt IVA | ITAA 1936 44(1) | ITAA 1936 98(3) | ITAA 1997 Div 815 | ITAA 1997 Div 820 | ITAA 1997 Div 974,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20203/NAT/ATO/00001,"A resident trust derives income which the trustee distributes to an offshore interposed beneficiary, with the trustee paying tax on the distribution at the corporate rate pursuant to subsection 98(3) of the Income Tax Assessment Act 1936 (ITAA 1936). The beneficiary is partially funded with high interest rate related-party debt, usually with no traceable third-party debt. This creates significant interest deductions for the beneficiary against its Australian income in the tax return, giving rise to a refundable credit for all or almost all the tax already paid by the trustee. The non-resident beneficiary is claimed not to be carrying on business through a permanent establishment in Australia. | The purported effect of the arrangement is that the interposition of Beneficiary Co enables the related-party debt to be located offshore so that no interest withholding tax liability arises while a significant amount of interest deductions is claimed against the assessable Australian income. | A resident trust derives income which the trustee distributes to an offshore interposed beneficiary, with the trustee paying tax on the distribution at the corporate rate pursuant to subsection 98(3) of the ITAA 1936. The interposed beneficiary is largely funded with a related-party loan priced at an excessive margin above relevant third-party loan, with a principal amount substantially more than that of the third-party loan. The beneficiary deducts interest expenses against its Australian income, with no liability to interest withholding tax arising, as in Example 1 of this Alert. A refundable credit for any tax paid by the resident trustee is claimed by the beneficiary. | The purported effect of the arrangement is that non-arm's length interest deductions (from both quantum and pricing perspectives) are claimed by the offshore beneficiary to offset its assessable Australian income, while avoiding interest withholding tax liability."
TA 2020/4,Multiple entry consolidated groups avoiding capital gains tax through the transfer of assets to an eligible tier-1 company prior to divestment,24 August 2020,Current,,"We are currently reviewing arrangements which appear to be designed to avoid the inclusion of capital gains in the assessable income of Australian-resident entities upon the disposal of their assets (underlying assets). | The arrangements involve: • an internal restructure within a multiple entry consolidated (MEC) group to enable the underlying assets to be disposed of by way of an eligible tier-1 (ET-1) company (directly or indirectly owning the underlying assets) leaving the MEC group • circumstances where the disposal of the underlying assets might reasonably be expected to have been achieved in a more convenient or straightforward manner resulting in the inclusion of a capital gain in the assessable income of the provisional head company of the MEC group, and • on closer investigation, the stated justification for additional steps under the internal restructure lacks substance or real probative weight. | • an internal restructure within a multiple entry consolidated (MEC) group to enable the underlying assets to be disposed of by way of an eligible tier-1 (ET-1) company (directly or indirectly owning the underlying assets) leaving the MEC group • circumstances where the disposal of the underlying assets might reasonably be expected to have been achieved in a more convenient or straightforward manner resulting in the inclusion of a capital gain in the assessable income of the provisional head company of the MEC group, and • on closer investigation, the stated justification for additional steps under the internal restructure lacks substance or real probative weight. | The arrangements typically display some or all of the following features: • steps or circumstances resulting in a company becoming an ET-1 company of an existing or new MEC group, for example, by way of - incorporating a company - acquiring the shares in a dormant company which is a subsidiary member of an existing consolidated group, or - migrating the central management and control of an associated foreign or dual resident company to Australia • steps or circumstances resulting in the intra-group transfer of - the underlying assets to the new ET-1 company (either directly or indirectly) being disregarded for Australian tax purposes [1] , or - assets other than the underlying assets to the new ET-1 company (either directly or indirectly) being disregarded for Australian tax purposes [2] • steps or circumstances resulting in - the new ET-1 company (directly or indirectly owning the underlying assets) leaving the MEC group, or - another ET-1 company (directly or indirectly owning the underlying assets) leaving the MEC group • some or all of the above-mentioned steps or circumstances are not responsive to the commercial objectives of the taxpayer and/or are responsive to anticipated Australian tax outcomes. For example, some of the steps are not necessary to achieve the commercial objective of divesting the underlying assets to a third-party buyer or a foreign associate of the taxpayer • the underlying assets are CGT assets [3] which may not be taxable Australian real property [4] (or an indirect interest therein) or active foreign business assets. [5] | • steps or circumstances resulting in a company becoming an ET-1 company of an existing or new MEC group, for example, by way of - incorporating a company - acquiring the shares in a dormant company which is a subsidiary member of an existing consolidated group, or - migrating the central management and control of an associated foreign or dual resident company to Australia • steps or circumstances resulting in the intra-group transfer of - the underlying assets to the new ET-1 company (either directly or indirectly) being disregarded for Australian tax purposes [1] , or - assets other than the underlying assets to the new ET-1 company (either directly or indirectly) being disregarded for Australian tax purposes [2] • steps or circumstances resulting in - the new ET-1 company (directly or indirectly owning the underlying assets) leaving the MEC group, or - another ET-1 company (directly or indirectly owning the underlying assets) leaving the MEC group • some or all of the above-mentioned steps or circumstances are not responsive to the commercial objectives of the taxpayer and/or are responsive to anticipated Australian tax outcomes. For example, some of the steps are not necessary to achieve the commercial objective of divesting the underlying assets to a third-party buyer or a foreign associate of the taxpayer • the underlying assets are CGT assets [3] which may not be taxable Australian real property [4] (or an indirect interest therein) or active foreign business assets. [5] | - incorporating a company - acquiring the shares in a dormant company which is a subsidiary member of an existing consolidated group, or - migrating the central management and control of an associated foreign or dual resident company to Australia | - the underlying assets to the new ET-1 company (either directly or indirectly) being disregarded for Australian tax purposes [1] , or - assets other than the underlying assets to the new ET-1 company (either directly or indirectly) being disregarded for Australian tax purposes [2] | - the new ET-1 company (directly or indirectly owning the underlying assets) leaving the MEC group, or - another ET-1 company (directly or indirectly owning the underlying assets) leaving the MEC group | In relation to arrangements involving ET-1 companies, Taxpayer Alert TA 2019/1 Multiple entry consolidated (MEC) groups avoiding CGT through intra-group debt should also be considered. In TA 2019/1, we expressed concerns about arrangements designed to reduce or avoid capital gains tax where the new ET-1 company is funded through the use of related party loans rather than equity. The arrangements of concern in TA 2019/1 involve underlying assets which are more likely to be taxable Australian real property and the sale of the ET-1 company accompanied by either the refinancing of the related-party loans by the purchaser or the sale of the loans directly to the purchaser.","A multinational group anticipates disposing of particular assets held by various Australian subsidiaries (the Asset Subs) as part of a global divestment of one of its businesses. The Asset Subs are wholly owned by Aus Head Co. Aus Head Co is the head company of an Australian tax consolidated group (TCG) and the Asset Subs are subsidiary members of the consolidated group. | The multinational group undertakes the following steps: • Aus Head Co's foreign controller (Foreign Head Co) incorporates a new company (New Co). New Co is a wholly-owned subsidiary of Foreign Head Co • Aus Head Co makes a choice to convert the TCG to a MEC group comprising - Aus Head Co as provisional head company - New Co as an ET-1 company - the Asset Subs as subsidiary members, including Target Co • the Asset Subs transfer the relevant assets to Target Co. Aus Head Co subsequently transfers the shares in Target Co to New Co. There are no income tax consequences for the intra-group transfer of the relevant assets by the Asset Subs or for the transfer of the shares in Target Co by Aus Head Co [6] • Foreign Head Co disposes of shares in New Co to a third party, resulting in New Co and Target Co ceasing to be members of the MEC Group. | • Aus Head Co's foreign controller (Foreign Head Co) incorporates a new company (New Co). New Co is a wholly-owned subsidiary of Foreign Head Co • Aus Head Co makes a choice to convert the TCG to a MEC group comprising - Aus Head Co as provisional head company - New Co as an ET-1 company - the Asset Subs as subsidiary members, including Target Co • the Asset Subs transfer the relevant assets to Target Co. Aus Head Co subsequently transfers the shares in Target Co to New Co. There are no income tax consequences for the intra-group transfer of the relevant assets by the Asset Subs or for the transfer of the shares in Target Co by Aus Head Co [6] • Foreign Head Co disposes of shares in New Co to a third party, resulting in New Co and Target Co ceasing to be members of the MEC Group. | - Aus Head Co as provisional head company - New Co as an ET-1 company - the Asset Subs as subsidiary members, including Target Co | The capital gain arising from the disposal of the shares in New Co by Foreign Head Co, which economically reflects the gain from disposal of the assets owned by the Asset Subs, is not included in the assessable income of Foreign Head Co. | A multinational group includes a single Australian-resident company (Aus Co) which carries on several businesses in Australia. The foreign controller of the group (Foreign Head Co) wishes to dispose of one particular business carried on by Aus Co (relevant business assets). | The multinational group undertakes the following steps: • Foreign Head Co incorporates a new Australian-resident company (New Co). New Co is a wholly-owned subsidiary of Foreign Head Co • Aus Co makes a choice to form a MEC group. The MEC group comprises - Aus Head Co as provisional head company - New Co as an ET-1 company • Aus Co transfers the relevant business assets to New Co. There are no income tax consequences for the intra-group transfer of the relevant assets by Aus Co [7] • Foreign Head Co disposes of shares in New Co to a third party. | • Foreign Head Co incorporates a new Australian-resident company (New Co). New Co is a wholly-owned subsidiary of Foreign Head Co • Aus Co makes a choice to form a MEC group. The MEC group comprises - Aus Head Co as provisional head company - New Co as an ET-1 company • Aus Co transfers the relevant business assets to New Co. There are no income tax consequences for the intra-group transfer of the relevant assets by Aus Co [7] • Foreign Head Co disposes of shares in New Co to a third party. | - Aus Head Co as provisional head company - New Co as an ET-1 company | The capital gain arising from the disposal by Foreign Head Co of the shares in New Co, which economically reflects the gain from disposal of the relevant business assets owned by Aus Co, is not included in the assessable income of Foreign Head Co. | This example adopts the same basic facts as Example 2 and includes additional information in connection with the purported commercial rationale of the intra-group asset transfer and ultimate third-party disposal of the relevant business assets. | A tax adviser learns that Aus Co wishes to dispose of one of its profitable Australian businesses. | The tax adviser is successful in organising a meeting with Foreign Head Co's Chief Financial Officer and global Head of Tax to discuss the proposed divestment of Aus Co's relevant business assets. At the meeting, the tax adviser provides a slide deck which includes diagrams of various options. Some of those diagrams show: • Foreign Head Co incorporating a new Australian-resident company (New Co) • Aus Co making the choice to form a MEC group comprising of - Aus Co as provisional head company - New Co as an ET-1 company • the transfer of relevant business assets from Aus Co to New Co • the sale of shares in New Co to a third-party buyer. | • Foreign Head Co incorporating a new Australian-resident company (New Co) • Aus Co making the choice to form a MEC group comprising of - Aus Co as provisional head company - New Co as an ET-1 company • the transfer of relevant business assets from Aus Co to New Co • the sale of shares in New Co to a third-party buyer. | - Aus Co as provisional head company - New Co as an ET-1 company | After the meeting, the Head of Tax of Foreign Head Co asks for confirmation from the tax adviser that implementing one of the options in the slide deck means the Australian group can sell the relevant business assets to any contemplated Australian or non-Australian buyer without any profit or gain being taxable in Australia. | The Head of Tax subsequently emails the tax adviser agreeing to engage the adviser's firm to: • design the specific steps of the arrangement to achieve the contemplated tax outcomes • draft all documents, including the board submissions and board minutes, setting out the purported commercial rationale for the numerous transactions for purposes including being able to be referred to or produced if Australian tax authorities ever challenged the arrangement • provide a written opinion confirming the contemplated tax outcomes treating the purported commercial rationale as an assumption or an understood underlying fact. | • design the specific steps of the arrangement to achieve the contemplated tax outcomes • draft all documents, including the board submissions and board minutes, setting out the purported commercial rationale for the numerous transactions for purposes including being able to be referred to or produced if Australian tax authorities ever challenged the arrangement • provide a written opinion confirming the contemplated tax outcomes treating the purported commercial rationale as an assumption or an understood underlying fact. | The tax adviser prepares an engagement letter which provides a statement of works, including substantial fees or costs associated with implementing the proposed arrangement. | Foreign Head Co continues to undertake a private sale and marketing process for the relevant business assets. The representatives of Foreign Head Co provide some information about the required method of sale, based on the method proposed by the tax adviser, to identified serious potential buyers. | The tax adviser's firm implements the arrangement by preparing and drafting all the necessary legal agreements, documents, board submissions, and steps for the formation of the MEC group, then executes the asset transfer and provides statements to record the taxpayer's stated commercial rationale for the intra-group transfers. | Foreign Head Co agrees with a third-party buyer to sell the relevant business assets for the agreed price by assigning to the buyer all the shares in New Co. The share sale of New Co is completed. | The tax adviser's firm provides written advice to Foreign Head Co, including advice to the effect that: • any capital gain from the intra-group transfer of the relevant business assets to New Co is ignored for Australian income tax purposes • any capital gain from the sale of the shares in New Co to the third-party buyer is disregarded for Australian income tax purposes because the shares are not taxable Australian property • Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply to any scheme in connection with the intra-group transfer of the relevant business assets or the sale of the shares in New Co on the basis of the stated commercial rationale recorded in the company minutes and in other documents created in connection with the scheme. | • any capital gain from the intra-group transfer of the relevant business assets to New Co is ignored for Australian income tax purposes • any capital gain from the sale of the shares in New Co to the third-party buyer is disregarded for Australian income tax purposes because the shares are not taxable Australian property • Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply to any scheme in connection with the intra-group transfer of the relevant business assets or the sale of the shares in New Co on the basis of the stated commercial rationale recorded in the company minutes and in other documents created in connection with the scheme.","Part IVA of the ITAA 1936 may apply where taxpayers enter into arrangements of the kind described in this Alert. | In particular, arrangements of the kind described in this Alert may be unnecessarily complex or involve additional steps which are not required to achieve real commercial objectives. For example, a commercial objective of divesting underlying assets might reasonably be expected to have been achieved by: • directly disposing of the underlying assets without any intra-group transfer of the underlying assets or other assets to an ET-1 company • disposing of the shares in a subsidiary member of the group which holds the underlying assets without any intra-group transfer of the assets to an ET-1 company • transferring ancillary or incidental other assets (not to be sold as part of the transaction) out of an existing company, rather than transferring a significantly larger or more complex set of assets to a new ET-1 company. | • directly disposing of the underlying assets without any intra-group transfer of the underlying assets or other assets to an ET-1 company • disposing of the shares in a subsidiary member of the group which holds the underlying assets without any intra-group transfer of the assets to an ET-1 company • transferring ancillary or incidental other assets (not to be sold as part of the transaction) out of an existing company, rather than transferring a significantly larger or more complex set of assets to a new ET-1 company. | Arrangements of the kind described in this Alert are potentially being proposed by advisers who may be: • engaged for the purposes of structuring a commercial deal which could have been structured in a more straightforward, convenient or less-complex way • involved in developing the commercial rationale, or non-Australian tax justification, for particular steps in the arrangement. | • engaged for the purposes of structuring a commercial deal which could have been structured in a more straightforward, convenient or less-complex way • involved in developing the commercial rationale, or non-Australian tax justification, for particular steps in the arrangement. | Arrangements of the kind described in this Alert may also involve the incurrence of additional transaction costs (for example, additional tax advisory costs, additional Foreign Investment Review Board approvals, or other additional regulatory or compliance costs) as compared to a direct sale of the underlying assets. The most significant result of the additional steps, complexity and regulatory cost may be that no capital gain (or only a reduced or minimal capital gain) is included in the assessable income of the Australian head company. | This Alert is not directed at arrangements which merely consist of a choice by two or more existing ET-1 companies of a top company to form a MEC group. [8] However, such a choice may be an integrated or interdependent step in arrangements of the kind under review. [9] The exception to the definition of 'tax benefit' in subsection 177C(2) of the ITAA 1936 will not apply where the planning for and implementation of a scheme involves steps that commence before and continue after the making of the relevant choice or election. [10] In such cases, the steps are not 'merely contextual' but form part of a scheme consisting of more than the mere making of a choice or election. [11] | We are issuing this Alert in addition to TA 2019/1 because we have subsequently seen further kinds of arrangements involving the uses of MEC groups to, in effect, reduce or avoid CGT. We are particularly concerned that the reasons for some of the steps in the arrangements are not responsive to the objectively inferred commercial rationale of the taxpayer.","We are currently reviewing arrangements of the kind described in this Alert. | Where we identify taxpayers who have entered into or carried out arrangements of the kind described in this Alert, we are likely to make detailed further enquiries regarding the particular facts and circumstances relevant to determining the objective purpose of each of the steps in the arrangements. | Taxpayers who enter into these types of arrangements can expect to be subject to increased scrutiny. For example, we will be asking for additional information and evidence to verify the stated commercial rationale for each step of the arrangement. | In cases where the purported commercial rationale is ultimately established as being without substance or probative weight, but has unreasonably been communicated to the ATO as a fact in the absence of apparently excusing circumstances, we will consider whether other relevant offences may have occurred.","If you have entered, or are contemplating entering, into an arrangement of this type we encourage you to: • phone or email us at the contact details provided to discuss next actions • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us at the contact details provided to discuss next actions • make a voluntary disclosure to reduce penalties that may apply. | Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15 | PS LA 2005/24 | TA 2019/1 | ITAA 1936 Pt IVA | ITAA 1936 177C(2) | ITAA 1997 108-5 | ITAA 1997 701-1 | ITAA 1997 719-50 | ITAA 1997 768-540 | ITAA 1997 855-20 | TAA 1953 Div 290 | Tax Agent Services Act 2009 | 2009 ATC 20-155 | 2010 ATC 20-222 | 2007 ATC 4973,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20204/NAT/ATO/00001,"Commissioner of Taxation 24 August 2020 | [1] By operation of section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997). | [3] Under section 108-5 of the ITAA 1997. | [4] Under section 855-20 of the ITAA 1997. | [5] Under section 768-540 of the ITAA 1997. | [6] Under section 701-1 of the ITAA 1997, the Asset Subs, Target Co and New Co are taken to be parts of Aus Head Co for relevant income tax purposes. As a consequence of that section, the actions and transactions of a subsidiary member are treated as having been undertaken by the head company and dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company. | [8] Section 719-50 of the ITAA 1997. | [9] See paragraph 71 of Practice Statement Law Administration PS LA 2005/24 Application of General Anti-Avoidance Rules . See also Walters v Commissioner of Taxation [2007] FCA 1270 at [83-85] and British American Tobacco Australia Services Limited v Commissioner of Taxation [2010] FCAFC 130 at [32-38]. | [10] British American Tobacco Australia Services Limited v Commissioner of Taxation [2009] FCA 1550 at [86]. | [11] British American Tobacco Australia Services Limited v Commissioner of Taxation [2010] FCAFC 130 at [34]. | British American Tobacco Australia Services Limited v Commissioner of Taxation [2009] FCA 1550 2009 ATC 20-155 77 ATR 518 | British American Tobacco Australia Services Limited v Commissioner of Taxation [2010] FCAFC 130 (2010) 189 FCR 151 2010 ATC 20-222 80 ATR 813 | Walters v Commissioner of Taxation [2007] FCA 1270 (2007) 162 FCR 421 2007 ATC 4973 67 ATR 156 | Stephanie.Long@ato.gov.au"
TA 2020/5,Structured arrangements that provide imputation benefits on shares acquired where economic exposure is offset through use of derivative instruments,4 December 2020,Current,"We are reviewing arrangements that are intended to provide imputation benefits to Australian taxpayers in respect of a parcel of shares [1] where, as a result of derivative instruments entered into as part of the arrangement, the taxpayer retains no or nominal economic exposure to the dividend and capital performance associated with that parcel of shares. | The arrangements involve an Australian taxpayer who already holds an existing long position in a portfolio of Australian shares acquiring additional parcels of Australian shares (or interests in shares) and, on the same day or about the same time, entering into derivative instruments (that are a short position) in relation to those additional shares. | While the derivative instruments themselves may differ, typically these arrangements result in the taxpayer having no or nominal economic exposure to both the dividend and capital performance associated with those additional shares. | Due to the taxpayer's existing holding of Australian shares, the taxpayer calculates the delta of their overall net position to be greater than 0.3. That is, the taxpayer relies on an existing long position of Australian shares to purport to meet the substantive integrity rules in Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to holding shares at risk for the purposes of claiming franking credits. This results in the taxpayer claiming franking credits in respect of both the existing Australian shares and the additional parcel of shares. | Setting aside the original holding of Australian shares, these arrangements result in the taxpayer holding the additional parcel of Australian shares at no or nominal risk, such that the franking credits are generally the only return of significance [2] relating to the additional Australian shares acquired.","Relevant arrangements usually display most or all of the following features: • The taxpayer holds a long position in an existing portfolio of Australian shares and calculates the delta of their net position to be greater than 0.3. • The taxpayer enters into a transaction or series of transactions (Transactions) under which the taxpayer - acquires an additional parcel of Australian shares either directly and/or through an investment trust under circumstances that are not consistent with the taxpayer's usual pattern of investment of maintaining their target asset allocation, and - at or about the same time, enters into a derivative instrument [3] , or a series of derivative instruments, that substantially reduces the taxpayer's economic exposure to the dividend and capital performance associated with the additional parcel of shares. • The taxpayer aggregates the deltas of the existing portfolio of Australian shares, the additional parcel of Australian shares, and the derivative instruments to arrive at a net delta position of at least 0.3 for its aggregate portfolio holding of Australian shares. • The taxpayer purports that the holding period rules in Division 1A of former Part IIIAA of the ITAA 1936 are satisfied in respect of the entire portfolio of Australian shares and therefore claims the franking credits associated with the additional parcel of shares. • When the Transactions are viewed in isolation, the delta of the additional parcel of shares is reduced to less than 0.3 and will usually be zero or close to zero. | • The taxpayer holds a long position in an existing portfolio of Australian shares and calculates the delta of their net position to be greater than 0.3. • The taxpayer enters into a transaction or series of transactions (Transactions) under which the taxpayer - acquires an additional parcel of Australian shares either directly and/or through an investment trust under circumstances that are not consistent with the taxpayer's usual pattern of investment of maintaining their target asset allocation, and - at or about the same time, enters into a derivative instrument [3] , or a series of derivative instruments, that substantially reduces the taxpayer's economic exposure to the dividend and capital performance associated with the additional parcel of shares. • The taxpayer aggregates the deltas of the existing portfolio of Australian shares, the additional parcel of Australian shares, and the derivative instruments to arrive at a net delta position of at least 0.3 for its aggregate portfolio holding of Australian shares. • The taxpayer purports that the holding period rules in Division 1A of former Part IIIAA of the ITAA 1936 are satisfied in respect of the entire portfolio of Australian shares and therefore claims the franking credits associated with the additional parcel of shares. • When the Transactions are viewed in isolation, the delta of the additional parcel of shares is reduced to less than 0.3 and will usually be zero or close to zero. | - acquires an additional parcel of Australian shares either directly and/or through an investment trust under circumstances that are not consistent with the taxpayer's usual pattern of investment of maintaining their target asset allocation, and - at or about the same time, enters into a derivative instrument [3] , or a series of derivative instruments, that substantially reduces the taxpayer's economic exposure to the dividend and capital performance associated with the additional parcel of shares. | An arrangement may occur as part of a transaction where the taxpayer is seeking to gain additional economic exposure to Australian shares. Our concerns are limited to the extent of the additional Australian shares that are held with no or nominal economic exposure, due to a matching short position being taken through a derivative instrument. | We are concerned that Australian taxpayers involved in these arrangements may be claiming imputation benefits that they are not entitled to under the law. | Our concerns regarding these arrangements include instances where Australian taxpayers hold and acquire Australian shares directly or indirectly through a managed investment trust (MIT) or attribution managed investment trust (AMIT).","We have included simplified examples that are representative of the types of arrangements under review. | The Australian taxpayer holds an existing portfolio of Australian shares pursuant to its target asset allocation and has funds under management that are intended to be invested in an asset class other than Australian shares. | Instead of investing directly in that other desired asset class, the taxpayer instead acquires an additional parcel of Australian shares as the starting point of the investment process. At or about the same time, the taxpayer enters into a TRS with a counterparty. Under the terms of the TRS, the taxpayer pays an amount that is substantially equivalent to the value of the dividend and capital performance of the additional Australian shares it acquired, and receives an interest-like return from the counterparty in Australian dollars, for example Bank Bill Swap Rate plus or minus a margin. | During the periods covered by the TRS, the taxpayer, as the legal owner of the additional parcel of Australian shares, derives franked dividends from those shares, and claims to be entitled to franking credits that are attached to those franked dividends. In calculating their net delta position, the taxpayer aggregates the deltas of: • the existing portfolio of Australian shares (that is, long positions held prior to entering into the arrangement) • the additional parcel of Australian shares, and • the TRS to arrive at a net delta position of at least 0.3 for the entire portfolio of shares. | • the existing portfolio of Australian shares (that is, long positions held prior to entering into the arrangement) • the additional parcel of Australian shares, and • the TRS to arrive at a net delta position of at least 0.3 for the entire portfolio of shares. | Due to the obligations placed upon both parties by the terms of the TRS, any dividends paid and any price movements in respect of the underlying reference assets that are the subject of the TRS are required to be passed on to or borne by the counterparty. Therefore any economic gains derived from the dividend and capital performance of the additional parcel of Australian shares are transferred from the taxpayer to the counterparty, effectively resulting in the taxpayer receiving no or nominal returns from the additional parcel of Australian shares. Notwithstanding this, the taxpayer then claims that they have maintained an entitlement to any franking credits generated by the additional shares. [4] This is on the basis of the taxpayer's calculation of the net delta of the existing portfolio of Australian shares, additional Australian shares and the TRS. | In these circumstances, while the taxpayer is the legal owner of the additional Australian shares, they retain no substantial equity risk in the additional parcel acquired due to the effect of the TRS. Economically, any investment reward for the taxpayer in respect of the additional parcel of Australian shares relates only to the returns they receive under the TRS. | Effectively, the taxpayer has converted their purported Australian equity investment into an investment that provides an interest like return with the potential for an enhanced return provided by the franking credits generated from the Australian shares that are subject to the TRS. | This example applies in instances where the taxpayer has decided to invest some of their funds under management into another asset class such as international equities using synthetic investments. Depending upon how the arrangements are implemented, this may be a stand-alone transaction or an additional step that follows from the transaction in Example 1 of this Alert. [5] | Similar to the taxpayer in Example 1 of this Alert, an Australian taxpayer holds an existing portfolio of Australian shares pursuant to its target asset allocation and has funds under management that are intended to be invested in an asset class other than Australian shares. | Instead of investing directly in the desired asset class, the taxpayer instead acquires an additional parcel of Australian shares that matches the ASX SPI 200 Index as the starting point of the investment process. The taxpayer then enters into a TRS to gain synthetic exposure to an asset class that is neither interest bearing debt nor Australian shares, for example international equities. | Under the terms of the TRS, the taxpayer pays an amount that is substantially equivalent to the value of the dividend and capital performance of the additional Australian shares it acquired, and receives the dividend and capital performance of international equities. | In some circumstances, the TRS pricing may result in a small economic benefit being received by the taxpayer (that is, the taxpayer may make a small profit from the TRS itself as the counterparty may be willing to price the arrangement on this basis). However, the value of the economic benefit inherent in the TRS pricing is generally far less than the value of the imputation benefit to the taxpayer. | Similar to the taxpayer in Example 1 of this Alert, the taxpayer calculates their net delta position of Australian shares by aggregating the deltas of: • the existing portfolio of Australian shares (that is, long positions held prior to entering into the arrangement) • the additional parcel of Australian shares, and • the TRS to arrive at a net delta position of at least 0.3 for the entire portfolio of Australian shares. | • the existing portfolio of Australian shares (that is, long positions held prior to entering into the arrangement) • the additional parcel of Australian shares, and • the TRS to arrive at a net delta position of at least 0.3 for the entire portfolio of Australian shares. | While the taxpayer is the legal owner of the additional Australian shares, they retain no substantial equity risk in the additional parcel acquired due to the effect of the TRS. Economically, any investment reward for the taxpayer in respect of the additional parcel of Australian shares relates predominantly to the returns they receive under the TRS. The returns from the Australian shares are transferred to the counterparty under the term of the TRS and the taxpayer receives a return from an investment in international equities. | Effectively, the taxpayer has converted their purported Australian equity investment into an investment in international equities with the potential for an enhanced return provided by the franking credits generated from the Australian shares that are subject to a short position. | Similar to the taxpayer in Example 1 of this Alert, an Australian taxpayer holds an existing portfolio of Australian shares pursuant to its target asset allocation and has funds under management that are intended to be invested in an asset class other than Australian shares. | Rather than investing directly into additional Australian shares, the taxpayer acquires an interest in an AMIT which invests in Australian shares. The interest in the AMIT, also referred to as a membership interest, is acquired either via purchasing units or through an in specie contribution. | At or about the same time, the taxpayer enters into a TRS with a counterparty that is equal to the value of the interests in shares it acquires through the AMIT. Under the terms of the TRS, the taxpayer pays any dividends and capital performance relating to the investments of the AMIT to the counterparty, effectively reducing the taxpayer's economic exposure to the changes of the value of the membership interest. | During the periods covered by the TRS, the taxpayer derives franked dividends indirectly from the AMIT. Due to the AMIT satisfying the qualified persons test, the taxpayer (as a member of the AMIT) is deemed to also be a qualified person in respect of the franked dividends derived by the AMIT. The taxpayer then claims to be entitled to an franking credit in respect of the interest in shares acquired through the AMIT. | Effectively, the taxpayer has converted their purported Australian equity investment into an investment that provides an interest-like return with the potential for an enhanced return provided by the franking credits generated from the Australian shares that are subject to the TRS. | Similar to the first step in Example 1 of this Alert, the taxpayer holds an existing portfolio of Australian shares. This holding is consistent with its target asset allocation. | The taxpayer acquires an additional parcel of Australian shares resulting in the taxpayer holding an amount of Australian shares that is materially higher than its target asset allocation such that it is now overweight in Australian shares. [6] | At or about the same time as acquiring the additional parcel of Australian shares, the taxpayer enters into a short position, or a series of short positions, by way of selling a futures contracts [7] with a value equivalent to the additional (overweight) shares. This short position matches the additional long position which gives the overall effect to the taxpayer of neutralising any investment (dividend and capital) performance exposure to those shares. | Over the course of the arrangement, the taxpayer receives the dividend and capital performance from the additional Australian shares and claims the franking credits. However, any economic benefit that the taxpayer derives from their exposure to the additional parcel of Australian shares is matched by a loss on the short position in the futures contracts. This outcome is achieved because any dividend performance and gain (or loss) in the capital performance of the Australian shares is substantially offset by the loss (or gain) on the futures contract as determined by the price for which the futures contract is agreed to be settled. | This structured arrangement results in effectively a zero sum commercial outcome for the taxpayer. Any gains on the additional Australian shares are offset by losses on the sold futures contract and vice versa, such that the only net benefit capable of being achieved from the additional Australian shares is the additional franking credits. | In calculating their net delta position, the taxpayer aggregates the deltas of: • the existing portfolio of Australian shares (that is, long positions held prior to entering into the arrangement) • the additional parcel of Australian shares, and • the futures contracts to arrive at a net delta position of at least 0.3 for the entire portfolio of Australian shares. | • the existing portfolio of Australian shares (that is, long positions held prior to entering into the arrangement) • the additional parcel of Australian shares, and • the futures contracts to arrive at a net delta position of at least 0.3 for the entire portfolio of Australian shares.","Broadly, one of the objects of the qualified person rules referred to in paragraph 207-145(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) is that the benefits of imputation should only be available to the true economic owners of shares. We are concerned that these arrangements may involve taxpayers inappropriately accessing the benefits of franking credits. | More specifically, aspects of the arrangements that concern us include: • The taxpayer acquires an additional parcel of Australian shares but retains minimal economic exposure; that is, the taxpayer receives and claims franking credits even though they are not effectively exposed to the risks of loss or opportunities for gain in respect of those shares as a result of entering into the derivative arrangements. • In a practical sense, the purpose of the derivative instrument is only to offset the economic exposure of the additional/overweight position of Australian shares acquired as part of the arrangement and not to hedge the long position of the existing portfolio of Australian shares. • The acquisition of the additional parcel of shares has no or only nominal apparent commercial purpose. The taxpayer forgoes any economic benefit of purchasing the additional parcel of Australian shares at a certain price because all future gains and losses are offset through the related derivative instrument. • The transactions are designed so that, or their effect is that, the main net benefit to the taxpayer in respect of the additional parcel of shares is the imputation benefit, or part thereof. • In some circumstances, the swap pricing may result in a small economic benefit being received by the taxpayer as the counterparty to the TRS. However, the value of the commercial basis point benefit inherent in the pricing of the swap is generally far less than the value of the imputation benefit to the taxpayer. | • The taxpayer acquires an additional parcel of Australian shares but retains minimal economic exposure; that is, the taxpayer receives and claims franking credits even though they are not effectively exposed to the risks of loss or opportunities for gain in respect of those shares as a result of entering into the derivative arrangements. • In a practical sense, the purpose of the derivative instrument is only to offset the economic exposure of the additional/overweight position of Australian shares acquired as part of the arrangement and not to hedge the long position of the existing portfolio of Australian shares. • The acquisition of the additional parcel of shares has no or only nominal apparent commercial purpose. The taxpayer forgoes any economic benefit of purchasing the additional parcel of Australian shares at a certain price because all future gains and losses are offset through the related derivative instrument. • The transactions are designed so that, or their effect is that, the main net benefit to the taxpayer in respect of the additional parcel of shares is the imputation benefit, or part thereof. • In some circumstances, the swap pricing may result in a small economic benefit being received by the taxpayer as the counterparty to the TRS. However, the value of the commercial basis point benefit inherent in the pricing of the swap is generally far less than the value of the imputation benefit to the taxpayer. | We believe the concerns raised in this Alert are the issues of whether: • The taxpayer is a qualified person in relation to the relevant dividends on the additional parcel of shares for the purposes of Division 1A of former Part IIIAA of the ITAA 1936, as required by paragraph 207-145(1)(a) of the ITAA 1997. • The Commissioner should make a determination pursuant to section 177EA of the ITAA 1936 in respect of these arrangements, in particular, to deny the imputation benefits received in respect of the additional parcel of shares, and • The promoter penalty laws in Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA) would apply to promoters of this arrangement. | • The taxpayer is a qualified person in relation to the relevant dividends on the additional parcel of shares for the purposes of Division 1A of former Part IIIAA of the ITAA 1936, as required by paragraph 207-145(1)(a) of the ITAA 1997. • The Commissioner should make a determination pursuant to section 177EA of the ITAA 1936 in respect of these arrangements, in particular, to deny the imputation benefits received in respect of the additional parcel of shares, and • The promoter penalty laws in Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA) would apply to promoters of this arrangement. | In addition, we have similar concerns over these arrangements where Australian taxpayers hold the Australian shares indirectly through AMITs. Where this occurs, we will consider whether: • the Commissioner should make a determination pursuant to section 276-90 of the ITAA 1997 in respect of these arrangements, in particular, to treat the taxpayer (being the member of the AMIT) as not being a qualified person in relation to the distribution received from the AMIT for the purposes of Division 1A of former Part IIIAA of the ITAA 1936 • the Commissioner should make a determination pursuant to section 177EA of the ITAA 1936 in respect of these arrangements, in particular, to deny the imputation benefits received in respect of the distributions from the AMIT, and • the promoter penalty laws in Division 290 of Schedule 1 to the TAA would apply to promoters of this arrangement. | • the Commissioner should make a determination pursuant to section 276-90 of the ITAA 1997 in respect of these arrangements, in particular, to treat the taxpayer (being the member of the AMIT) as not being a qualified person in relation to the distribution received from the AMIT for the purposes of Division 1A of former Part IIIAA of the ITAA 1936 • the Commissioner should make a determination pursuant to section 177EA of the ITAA 1936 in respect of these arrangements, in particular, to deny the imputation benefits received in respect of the distributions from the AMIT, and • the promoter penalty laws in Division 290 of Schedule 1 to the TAA would apply to promoters of this arrangement.","We are currently reviewing these arrangements and engaging with taxpayers who have entered into, or are considering entering into, these arrangements. Compliance activity and engagement will continue while we are developing our technical position on the arrangements. | Taxpayers and advisors who enter into these types of arrangements will be subject to increased scrutiny.","If you have entered, or are contemplating entering, into an arrangement of this type we encourage you to: • phone or email us at the contact details provided • ask us for our view through a private ruling • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us at the contact details provided • ask us for our view through a private ruling • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties under Division 290 of Schedule 1 to the TAA for promoters. | Commissioner of Taxation 4 December 2020 | ISSN 2651-9550 | © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | Date of Issue: 4 December 2020 | Date of Effect: N/A | [1] A parcel of shares could include multiple parcels of shares in one or more Australian companies that were purchased in one or more transactions. | [2] That is not to say that there will be no other return associated with the arrangement. | [3] While the type of derivative instrument may differ, one typical derivative instrument would be a Total Return Swap (TRS). For present purposes, the main features of relevance for a TRS in this regard is that the taxpayer would remain the legal owner of the underlying property being swapped (Australian shares) but is required by the terms of the TRS to compensate the counterparty for any cash flows (dividends received) and upwards price movements of the underlying property in return for compensation paid by the counterparty having regard to the specified reference asset (which will typically be a funding rate applying to a cash notional principal or another underlying asset such as overseas shares or an overseas index). Further, if the value of the underlying reference asset drops then the counterparty will also have an obligation to compensate the taxpayer for this price movement. | [4] The terms of the TRS do not require any compensation for the value of franking credits, which we understand to be common for instruments of this nature. | [5] This diagram shows the net result of a new transaction or the combined effect of transactions outlined in Examples 1 and 2 of this Alert. For illustrative purposes, the purchase of an international equities index with the reference interest rate from Example 1 has been omitted. | [6] The additional parcel of Australian shares may be purchased in a transaction with other Australian shares which the taxpayer is seeking to obtain economic exposure to. That is, the taxpayer may want to increase their economic exposure to Australian shares by $50 million. Instead of purchasing $50 million of Australian shares, the taxpayer acquires an additional $300 million of Australian shares in conjunction with a short futures position of $250 million. When reviewing this arrangement, we would focus on the acquisition of the $250 million parcels of Australian shares that are in excess of the target asset allocation as the additional shares. | [7] Such as taking a short position in the ASX SPI 200 Index. | Related Practice Statements: PS LA 2008/15 | Legislative References: ITAA 1936 Div 1A of former Part IIIAA ITAA 1936 177EA ITAA 1997 207-145(1)(a) ITAA 1997 276-90 TAA 1953 Div 290 Sch 1 | Contact officer: Andrew Grace Email address: Andrew.Grace@ato.gov.au Telephone: (08) 8208 1688 | ISSN: 2651-9550",PS LA 2008/15 | ITAA 1936 177EA | ITAA 1997 207-145(1)(a) | ITAA 1997 276-90 | TAA 1953 Div 290 Sch 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20205/NAT/ATO/00001,
TA 2019/1,Multiple entry consolidated (MEC) groups avoiding CGT through intra-group debt,28 March 2019,Current,,"We are reviewing specific variations of known arrangements where a multiple entry consolidated ( MEC ) group sells a CGT asset ( Relevant Asset ) with a large unrealised capital gain by way of moving the Relevant Asset into an 'eligible tier-1 company' [1] ( ET-1 Company) ) with significant (existing or newly created) intra-group debt and then selling the shares in the ET-1 Company to a third party purchaser ( Purchaser ). The debt usually approximates the value of the assets of the company. As part of the arrangement, the Purchaser undertakes to ensure the ET-1 Company's intra-group debt is extinguished on completion of the sale. | The arrangements are, in substance, a sale of the Relevant Asset by the MEC group to the Purchaser with the agreed purchase price being the sum of the purchase price for the shares in the ET-1 Company and the amount of the intra-group debt that is repaid. | By entering into these arrangements rather than selling the Relevant Asset directly to the Purchaser, the MEC group receives the same total 'consideration' for the Relevant Asset but purportedly avoids tax on the large capital gain that would otherwise have arisen with an asset sale. | The arrangements usually display most or all of the following features: • The MEC group (or a member of said group) has agreed to dispose of the Relevant Asset to a Purchaser. • An internal restructure is undertaken within the MEC group, including the transfer of the Relevant Asset to a new or existing ET-1 Company and the transfer of any other assets out of that ET-1 Company. Alternatively, the ET-1 Company may acquire the Relevant Asset indirectly by acquiring a member of the MEC group that owns the asset. There are no tax consequences for these transactions due to the operation of the single entity rule. • The ET-1 Company has existing intra-group debt or may incur intra-group debt as part of the internal restructure. The effect of the intra-group debt is to significantly reduce the market value of the shares in the ET-1 Company and, consequently, on the disposal of those shares reduce any capital gain to a nominal amount. • The foreign resident shareholders of the ET-1 Company enter into an agreement with the Purchaser for the sale of the shares in the ET-1 Company. Under the agreement, the purchase price for the shares in the ET-1 Company reflects the intra-group debt in the company. Further, the Purchaser undertakes to ensure that the ET-1 Company repays the outstanding intra-group debt on, or shortly after, the completion of the sale. • On completion of the sale of the shares in the ET-1 Company, the Purchaser pays the purchase price for the shares and arranges for the outstanding intra-group debt to be repaid. This may be done under relevant arrangements by way of the Purchaser paying the creditor in the MEC group directly and the ET-1 Company recording the Purchaser as having subscribed for additional equity in the ET-1 Company. • The sale of the shares in the ET-1 Company results in the ET-1 Company leaving the MEC group. • The foreign resident shareholders of the ET-1 Company may have no capital gain or, if the capital gain is not disregarded under Division 855, a relatively small capital gain on the sale of the shares in the ET-1 Company due to the effect the intra-group debt has on the value of the ET-1 Company. In addition, CGT event L5 does not apply to the ET-1 Company. This is because ET-1 Companies are subject to the modified tax cost setting ('pooling') rules in Subdivisions 719-J and 719-K, rather than the tax cost setting amount rules for entities that cease to be a subsidiary member of a consolidated group in Division 711. • The foreign resident shareholders of the ET-1 Company, together with its related entities, receive from the Purchaser a total sum representing the value of the Relevant Asset but in the form of sale proceeds from the sale of the shares in the ET-1 Company and the intra-group debt repayment. • Following completion of the sale of the shares in the ET-1 Company, the Purchaser may move the Relevant Asset out of the ET-1 Company into a controlled entity of its choosing. | • The MEC group (or a member of said group) has agreed to dispose of the Relevant Asset to a Purchaser. • An internal restructure is undertaken within the MEC group, including the transfer of the Relevant Asset to a new or existing ET-1 Company and the transfer of any other assets out of that ET-1 Company. Alternatively, the ET-1 Company may acquire the Relevant Asset indirectly by acquiring a member of the MEC group that owns the asset. There are no tax consequences for these transactions due to the operation of the single entity rule. • The ET-1 Company has existing intra-group debt or may incur intra-group debt as part of the internal restructure. The effect of the intra-group debt is to significantly reduce the market value of the shares in the ET-1 Company and, consequently, on the disposal of those shares reduce any capital gain to a nominal amount. • The foreign resident shareholders of the ET-1 Company enter into an agreement with the Purchaser for the sale of the shares in the ET-1 Company. Under the agreement, the purchase price for the shares in the ET-1 Company reflects the intra-group debt in the company. Further, the Purchaser undertakes to ensure that the ET-1 Company repays the outstanding intra-group debt on, or shortly after, the completion of the sale. • On completion of the sale of the shares in the ET-1 Company, the Purchaser pays the purchase price for the shares and arranges for the outstanding intra-group debt to be repaid. This may be done under relevant arrangements by way of the Purchaser paying the creditor in the MEC group directly and the ET-1 Company recording the Purchaser as having subscribed for additional equity in the ET-1 Company. • The sale of the shares in the ET-1 Company results in the ET-1 Company leaving the MEC group. • The foreign resident shareholders of the ET-1 Company may have no capital gain or, if the capital gain is not disregarded under Division 855, a relatively small capital gain on the sale of the shares in the ET-1 Company due to the effect the intra-group debt has on the value of the ET-1 Company. In addition, CGT event L5 does not apply to the ET-1 Company. This is because ET-1 Companies are subject to the modified tax cost setting ('pooling') rules in Subdivisions 719-J and 719-K, rather than the tax cost setting amount rules for entities that cease to be a subsidiary member of a consolidated group in Division 711. • The foreign resident shareholders of the ET-1 Company, together with its related entities, receive from the Purchaser a total sum representing the value of the Relevant Asset but in the form of sale proceeds from the sale of the shares in the ET-1 Company and the intra-group debt repayment. • Following completion of the sale of the shares in the ET-1 Company, the Purchaser may move the Relevant Asset out of the ET-1 Company into a controlled entity of its choosing. | The diagram below illustrates a simplified example of the arrangement.",,"We are concerned that taxpayers may be entering into these arrangements to avoid realising large capital gains on the disposal of CGT assets. | More specifically, aspects of the arrangements that concern us include: • The intra-group transactions leading up to the sale of the shares in the ET-1 Company have no apparent commercial rationale and appear designed to put the MEC group into a position to exploit the special rules that apply when disposing of membership interests in an ET-1 Company. • The parties have entered into this arrangement in circumstances where a direct sale of the Relevant Asset to the Purchaser would have been simple, viable and commercially expected. • The arrangement is in substance a sale of the Relevant Asset but the parties (or the vendor unilaterally) have structured it in the form of a share sale with the purchaser repaying the intra-group debt on completion. • Commercially, the 'agreed consideration' for the Relevant Asset is the sum of the sale price for the shares in the ET-1 Company and the intra-group debt repayment. • The MEC group, together with its related entities, receives (and the Purchaser pays) the same total sum under the arrangement as would have been the case if the Relevant Asset had been sold directly to the Purchaser. | • The intra-group transactions leading up to the sale of the shares in the ET-1 Company have no apparent commercial rationale and appear designed to put the MEC group into a position to exploit the special rules that apply when disposing of membership interests in an ET-1 Company. • The parties have entered into this arrangement in circumstances where a direct sale of the Relevant Asset to the Purchaser would have been simple, viable and commercially expected. • The arrangement is in substance a sale of the Relevant Asset but the parties (or the vendor unilaterally) have structured it in the form of a share sale with the purchaser repaying the intra-group debt on completion. • Commercially, the 'agreed consideration' for the Relevant Asset is the sum of the sale price for the shares in the ET-1 Company and the intra-group debt repayment. • The MEC group, together with its related entities, receives (and the Purchaser pays) the same total sum under the arrangement as would have been the case if the Relevant Asset had been sold directly to the Purchaser. | The arrangements appear designed to significantly reduce or eliminate any CGT that might otherwise have been payable by the MEC group (or its related entities) in respect of the sale of the Relevant Asset to the Purchaser. | We consider that Part IVA of the Income Tax Assessment Act 1936 may apply to these arrangements.",We are actively reviewing these arrangements. Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny.,"If you have entered, or are contemplating entering, into an arrangement of this type we recommend: • you seek independent professional advice, and • review your arrangements. | • you seek independent professional advice, and • review your arrangements. | Commissioner of Taxation | © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | Date of Issue: 28 March 2019 | Date of Effect: N/A | [1] See the meaning in section 719-15 of the Income Tax Assessment Act 1997 (ITAA 1997). All legislative references are to the ITAA 1997 unless otherwise indicated. | Related Practice Statements: PS LA 2008/15 | Legislative References: ITAA 1936 ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 104-520 ITAA 1997 Div 711 ITAA 1997 719-15 ITAA 1997 Subdiv 719-J ITAA 1997 Subdiv 719-K ITAA 1997 Div 855 | Contact officer: John Nikolas Email address: john.nikolas@ato.gov.au Phone: (02) 9374 2013",PS LA 2008/15 | ITAA 1936 | ITAA 1936 Pt IVA | ITAA 1997 | ITAA 1997 104-520 | ITAA 1997 Div 711 | ITAA 1997 719-15 | ITAA 1997 Subdiv 719-J | ITAA 1997 Subdiv 719-K | ITAA 1997 Div 855,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20191/NAT/ATO/00001,
TA 2019/2,Trusts avoiding CGT by exploiting restructure rollover,31 October 2019,Current,"We are currently reviewing certain arrangements that purportedly allow a unit trust to effectively dispose of a CGT asset to an arm's length purchaser with no CGT consequences. The arrangements seek to exploit the CGT rollover for trust restructures. | Under these arrangements, a trustee of a unit trust ( Transferring Trust ) sells a CGT asset ( Relevant Asset ) with a large unrealised capital gain to an arm's length purchaser [1] ( Purchaser ) for an agreed purchase price ( Purchase Price ) by way of: • transferring the Relevant Asset to a trustee of a new unit trust ( Receiving Trust ) for the Purchase Price which gives rise to a debt owing to the Transferring Trust • choosing rollover under Subdivision 126-G [2] of the Income Tax Assessment Act 1997 [3] for the transfer • the Purchaser subscribing for new units in the Receiving Trust equal in value to the Purchase Price, and • the Receiving Trust repaying the debt to the Transferring Trust with the funds received from the issue of the new units. | • transferring the Relevant Asset to a trustee of a new unit trust ( Receiving Trust ) for the Purchase Price which gives rise to a debt owing to the Transferring Trust • choosing rollover under Subdivision 126-G [2] of the Income Tax Assessment Act 1997 [3] for the transfer • the Purchaser subscribing for new units in the Receiving Trust equal in value to the Purchase Price, and • the Receiving Trust repaying the debt to the Transferring Trust with the funds received from the issue of the new units. | By entering into these arrangements rather than selling the Relevant Asset directly to the Purchaser, the Transferring Trust is able to transfer the underlying ownership of the Relevant Asset to the Purchaser but purportedly avoids tax on the large capital gain that would otherwise have been made with an asset sale.",The arrangements typically involve the Transferring Trust agreeing to dispose of the Relevant Asset to the Purchaser for the Purchase Price by way of the following steps: 1. The Receiving Trust is settled with nominal funds and issued units. The Transferring Trust and Receiving Trust have the same beneficiaries with the same entitlements and no material discretionary elements. 2. The Transferring Trust transfers the Relevant Asset to the Receiving Trust for the Purchase Price and makes a capital gain. 3. The trustees of the Transferring and Receiving Trusts both choose to obtain Subdivision 126-G rollover. The asserted result is that the Transferring Trust disregards the capital gain it makes from transferring the Relevant Asset to the Receiving Trust. 4. The Receiving Trust's acquisition of the Relevant Asset results in it owing an amount to the Transferring Trust equal to the Purchase Price. This may be in the form of a promissory note. 5. The Purchaser subscribes for a large number of new units in the Receiving Trust equal in value to the Purchase Price and the Receiving Trust uses those subscription funds to repay the amount owing to the Transferring Trust. 6. The Purchaser acquires the original units in the Receiving Trust for typically nominal consideration and replaces the existing trustee with an entity it controls. | 1. The Receiving Trust is settled with nominal funds and issued units. The Transferring Trust and Receiving Trust have the same beneficiaries with the same entitlements and no material discretionary elements. 2. The Transferring Trust transfers the Relevant Asset to the Receiving Trust for the Purchase Price and makes a capital gain. 3. The trustees of the Transferring and Receiving Trusts both choose to obtain Subdivision 126-G rollover. The asserted result is that the Transferring Trust disregards the capital gain it makes from transferring the Relevant Asset to the Receiving Trust. 4. The Receiving Trust's acquisition of the Relevant Asset results in it owing an amount to the Transferring Trust equal to the Purchase Price. This may be in the form of a promissory note. 5. The Purchaser subscribes for a large number of new units in the Receiving Trust equal in value to the Purchase Price and the Receiving Trust uses those subscription funds to repay the amount owing to the Transferring Trust. 6. The Purchaser acquires the original units in the Receiving Trust for typically nominal consideration and replaces the existing trustee with an entity it controls. | These steps may be implemented in close succession or structured in stages as part of a broad scheme.,,"We are concerned that taxpayers may be entering into these arrangements to avoid tax on large capital gains that would otherwise be made from the disposal of CGT assets. | More specifically, aspects of the arrangements that concern us include: • whether the conditions for Subdivision 126-G rollover relief are met in respect of the arrangement, in particular - whether the Receiving Trust's rights under the arrangement (collectively) 'only facilitate the transfer of assets to it from the Transferring Trust' for the purposes of subparagraph 126 225(1)(b)(ii), and - whether the Purchaser's right under the arrangement to subscribe for units in the Receiving Trust creates an interest in the Receiving Trust such that that trust does not have the same beneficiaries as the Transferring Trust for the purposes of subparagraph 126-225(1)(c)(i) • the arrangement appears to be designed primarily to allow the Transferring Trust to exploit the Subdivision 126-G rollover to disregard a capital gain that would otherwise be assessable to the trustee or beneficiaries of that trust • the arrangement results in a change in the underlying ownership of the Relevant Asset without triggering a CGT taxing point, which is contrary to the intent of the Subdivision 126-G rollover [4] • the parties have entered into this arrangement in circumstances where a direct sale of the Relevant Asset by the Transferring Trust to the Purchaser would have been simple, viable and commercially expected • the commercial substance of the arrangement is a sale of the Relevant Asset by the Transferring Trust to the Purchaser, but the divergent form of the arrangement is explicable only by the tax advantage purportedly obtained by the Transferring Trust, and • the Transferring Trust receives (and the Purchaser pays) the same total sum under the arrangement as would have been the case if the asset were sold directly to the Purchaser. | • whether the conditions for Subdivision 126-G rollover relief are met in respect of the arrangement, in particular - whether the Receiving Trust's rights under the arrangement (collectively) 'only facilitate the transfer of assets to it from the Transferring Trust' for the purposes of subparagraph 126 225(1)(b)(ii), and - whether the Purchaser's right under the arrangement to subscribe for units in the Receiving Trust creates an interest in the Receiving Trust such that that trust does not have the same beneficiaries as the Transferring Trust for the purposes of subparagraph 126-225(1)(c)(i) • the arrangement appears to be designed primarily to allow the Transferring Trust to exploit the Subdivision 126-G rollover to disregard a capital gain that would otherwise be assessable to the trustee or beneficiaries of that trust • the arrangement results in a change in the underlying ownership of the Relevant Asset without triggering a CGT taxing point, which is contrary to the intent of the Subdivision 126-G rollover [4] • the parties have entered into this arrangement in circumstances where a direct sale of the Relevant Asset by the Transferring Trust to the Purchaser would have been simple, viable and commercially expected • the commercial substance of the arrangement is a sale of the Relevant Asset by the Transferring Trust to the Purchaser, but the divergent form of the arrangement is explicable only by the tax advantage purportedly obtained by the Transferring Trust, and • the Transferring Trust receives (and the Purchaser pays) the same total sum under the arrangement as would have been the case if the asset were sold directly to the Purchaser. | - whether the Receiving Trust's rights under the arrangement (collectively) 'only facilitate the transfer of assets to it from the Transferring Trust' for the purposes of subparagraph 126 225(1)(b)(ii), and - whether the Purchaser's right under the arrangement to subscribe for units in the Receiving Trust creates an interest in the Receiving Trust such that that trust does not have the same beneficiaries as the Transferring Trust for the purposes of subparagraph 126-225(1)(c)(i) | We consider that Part IVA of the Income Tax Assessment Act 1936 may apply to these arrangements where they would otherwise qualify for rollover relief under Subdivision 126-G.",We are actively reviewing these arrangements. Taxpayers and advisors who enter into these types of arrangements will be subject to increased scrutiny.,"If you have entered, or are contemplating entering, into an arrangement of this type we encourage you to: • phone or email us at the contact details provided below • ask us for our view through a private ruling • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | • phone or email us at the contact details provided below • ask us for our view through a private ruling • seek independent professional advice, and/or • make a voluntary disclosure to reduce penalties that may apply. | Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009 .",PS LA 2008/15 | Explanatory Memorandum | ITAA 1936 Pt IVA | ITAA 1997 Subdiv 126-G | ITAA 1997 126-225(1)(b)(ii) | ITAA 1997 126-225(1)(c)(i),False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20192/NAT/ATO/00001,"Commissioner of Taxation 31 October 2019 | Updated ATO tip-off hotline number | [1] While the purchaser in the arrangement described in this Alert is an arm's length party, our concerns would apply equally if the purchaser was a non-arm's length related party. | [2] Subdivision 126-G provides a CGT rollover when an asset is transferred between certain trusts with the same beneficiaries and certain requirements are met. | [3] All legislative references in this Alert are to the Income Tax Assessment Act 1997 unless otherwise indicated. | [4] That is, to provide rollover relief only where there is no change to the underlying ownership of an asset: see paragraphs 1.7-1.8 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Measures No. 6) Bill 2009."
TA 2018/1,Structured arrangements that provide imputation benefits on shares acquired on a limited risk basis around ex-dividend dates,13 February 2018,Current,"We are reviewing arrangements that are intended to provide imputation benefits to Australian taxpayers who are not the true economic owners of the shares. | The arrangements involve an Australian taxpayer [1] with a long position in Australian shares legally acquiring, but having little or no economic exposure to, an additional parcel of the same shares and holding those shares over the ex-dividend date. [2] They will typically involve the use of securities lending arrangements in combination with, repurchase agreements or derivative contracts ( contracts ), to create what is essentially a circular flow of shares. Although the Australian taxpayer has no or only nominal economic exposure to the additional parcel of shares on a stand-alone basis, the Australian taxpayer claims franking credits in respect of both the existing long position and the additional parcel of shares. | That is, taxpayers are relying on an existing long shareholding to claim additional franking credits on a second parcel of shares at zero or nominal risk, such that the franking credits are generally the only return of significance that the taxpayer receives on that second parcel.","Relevant arrangements usually display most or all of the following features: • The taxpayer has an existing parcel of shares in an Australian Securities Exchange (ASX) listed company, XYZ. Company XYZ is expected to pay a franked dividend on its shares. • Prior to the ex-dividend date for the XYZ shares, the taxpayer acquires an additional parcel of XYZ shares. The acquisition of the additional parcel of shares is funded by lending the existing XYZ shares to the Supplier [3] in return for cash collateral under a standard securities lending transaction [4] or from the proceeds of selling another parcel of XYZ shares [5] borrowed from the Supplier. This effectively enables the taxpayer to top-up its XYZ share long position and access additional franked dividends without the outlay of additional funds. The Supplier may also be involved with sourcing the additional shares. • Simultaneously, the taxpayer enters into contracts with the Supplier that substantially reduce the taxpayer's economic exposure to the additional parcel of shares. The additional parcel of shares is expected to be transferred back to the Supplier at the end of the arrangement pursuant to these contracts, after the imputation benefits have been received by the taxpayer. • The taxpayer is the shareholder of record in respect of the existing and additional parcel of shares, and will receive the franked dividend in respect of both parcels. • The taxpayer aggregates the deltas of the existing parcel, the additional parcel of XYZ shares, and the derivative contracts to arrive at a net delta position of at least 0.3 for the entire portfolio of XYZ shares. The taxpayer purports the holding period rules in Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) are satisfied in respect of the portfolio of XYZ shares and claims the benefit of the imputation credits. When viewed in isolation, the delta of the additional parcel of shares is reduced to less than 0.3 and will usually be significantly less than 0.1. • After the ex-dividend date, pursuant to the arrangements between the parties, the taxpayer sells or otherwise delivers the additional parcel of XYZ shares to the Supplier or a nominated entity on an ex-dividend basis. [6] • In certain variants of these arrangements, in acquiring the additional parcel of XYZ shares, the taxpayer purports to have a commercial objective to target particular abnormal price behaviours in XYZ shares around the ex-dividend date. In reality, the transaction has little or no ability to capture or make a (pre-tax) profit from these price behaviours. • The arrangements often involve one or more trades occurring via a stock exchange crossing mechanism. This allows the parties to trade the XYZ shares at a predetermined price and settle the transaction on the same date, unlike typical T-2 terms for trades occurring on the open market. | • The taxpayer has an existing parcel of shares in an Australian Securities Exchange (ASX) listed company, XYZ. Company XYZ is expected to pay a franked dividend on its shares. • Prior to the ex-dividend date for the XYZ shares, the taxpayer acquires an additional parcel of XYZ shares. The acquisition of the additional parcel of shares is funded by lending the existing XYZ shares to the Supplier [3] in return for cash collateral under a standard securities lending transaction [4] or from the proceeds of selling another parcel of XYZ shares [5] borrowed from the Supplier. This effectively enables the taxpayer to top-up its XYZ share long position and access additional franked dividends without the outlay of additional funds. The Supplier may also be involved with sourcing the additional shares. • Simultaneously, the taxpayer enters into contracts with the Supplier that substantially reduce the taxpayer's economic exposure to the additional parcel of shares. The additional parcel of shares is expected to be transferred back to the Supplier at the end of the arrangement pursuant to these contracts, after the imputation benefits have been received by the taxpayer. • The taxpayer is the shareholder of record in respect of the existing and additional parcel of shares, and will receive the franked dividend in respect of both parcels. • The taxpayer aggregates the deltas of the existing parcel, the additional parcel of XYZ shares, and the derivative contracts to arrive at a net delta position of at least 0.3 for the entire portfolio of XYZ shares. The taxpayer purports the holding period rules in Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) are satisfied in respect of the portfolio of XYZ shares and claims the benefit of the imputation credits. When viewed in isolation, the delta of the additional parcel of shares is reduced to less than 0.3 and will usually be significantly less than 0.1. • After the ex-dividend date, pursuant to the arrangements between the parties, the taxpayer sells or otherwise delivers the additional parcel of XYZ shares to the Supplier or a nominated entity on an ex-dividend basis. [6] • In certain variants of these arrangements, in acquiring the additional parcel of XYZ shares, the taxpayer purports to have a commercial objective to target particular abnormal price behaviours in XYZ shares around the ex-dividend date. In reality, the transaction has little or no ability to capture or make a (pre-tax) profit from these price behaviours. • The arrangements often involve one or more trades occurring via a stock exchange crossing mechanism. This allows the parties to trade the XYZ shares at a predetermined price and settle the transaction on the same date, unlike typical T-2 terms for trades occurring on the open market. | We are concerned that taxpayers involved in these arrangements may be claiming imputation benefits that they are not entitled to under the law. | Transactions to which this Alert does not apply | This Alert does not apply to isolated securities lending transactions or derivative contracts that a taxpayer may enter into in connection with an existing parcel of shares. | It is only intended to apply where the purported combined effect of entering into one or more such transactions is the entitlement of the taxpayer to the benefit of franking credits where they have no or nominal exposure to an additional parcel of shares, as outlined in this Alert. | If you have entered into these types of arrangements over the ex-dividend date, you may want to consider if this Alert applies to you. | We have included simplified examples that are representative of the types of arrangements being reviewed.","Figure 1: Inception | Investor A holds a parcel of 100 XYZ shares (Parcel 1) that will pay a fully franked dividend. The expected dividend is $2. | Prior to XYZ's ex-dividend date, the following steps occur: • Step 1(a) and (b): Investor A lends Parcel 1 to Supplier B under a standard securities lending transaction ( Stock Loan 1 ) in return for cash collateral of $100. [7] The term of the transaction expires on XYZ's ex-dividend date with the 100 XYZ shares returned to Investor A on a cum-dividend basis. The securities lending transaction is intended to comply with section 26BC of the ITAA 1936. • Step 2(a) and (b): Investor A uses the $100 cash collateral to purchase 100 XYZ shares from Supplier B (directly or indirectly). This acquisition will be deemed a new acquisition of 100 XYZ shares (Parcel 2) for tax purposes. To settle the sale, Supplier B sells the 100 XYZ shares it borrowed under the securities lending transaction. The buy and sell transactions settle on the same day. The buy and sell transactions are matched and reported to the ASX as a special crossing rather than being conducted on the open ASX market. • Step 3: Investor A enters into an option collar (or a similar derivative product) where they will have the right or obligation to sell Parcel 2 on an ex-dividend basis back to Supplier B on a predetermined date. [8] This collar will settle after XYZ's record date. The strike price for the collar is set such that Investor A has little or no risk of loss and opportunities for gain in respect of Parcel 2 (that is, movements in the market value of the XYZ shares). Parcel 2 is expected to be delivered to Supplier B through the exercise of the collar mechanism upon settlement. The value of the dividend that XYZ is expected to pay is factored into the strike price of the option collar. | • Step 1(a) and (b): Investor A lends Parcel 1 to Supplier B under a standard securities lending transaction ( Stock Loan 1 ) in return for cash collateral of $100. [7] The term of the transaction expires on XYZ's ex-dividend date with the 100 XYZ shares returned to Investor A on a cum-dividend basis. The securities lending transaction is intended to comply with section 26BC of the ITAA 1936. • Step 2(a) and (b): Investor A uses the $100 cash collateral to purchase 100 XYZ shares from Supplier B (directly or indirectly). This acquisition will be deemed a new acquisition of 100 XYZ shares (Parcel 2) for tax purposes. To settle the sale, Supplier B sells the 100 XYZ shares it borrowed under the securities lending transaction. The buy and sell transactions settle on the same day. The buy and sell transactions are matched and reported to the ASX as a special crossing rather than being conducted on the open ASX market. • Step 3: Investor A enters into an option collar (or a similar derivative product) where they will have the right or obligation to sell Parcel 2 on an ex-dividend basis back to Supplier B on a predetermined date. [8] This collar will settle after XYZ's record date. The strike price for the collar is set such that Investor A has little or no risk of loss and opportunities for gain in respect of Parcel 2 (that is, movements in the market value of the XYZ shares). Parcel 2 is expected to be delivered to Supplier B through the exercise of the collar mechanism upon settlement. The value of the dividend that XYZ is expected to pay is factored into the strike price of the option collar. | Just prior to the ex-dividend date, Investor A: • physically holds one parcel of 100 XYZ shares (Parcel 2). Under the holding period rule, the day after the date of acquisition will count as day 1 for Parcel 2 • is considered not to have disposed of Parcel 1 for imputation purposes by virtue of the securities lending transaction and the operation of subsection 160APHH(8) in Division 1A of former Part IIIAA of the ITAA 1936 • as a result of these steps, has funded the acquisition of Parcel 2 by lending out Parcel 1 for cash collateral, and effectively increased their shareholding in XYZ shares for taxation purposes (Parcels 1 and 2). The pricing of the collar leaves Investor A with no or only nominal economic exposure to Parcel 2 on a stand-alone basis. | • physically holds one parcel of 100 XYZ shares (Parcel 2). Under the holding period rule, the day after the date of acquisition will count as day 1 for Parcel 2 • is considered not to have disposed of Parcel 1 for imputation purposes by virtue of the securities lending transaction and the operation of subsection 160APHH(8) in Division 1A of former Part IIIAA of the ITAA 1936 • as a result of these steps, has funded the acquisition of Parcel 2 by lending out Parcel 1 for cash collateral, and effectively increased their shareholding in XYZ shares for taxation purposes (Parcels 1 and 2). The pricing of the collar leaves Investor A with no or only nominal economic exposure to Parcel 2 on a stand-alone basis. | Figure 2: Ex-dividend date | On the ex-dividend date, the following steps occur simultaneously: • Step 4(a) and (b): Investor A lends 100 ABC shares to Supplier B in return for cash collateral of $100 under a standard securities lending transaction (Stock Loan 2). [9] This funds Investor A's obligation to return the $100 cash collateral to Supplier B upon the expiry of Stock Loan 1. • Step 5(a) and (b): Supplier B borrows 100 XYZ shares (cum-dividend) from a third party [10] under a standard securities lending transaction (Stock Loan 3) in return for non-cash collateral in the form of the 100 ABC shares Supplier B borrowed under Stock Loan 2. [11] Supplier B is required to make a dividend equivalence payment on the 100 XYZ shares to the third party. • Step 6(a) and (b): Supplier B uses the 100 XYZ shares borrowed under Stock Loan 3 to return 100 XYZ shares to Investor A. • Step 7: The collar entered into between Investor A and Supplier B is exercised on this date, but does not settle until after the record date. | • Step 4(a) and (b): Investor A lends 100 ABC shares to Supplier B in return for cash collateral of $100 under a standard securities lending transaction (Stock Loan 2). [9] This funds Investor A's obligation to return the $100 cash collateral to Supplier B upon the expiry of Stock Loan 1. • Step 5(a) and (b): Supplier B borrows 100 XYZ shares (cum-dividend) from a third party [10] under a standard securities lending transaction (Stock Loan 3) in return for non-cash collateral in the form of the 100 ABC shares Supplier B borrowed under Stock Loan 2. [11] Supplier B is required to make a dividend equivalence payment on the 100 XYZ shares to the third party. • Step 6(a) and (b): Supplier B uses the 100 XYZ shares borrowed under Stock Loan 3 to return 100 XYZ shares to Investor A. • Step 7: The collar entered into between Investor A and Supplier B is exercised on this date, but does not settle until after the record date. | At the end of this day, Investor A: • physically holds and is shareholder of record for two parcels of 100 XYZ shares (200 XYZ shares in total) that carry dividend entitlements • has held Parcel 2 for the requisite 45 day period and is deemed to have continuously held Parcel 1, the stock returned from Stock Loan 1, for at least the same period if not longer, and • receives franked dividends in respect of two parcels of shares. | • physically holds and is shareholder of record for two parcels of 100 XYZ shares (200 XYZ shares in total) that carry dividend entitlements • has held Parcel 2 for the requisite 45 day period and is deemed to have continuously held Parcel 1, the stock returned from Stock Loan 1, for at least the same period if not longer, and • receives franked dividends in respect of two parcels of shares. | Figure 3: After record date | Just after the record date of the XYZ shares: • Step 8(a) and (b): The collar settles on an ex-dividend basis and Investor A delivers Parcel 2 XYZ shares to Supplier B in return for a cash payment that will generally be calculated on the basis of the original cum-dividend purchase price adjusted for the amount of the expected dividend. In this simplified example, the collar strike price is $98. • Step 9(a) and (b): Upon the expiry of Stock Loan 3, Supplier B returns to the third party the 100 XYZ shares (Parcel 2) it received upon settlement of the collar. The third party returns the 100 ABC shares. • Step 10(a) and (b): Upon the expiry of Stock Loan 2, Investor A uses the proceeds from the collar and the receipt of the Parcel 2 dividend to repay the cash collateral and Supplier B returns the 100 ABC shares. | • Step 8(a) and (b): The collar settles on an ex-dividend basis and Investor A delivers Parcel 2 XYZ shares to Supplier B in return for a cash payment that will generally be calculated on the basis of the original cum-dividend purchase price adjusted for the amount of the expected dividend. In this simplified example, the collar strike price is $98. • Step 9(a) and (b): Upon the expiry of Stock Loan 3, Supplier B returns to the third party the 100 XYZ shares (Parcel 2) it received upon settlement of the collar. The third party returns the 100 ABC shares. • Step 10(a) and (b): Upon the expiry of Stock Loan 2, Investor A uses the proceeds from the collar and the receipt of the Parcel 2 dividend to repay the cash collateral and Supplier B returns the 100 ABC shares. | At the end of the transaction: • Investor A physically holds a parcel of 100 XYZ shares. • Investor A has derived an additional franked dividend in respect of the Parcel 2 shares, but has made an approximately identical loss on its ownership of the Parcel 2 shares, leaving its net return (before fees) being the additional imputation benefit received. • Supplier B has made a matching gain [12] on its borrowing and sale of the XYZ shares, allowing it to meet its obligation to make a dividend equivalence payment to the third party counterparty to Stock Loan 3. | • Investor A physically holds a parcel of 100 XYZ shares. • Investor A has derived an additional franked dividend in respect of the Parcel 2 shares, but has made an approximately identical loss on its ownership of the Parcel 2 shares, leaving its net return (before fees) being the additional imputation benefit received. • Supplier B has made a matching gain [12] on its borrowing and sale of the XYZ shares, allowing it to meet its obligation to make a dividend equivalence payment to the third party counterparty to Stock Loan 3. | Figure 1: Inception | Investor A initially holds a parcel of 30 XYZ shares that will pay a fully franked dividend. | Prior to XYZ's ex-dividend date, the following steps occur simultaneously: • Step 1: Investor A borrows 70 XYZ shares from Supplier B and may provide collateral under a standard securities lending arrangement. • Step 2: Investor A sells 70 XYZ shares to Supplier B for $70. • Step 3: Investor A purchases 70 XYZ shares from Supplier B for $70. | • Step 1: Investor A borrows 70 XYZ shares from Supplier B and may provide collateral under a standard securities lending arrangement. • Step 2: Investor A sells 70 XYZ shares to Supplier B for $70. • Step 3: Investor A purchases 70 XYZ shares from Supplier B for $70. | The result of the arrangement is, just prior to the ex-dividend date, Investor A: • holds existing 30 XYZ shares and an additional 70 XYZ shares (long position) • is under an obligation to return 70 XYZ shares on a cum-dividend basis to Supplier B under a securities lending arrangement (short position) [13] , and • has no or only nominal economic exposure to 70 XYZ shares on a stand-alone basis as the long and short positions are perfectly matched. | • holds existing 30 XYZ shares and an additional 70 XYZ shares (long position) • is under an obligation to return 70 XYZ shares on a cum-dividend basis to Supplier B under a securities lending arrangement (short position) [13] , and • has no or only nominal economic exposure to 70 XYZ shares on a stand-alone basis as the long and short positions are perfectly matched. | Figure 2: Ex-dividend date | On the ex-dividend date, the following steps occur simultaneously [14] : • Step 4: Investor A sells 70 XYZ shares on an ex-dividend basis to Supplier B in return for $69. [15] The $69 substantially funds Investor A's acquisition of 70 XYZ shares on a cum-dividend basis (Step 5) to meet their redelivery obligation to Supplier B (Step 6). • Step 5: Investor A purchases 70 XYZ shares cum-dividend from Supplier B for $71. • Step 6: Investor A uses the 70 XYZ cum-dividend shares to meet its obligation to return 70 XYZ shares to Supplier B under the securities lending arrangement. Supplier returns any collateral to Investor A. The term of the securities lending arrangement expires on XYZ's ex-dividend date with the 70 XYZ shares returned to Supplier B on a cum-dividend basis. | • Step 4: Investor A sells 70 XYZ shares on an ex-dividend basis to Supplier B in return for $69. [15] The $69 substantially funds Investor A's acquisition of 70 XYZ shares on a cum-dividend basis (Step 5) to meet their redelivery obligation to Supplier B (Step 6). • Step 5: Investor A purchases 70 XYZ shares cum-dividend from Supplier B for $71. • Step 6: Investor A uses the 70 XYZ cum-dividend shares to meet its obligation to return 70 XYZ shares to Supplier B under the securities lending arrangement. Supplier returns any collateral to Investor A. The term of the securities lending arrangement expires on XYZ's ex-dividend date with the 70 XYZ shares returned to Supplier B on a cum-dividend basis. | At the end of this day, Investor A: • physically holds 30 XYZ shares • is the shareholder of record for 100 XYZ shares that carry dividend entitlements • has held 100 XYZ shares for the requisite 45 day period • receives a franked dividend in respect of 100 XYZ shares, and • makes a loss of the difference between the ex-dividend selling price of XYZ shares and the cum-dividend purchase price of XYZ shares in respect of 70 shares. [16] | • physically holds 30 XYZ shares • is the shareholder of record for 100 XYZ shares that carry dividend entitlements • has held 100 XYZ shares for the requisite 45 day period • receives a franked dividend in respect of 100 XYZ shares, and • makes a loss of the difference between the ex-dividend selling price of XYZ shares and the cum-dividend purchase price of XYZ shares in respect of 70 shares. [16]","Broadly, one of the objects of the qualified person rules referred to in paragraph 207-145(1)(a) of the ITAA 1997 is that the benefits of imputation should only be available to the true economic owners of shares and only to the extent those owners are able to use the franking credits themselves. We are concerned that these arrangements may involve taxpayers inappropriately receiving the benefits of imputation in breach of the rules designed to maintain the integrity of the imputation system. | More specifically, aspects of the arrangements that concern us include: • the relevant taxpayer acquires an additional parcel of shares for a short period with minimal economic exposure; that is, they are not effectively exposed to the risks of loss or opportunities for gain in respect of those shares • the additional parcel of shares has no or only nominal apparent commercial purpose. For example, where taxpayers claim to be targeting abnormal price behaviour around the ex-dividend date, the terms of the contracts effectively prevent those taxpayers from targeting all or most of this price behaviour in respect of the additional parcel of shares • the transactions are designed so that, or their effect is that, the main net benefit to the taxpayer in respect of the additional parcel of shares is the imputation benefit, or part thereof, and • the arrangements in relation to the additional parcel of shares are designed to enable the taxpayer to claim tax offsets from franking credits on what are effectively borrowed shares, even though the third party lender remains the party exposed to price risk. | • the relevant taxpayer acquires an additional parcel of shares for a short period with minimal economic exposure; that is, they are not effectively exposed to the risks of loss or opportunities for gain in respect of those shares • the additional parcel of shares has no or only nominal apparent commercial purpose. For example, where taxpayers claim to be targeting abnormal price behaviour around the ex-dividend date, the terms of the contracts effectively prevent those taxpayers from targeting all or most of this price behaviour in respect of the additional parcel of shares • the transactions are designed so that, or their effect is that, the main net benefit to the taxpayer in respect of the additional parcel of shares is the imputation benefit, or part thereof, and • the arrangements in relation to the additional parcel of shares are designed to enable the taxpayer to claim tax offsets from franking credits on what are effectively borrowed shares, even though the third party lender remains the party exposed to price risk. | We believe the above concerns raise the issues of whether: • the taxpayer is a qualified person in relation to the relevant dividends on the additional parcel of shares for the purposes of Division 1A of former Part IIIAA of the ITAA 1936, as required by paragraph 207-145(1)(a) of the ITAA 1997 • section 177EA of the ITAA 1936 applies to these arrangements, in particular, to deny the imputation benefits received in respect of the additional parcel of shares, and • the promoter penalty laws in Division 290 of Schedule 1 to the Taxation Administration Act 1953 would apply to promoters of this arrangement. | • the taxpayer is a qualified person in relation to the relevant dividends on the additional parcel of shares for the purposes of Division 1A of former Part IIIAA of the ITAA 1936, as required by paragraph 207-145(1)(a) of the ITAA 1997 • section 177EA of the ITAA 1936 applies to these arrangements, in particular, to deny the imputation benefits received in respect of the additional parcel of shares, and • the promoter penalty laws in Division 290 of Schedule 1 to the Taxation Administration Act 1953 would apply to promoters of this arrangement. | We note similarities between our concerns regarding section 177EA of the ITAA 1936 applying to these arrangements and our determination regarding the application of section 177EA in Taxation Determination TD 2003/32 Income tax: what are the tax consequences for a taxpayer as a result of entering into a scrip loan and call option arrangement as described in Taxpayer Alert 2002/2? | Further, the steps taken at ex-dividend date in Example 2 are similar to the example provided in Taxation Determination TD 2014/10 Income tax: can section 177EA of the Income Tax Assessment Act 1936 apply to a 'dividend washing' scheme of the type described in this Taxation Determination? [17]","We are currently reviewing these arrangements and engaging with taxpayers who have entered into, or are considering entering into these arrangements. Compliance activity and engagement will continue and we are developing our technical position on the arrangements. | Taxpayers and advisors who enter into these types of arrangements will be subject to increased scrutiny.","If you have entered into, or are contemplating entering into, an arrangement of this type, we recommend you seek independent professional advice, review your arrangements and discuss your situation with us by emailing PGIAdvice@ato.gov.au | Date of Issue: 13 February 2018 | Date of Effect: | [1] The Australian taxpayer may be an individual, a superannuation fund, a managed investment trust or other trust or fund. | [2] For simplicity, this Taxpayer Alert will refer to dividends, but it may relate to distributions more generally. Also, because of their fungibility, references to shares include identical shares. | [3] The Supplier will typically be licensed to deal in securities. There may be more than one Supplier in the arrangement, in which case the Suppliers may be related parties or may act as counterparties in additional transactions connected with the arrangement. | [4] Generally, in a standard securities lending transaction, one party (the borrower) borrows shares from another party (the lender) in exchange for a promise to return identical shares on a specified date, usually less than 12 months in the future. Collateral is provided by the borrower to the lender to protect the lender from the borrower failing to perform their promise in the future. As the requirement to redeliver is independent of the price of the underlying property, the market risk in respect of any price changes of the underlying property is still borne by the lender. A borrower in a standard securities lending transaction would not usually be capable of receiving imputation benefits from dividends paid on the borrowed securities, because the borrower would not be a qualified person in relation to those dividends for the purposes of Division IA of former Part IIIAA of the ITAA 1936, as required by paragraph 207-145(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997). | [5] If a trader has sold securities short, it can borrow those securities in order to fulfil its settlement obligation in the securities settlement system. In Australia, this requires the seller be in possession of securities to deliver to the buyer three days after trade date. | [6] The taxpayer typically holds the additional shares for approximately 55 days. | [7] The securities lending transaction may be replaced by a number of alternative transactions, which together have broadly the same overall effect. For example, a securities lending transaction may be entered into by the Investor with another party (an Intermediary Supplier). The Intermediary Supplier then sells the shares to the Supplier and enters into a forward contract to reacquire equivalent shares from the Supplier on a cum-dividend basis at a future date. In other words, the Supplier may engage with other parties to provide the Investor with all of the necessary elements of the transaction. Despite this, all of the elements are still entered into as part of the one overall arrangement. | [8] This is regarded to be a European Option. | [9] Investor A can fund the return of the $100 cash collateral in many different ways - this is just one example of how it may occur. | [10] Borrowing shares from non-residents over the dividend period is generally less expensive as non-residents do not require gross-up for franking credits when a dividend equivalence payment is made. | [11] The Supplier can source the XYZ shares in a number of ways including repurchase agreements or equivalent buy and sell transactions. | [12] The share trade is settled on record date. | [13] Alternatively, Investor A will be under an obligation to pay a dividend equivalence payment, and potentially a franking credit equivalence payment, to the counterparty to the securities lending arrangement if the borrowed shares are not returned on a cum-dividend basis. | [14] The steps taken at ex-dividend date are similar to the example provided in Taxation Determination TD 2014/10 Income tax: can section 177EA of the Income Tax Assessment Act 1936 apply to a 'dividend washing' scheme of the type described in this Taxation Determination? | [15] The share trade is settled on record date. | [16] The difference between the ex-dividend selling price of XYZ shares and the cum-dividend purchase price of XYZ shares should closely approximate the dividend. However, especially when cum-dividends shares are sourced from the special market, the difference between the ex-dividend selling price and the cum-dividend purchase price is typically greater than the amount of the dividend. | [17] However, instead of utilising the 'Special Market' to source replacement shares on a cum-dividend basis to derive additional franked dividends, the taxpayer in this example is utilising the Special Market to source shares to fulfil their obligation to return cum-dividend shares to Supplier B, having already received franked dividends on the additional XYZ shares it acquired at the start of the arrangement and sold ex-dividend. In other words, what could effectively be regarded as the 'washed interest' in this case is instead used by the taxpayer to both claim franking credits and settle the obligation to return the XYZ shares under the initial securities lending arrangement. As such, no corresponding franked distribution is made to the taxpayer or a connected entity for the purposes of paragraph 207-157 of the ITAA 1997. However, in this arrangement, the taxpayer is able to generate franked dividends in excess of their existing shareholding, at no or normal additional economic exposure. | Related Rulings/Determinations: TD 2003/32 TD 2014/10 | Related Practice Statements: PS LA 2008/15 | Legislative References: ITAA 1936 ITAA 1936 Pt IIIAA Div 1A ITAA 1936 160APHH(8) ITAA 1936 26BC ITAA 1936 177EA ITAA 1997 ITAA 1997 207-145(1)(a) ITAA 1997 207-157 TAA 1953 TAA 1953 Div 290 Sch 1 | ATO contact officer: Chris Magee Business Line: Tax Counsel Network Phone: (02) 9374 8373",PS LA 2008/15 | TD 2003/32 | TD 2014/10 | ITAA 1936 | ITAA 1936 26BC | ITAA 1936 177EA | ITAA 1997 | ITAA 1997 207-145(1)(a) | ITAA 1997 207-157 | TAA 1953 | TAA 1953 Div 290 Sch 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20181/NAT/ATO/00001,
TA 2018/2,Mischaracterisation of activities or payments in connection with intangible assets,20 November 2018,Current,,"We are currently reviewing international arrangements that mischaracterise intangible assets [1] and/or activities or conditions connected with intangible assets. | Our concerns include whether intangible assets have been appropriately recognised for Australian tax purposes and whether Australian royalty withholding tax obligations have been met. Arrangements that allocate all consideration to tangible goods and/or services, arrangements that allocate no consideration to intangible assets, and arrangements that view intangible assets collectively, or conceal intangible assets, may be more likely to result in a mischaracterisation. | Where arrangements are between related parties, we are concerned about whether the: • amount deducted by the Australian entity under the arrangement meets the arm's length requirements of the transfer pricing provisions in the taxation law [2] • functions performed, assets used and risked assumed by the Australian entity, in connection with the arrangement, are appropriately compensated in accordance with the arm's length requirements of the transfer pricing provisions in the taxation law. | • amount deducted by the Australian entity under the arrangement meets the arm's length requirements of the transfer pricing provisions in the taxation law [2] • functions performed, assets used and risked assumed by the Australian entity, in connection with the arrangement, are appropriately compensated in accordance with the arm's length requirements of the transfer pricing provisions in the taxation law. | These arrangements typically display most, if not all, of the following features: • intangible assets are developed, maintained, protected or owned by an entity located in a foreign jurisdiction (an 'IP entity') • the Australian entity enters into an arrangement to undertake an activity or a combination of activities • the Australian entity requires the use of the relevant intangible assets in order to undertake these activities • the Australian entity purchases goods and/or services from an IP entity or a foreign associate of an IP entity in order to undertake these activities • the Australian entity agrees to pay an amount, or a series of amounts, to a foreign entity which the Australian entity does not recognise or treat as wholly or partly being for the use of an IP entity's intangible assets. | • intangible assets are developed, maintained, protected or owned by an entity located in a foreign jurisdiction (an 'IP entity') • the Australian entity enters into an arrangement to undertake an activity or a combination of activities • the Australian entity requires the use of the relevant intangible assets in order to undertake these activities • the Australian entity purchases goods and/or services from an IP entity or a foreign associate of an IP entity in order to undertake these activities • the Australian entity agrees to pay an amount, or a series of amounts, to a foreign entity which the Australian entity does not recognise or treat as wholly or partly being for the use of an IP entity's intangible assets. | This Taxpayer Alert (Alert) does not apply to international arrangements which involve an incidental use of an intangible asset. For example, this Alert does not apply to resellers of finished tangible goods where the activity of reselling the goods involves an incidental use of a brand name that appears on the goods and related packaging. Whether a use is incidental in this sense will depend on an analysis of the true relationship and activities of the parties. The fact that an arrangement fails to expressly provide for the use of an intangible asset does not, in itself, determine that a use is incidental.","An Australian company (AusCo) is party to an agreement with a foreign company (ForCo). | The terms of the agreement provide that AusCo will acquire from ForCo: • the right to manufacture, market and distribute certain products in the territory of Australia • manufacturing know how, including secret formulas or processes • a right to use trademarks • tangible goods such as raw materials used in the manufacturing process. | • the right to manufacture, market and distribute certain products in the territory of Australia • manufacturing know how, including secret formulas or processes • a right to use trademarks • tangible goods such as raw materials used in the manufacturing process. | AusCo: • applies the manufacturing know how and tangible goods in the process of manufacturing the product • uses the trademarks in marketing and distributing the finished product in Australia. | • applies the manufacturing know how and tangible goods in the process of manufacturing the product • uses the trademarks in marketing and distributing the finished product in Australia. | The terms of the agreement provide that AusCo pays a single undivided amount of consideration to ForCo which is stated to be solely for tangible goods. | AusCo and ForCo do not recognise any part of the amount paid by AusCo to ForCo as being consideration for AusCo's use of ForCo's trademarks and manufacturing know how. AusCo and ForCo do not recognise any part of the amount paid by AusCo to ForCo as a royalty. AusCo does not pay any royalty withholding tax on the relevant amount. | This characterisation may not appropriately recognise the exploitation of relevant intangible assets or the functions performed and risks assumed in connection with those intangible assets. | An Australian company (AusCo) is party to an agreement with a related foreign company (ForCo). | The terms of the agreement provide that AusCo: • is granted the right to manufacture, market and distribute certain products in the territory of Australia • is obliged to manufacture, market and distribute the relevant products in accordance with the directions of ForCo • agrees to purchase tangible goods from another foreign company (SupplyCo) which may not be a related party, under a separate contractual arrangement. | • is granted the right to manufacture, market and distribute certain products in the territory of Australia • is obliged to manufacture, market and distribute the relevant products in accordance with the directions of ForCo • agrees to purchase tangible goods from another foreign company (SupplyCo) which may not be a related party, under a separate contractual arrangement. | Pursuant to the agreement, ForCo is to provide management services to AusCo to assist with the manufacturing, marketing and distribution activities undertaken by AusCo. | ForCo maintains, protects and owns certain intangible assets being trademarks, copyright and formulas/processes associated with the products that AusCo has been granted the right to manufacture, market and distribute. | The agreement between AusCo and ForCo does not grant AusCo the right to use the relevant intangible assets. The terms of agreement provide that AusCo pays a single undivided amount of consideration to ForCo for management services. | ForCo grants IP Company (IPCo), a related party, exclusive use of the relevant trademarks, copyright and formulas/processes in the territory of Australia. IPCo is not a resident of Australia. | AusCo: • pays SupplyCo an amount for the tangible goods; the amount paid by AusCo to SupplyCo is determined by ForCo • applies the trademarks and formulas/processes exclusively licensed to IPCo, and the tangible goods purchased from SupplyCo, in the process of manufacturing the products • uses the copyright and trademarks exclusively licensed to IPCo in marketing and distributing the finished products in the territory of Australia. | • pays SupplyCo an amount for the tangible goods; the amount paid by AusCo to SupplyCo is determined by ForCo • applies the trademarks and formulas/processes exclusively licensed to IPCo, and the tangible goods purchased from SupplyCo, in the process of manufacturing the products • uses the copyright and trademarks exclusively licensed to IPCo in marketing and distributing the finished products in the territory of Australia. | IPCo does not enter into an agreement with AusCo, or any other party, granting the right to exploit the relevant intangible assets in the territory of Australia. | It is implicit from AusCo's activities and dealings with ForCo and SupplyCo that, in substance, AusCo is entitled to use the relevant intangible assets that have been exclusively licensed to IPCo in the territory of Australia. AusCo, ForCo and SupplyCo do not recognise any part of the amounts paid by AusCo to ForCo or SupplyCo as being consideration for AusCo's use of IPCo's trademarks, copyright and formulas/processes. AusCo, ForCo and Supply Co do not recognise any part of the amount paid as a royalty. AusCo does not pay any royalty withholding tax on the relevant amount. | The characterisation and remuneration of AusCo may not appropriately recognise the exploitation of the relevant intangible assets or the functions performed, assets used and risks assumed in connection with those intangible assets.","We are concerned that parties to arrangements of the type described in this Alert may fail to comply with Australian royalty withholding tax obligations associated with consideration for the use of intangible assets, under Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). Parties may mischaracterise an undivided amount of consideration, or part thereof, as not being for the use of intangible assets, and may not recognise a royalty. Additionally, parties may be claiming deductions for such payments contrary to section 26-25 of the ITAA 1997. | We are also concerned that the analysis or methodology relied on to determine the arm's length conditions and/or profits connected with arrangements of the type considered in this Alert may result in parties obtaining a transfer pricing benefit. This transfer pricing benefit occurs due to a mischaracterisation of the functions performed, assets used and risks assumed by the Australian entity. In these circumstances, Division 815 of the ITAA 1997 may apply to negate such transfer pricing benefits. | In this Alert, royalty refers to the definition of 'royalty' found in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or the definition of 'royalty' or 'royalties' found in any applicable Australian tax treaty. [3] | We are concerned that arrangements of this type may be entered into or carried out for the dominant or principal purpose of obtaining a tax benefit. This may attract the operation of the general anti-avoidance rules in Part IVA of the ITAA 1936 and/or the application of the diverted profits tax. [4]","We are currently reviewing these arrangements and engaging with taxpayers who have entered into, or are considering entering into, these arrangements. Compliance activity and engagement will continue as we develop our technical position on these arrangements. | Taxpayers and advisors who enter into these types of arrangements will be subject to increased scrutiny.","If you have entered into, or are contemplating entering into, an arrangement of this type we encourage you to discuss your situation with us by emailing PGIAdvice@ato.gov.au . | Penalties may apply to participants and promoters of this type of arrangement. | Commissioner of Taxation | Date of Issue: 20 November 2018 | Date of Effect: N/A | [1] Intangible assets being property, assets and rights that are not physical assets or financial assets, which are capable of being controlled for use in commercial activities as defined in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 at Chapter VI : Intangibles paragraph 6.6, including trademarks, copyright, designs, know how, patents, secret formulas or processes, or similar property or rights. | [2] As defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). | [3] For example, paragraph (3) of Article 12 of the Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains in force 17 December, given the force of law in Australia under section 5 of the International Tax Agreements Act 1953 . | [4] Further information concerning the application of the diverted profits tax to cross border arrangements in connection with intangible assets is available in Practical Compliance Guideline PCG 2018/5 Diverted profits tax . | Related Practice Statements: PS LA 2008/15 | Other References: PCG 2018/5 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains | Legislative References: ITAA 1936 Pt IVA 6(1) ITAA 1997 26-25 Div 815 995-1 TAA 1953 TAA 1953 5 TAA 1953 Subdiv 12-F Sch 1 | Contact officer: Christopher Ferguson Email address: PGIIntangiblesMigration@ato.gov.au Address: Australian Taxation Office GPO Box 9977 MELBOURNE VIC 3001",PS LA 2008/15 | PCG 2018/5 | ITAA 1936 | Pt IVA | 6(1) | ITAA 1997 | 26-25 | Div 815 | 995-1 | TAA 1953 | TAA 1953 5 | TAA 1953 Subdiv 12-F Sch 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20182/NAT/ATO/00001,
TA 2018/3,GST implications of certain development lease arrangements,26 November 2018,Current,"We are currently reviewing arrangements involving property developers acquiring land from government entities, specifically where the developer purportedly provides certain development works to the government entity as payment for the land. | There are instances where the developer and the government entity are not reporting the value of their supplies under these arrangements in a consistent manner, resulting in the underpayment of GST.",In property development arrangements of this type the parties to the arrangement each agree to provide things of equal value to each other. The 'things' provided may be money and/or development works in exchange for the supply of land. | We are concerned about arrangements that involve the following features:,"• The government entity agrees to supply land to a property developer. The agreement requires the developer to pay an amount of money, and also requires the developer to do certain development works, as payment for the supply of the land. • The developer pays the amount of money to the government entity. • The government entity may grant the developer a short term lease, or licence, to allow the developer to complete the development works on the land. • Upon completion of the development works the developer invoices the government entity for the value (inclusive of GST) of those development works. • The government entity supplies the land to the developer by granting the developer a long term lease, or transferring title, over the land. • When reporting their GST obligations in their activity statements (a) The government entity claims an input tax credit for the amount of GST included on the invoice received from the developer for the supply of development works. However, the government entity only reports the monetary payment received for the land, without reporting the value of the development works provided by the developer as payment for the land. This results in the government entity under-paying GST on the supply of land, whilst receiving the benefit of the input tax credit relating to the development works. (b) The developer does not report the supply of the development works it invoiced to the government entity. This results in the developer not paying GST on the development works provided to the government entity, despite having claimed input tax credits on all the acquisitions it used in completing those development works. (c) Additionally, the developer may include the value of all the development works completed on the land (including the development works invoiced to the government entity), in the cost of the development when applying the 'margin scheme'. This significantly reduces the amount of GST that the developer pays on their supply of the property (as vacant land or a residential unit) to a customer. | • The government entity agrees to supply land to a property developer. The agreement requires the developer to pay an amount of money, and also requires the developer to do certain development works, as payment for the supply of the land. • The developer pays the amount of money to the government entity. • The government entity may grant the developer a short term lease, or licence, to allow the developer to complete the development works on the land. • Upon completion of the development works the developer invoices the government entity for the value (inclusive of GST) of those development works. • The government entity supplies the land to the developer by granting the developer a long term lease, or transferring title, over the land. • When reporting their GST obligations in their activity statements (a) The government entity claims an input tax credit for the amount of GST included on the invoice received from the developer for the supply of development works. However, the government entity only reports the monetary payment received for the land, without reporting the value of the development works provided by the developer as payment for the land. This results in the government entity under-paying GST on the supply of land, whilst receiving the benefit of the input tax credit relating to the development works. (b) The developer does not report the supply of the development works it invoiced to the government entity. This results in the developer not paying GST on the development works provided to the government entity, despite having claimed input tax credits on all the acquisitions it used in completing those development works. (c) Additionally, the developer may include the value of all the development works completed on the land (including the development works invoiced to the government entity), in the cost of the development when applying the 'margin scheme'. This significantly reduces the amount of GST that the developer pays on their supply of the property (as vacant land or a residential unit) to a customer. | (a) The government entity claims an input tax credit for the amount of GST included on the invoice received from the developer for the supply of development works. However, the government entity only reports the monetary payment received for the land, without reporting the value of the development works provided by the developer as payment for the land. This results in the government entity under-paying GST on the supply of land, whilst receiving the benefit of the input tax credit relating to the development works. (b) The developer does not report the supply of the development works it invoiced to the government entity. This results in the developer not paying GST on the development works provided to the government entity, despite having claimed input tax credits on all the acquisitions it used in completing those development works. (c) Additionally, the developer may include the value of all the development works completed on the land (including the development works invoiced to the government entity), in the cost of the development when applying the 'margin scheme'. This significantly reduces the amount of GST that the developer pays on their supply of the property (as vacant land or a residential unit) to a customer. | • The government entity agrees to supply land to a developer in return for the developer paying an amount of money. The agreement does not require the developer to provide any works to the government entity as payment for the supply of the land. • The developer pays the amount of money and the government entity supplies the land to the developer by granting a long term lease, or transferring title, over the land. • Upon completion of the development, without the knowledge or agreement of the government entity, the developer includes the value of all the development works completed on the land in the cost of the development when applying the 'margin scheme'. The developer contends that the development works were provided to the government entity more than four years earlier, despite the developer never invoicing the government entity for the works or reporting the supply in their activity statement. By including the value of the development works in the cost of the development when applying the margin scheme, the developer significantly reduces the amount of GST that they pay on their supply of the property (as vacant land or a residential unit) to a customer. This means the developer does not pay GST on the value of all their development work, despite having claimed input tax credits on all the acquisitions it used in completing those development works. • In some instances, the developer may change the supplies that they have previously reported in their activity statements in order to reduce the amount of GST payable on their supply of property to customers. | • The government entity agrees to supply land to a developer in return for the developer paying an amount of money. The agreement does not require the developer to provide any works to the government entity as payment for the supply of the land. • The developer pays the amount of money and the government entity supplies the land to the developer by granting a long term lease, or transferring title, over the land. • Upon completion of the development, without the knowledge or agreement of the government entity, the developer includes the value of all the development works completed on the land in the cost of the development when applying the 'margin scheme'. The developer contends that the development works were provided to the government entity more than four years earlier, despite the developer never invoicing the government entity for the works or reporting the supply in their activity statement. By including the value of the development works in the cost of the development when applying the margin scheme, the developer significantly reduces the amount of GST that they pay on their supply of the property (as vacant land or a residential unit) to a customer. This means the developer does not pay GST on the value of all their development work, despite having claimed input tax credits on all the acquisitions it used in completing those development works. • In some instances, the developer may change the supplies that they have previously reported in their activity statements in order to reduce the amount of GST payable on their supply of property to customers.","We are concerned about arrangements where the developer and the government entity do not report the value of their supplies in a consistent manner, resulting in the underpayment of GST. In some instances this may arise because the value of the development works has not been agreed between the government entity and developer, or the supply is not reported until GST can no longer be recovered due to the statutory time limits for amending activity statements. | The contractual obligations that arise under an agreement are binding on both parties and the whole of the arrangement must be examined to ensure that all supplies and acquisitions are correctly accounted for under the A New Tax System (Goods and Services Tax) Act 1999 and the Income Tax Assessment Act 1997 . | Whether development work is required as payment for the supply of the land will turn on the specific terms of each arrangement. An attempt to treat all of the development or building works completed on the land as being payment for the supply of the land, where this is not supported by the contractual agreement between the parties, will incorrectly reduce the GST payable on the supply of property.","We are engaging with taxpayers and government entities to examine the issues of concern and ensure that all parties have correctly accounted for their GST and income tax obligations. In situations where there is a change in how the arrangement is accounted for, after the fact, so as to gain an advantage due to the lapse of the statutory periods for amending activity statements, the fraud or evasion provisions may be considered. | Taxpayers who adopt these types of arrangements and their advisors will be subject to increased scrutiny from the ATO. | Penalties may apply to participants and promoters of these types of arrangements.","You should consider whether our concerns apply to you. If you are considering, or have entered into, a similar arrangement to that described in this Alert, we encourage you to do one of the following: • Phone us at the contact details provided below. • Email us at GSTmail@ato.gov.au (for GST queries). • Ask the ATO for our view by applying for a private ruling. • Seek independent advice as to the legal and tax consequences of your arrangement. | • Phone us at the contact details provided below. • Email us at GSTmail@ato.gov.au (for GST queries). • Ask the ATO for our view by applying for a private ruling. • Seek independent advice as to the legal and tax consequences of your arrangement. | Penalties may apply if you have incorrectly reported your GST or income tax obligations in relation to an arrangement but will be significantly reduced if you contact us and make a voluntary disclosure. Generally, the reduction is greater if you make the disclosure before we notify you of an examination of your tax affairs. | If you are a registered tax agent or tax advisor who has been involved in the promotion of these arrangements, you may be perceived to be a 'promoter' of a scheme. We encourage you to engage with the ATO per the advice above.",GSTD 2021/1 | GSTR 2015/2 | PS LA 2008/15 | A New Tax System (Goods and Services Tax) Act 1999 | Income Tax Assessment Act 1936,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20183/NAT/ATO/00001,"The ATO view on the GST treatment of development arrangements in the ACT carried out by private developers on land acquired under a long-term Crown lease is set out in Goods and Services Tax Determination GSTD 2021/1 Goods and services tax: development works in the Australian Capital Territory . Development arrangements between a private developer and a government entity outside of the ACT are dealt with in Goods and Services Tax Ruling GSTR 2015/2 Goods and services tax: development lease arrangements with government agencies. This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | Updated ATO tip-off hotline number | Linda.Griffiths@ato.gov.au | Australian Taxation Office PO Box 9977 NEWCASTLE NSW 2300"
TA 2018/4,Accrual deductions and deferral or avoidance of withholding tax,20 December 2018,Current,,"We are reviewing the implementation of a variety of cross-border arrangements where income tax deductions are claimed in Australia on an accruals basis under Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997) [1] but withholding tax is not paid when deductions are claimed. | Relevant arrangements typically display the following features: (a) Funds are provided by a non-resident entity to a related [2] resident entity pursuant to a financial arrangement. The legal form of the arrangement may vary; to date, we have seen loans and redeemable preference shares. (b) Funds provided are repayable at the end of the term of the financial arrangement, and a return is calculated on the funds provided. (c) Entitlement to interest is deferred, including where it is payable at the end of the term of the financial arrangement. (d) The way in which the arrangement is structured or carried out raises one of the concerns set out below. | (a) Funds are provided by a non-resident entity to a related [2] resident entity pursuant to a financial arrangement. The legal form of the arrangement may vary; to date, we have seen loans and redeemable preference shares. (b) Funds provided are repayable at the end of the term of the financial arrangement, and a return is calculated on the funds provided. (c) Entitlement to interest is deferred, including where it is payable at the end of the term of the financial arrangement. (d) The way in which the arrangement is structured or carried out raises one of the concerns set out below.",,"We are concerned about: • tax-driven structuring to produce a current deduction but deferral of withholding tax. • claiming a deduction where payment is not expected to take place, or, when the return is paid, it is not expected to trigger a withholding tax liability. • tax issues that arise from how the transaction is effected, including whether - a liability for withholding tax arises because interest, though not paid, is dealt with on behalf of the non-resident or as the non-resident directs [3] - a loss is sufficiently certain under Division 230 - the arrangement is an equity interest under Division 974 - reassessment is triggered under Division 230 - a balancing adjustment arises under Division 230 - the commercial debt forgiveness provisions apply, or, where a forgiveness would give rise to ordinary income, subsection 230-15(1) applies [4] - the anti-avoidance provisions apply - the promoter penalty laws in Division 290 of Schedule 1 to the Taxation Administration Act 1953 apply to promoters of this arrangement. | • tax-driven structuring to produce a current deduction but deferral of withholding tax. • claiming a deduction where payment is not expected to take place, or, when the return is paid, it is not expected to trigger a withholding tax liability. • tax issues that arise from how the transaction is effected, including whether - a liability for withholding tax arises because interest, though not paid, is dealt with on behalf of the non-resident or as the non-resident directs [3] - a loss is sufficiently certain under Division 230 - the arrangement is an equity interest under Division 974 - reassessment is triggered under Division 230 - a balancing adjustment arises under Division 230 - the commercial debt forgiveness provisions apply, or, where a forgiveness would give rise to ordinary income, subsection 230-15(1) applies [4] - the anti-avoidance provisions apply - the promoter penalty laws in Division 290 of Schedule 1 to the Taxation Administration Act 1953 apply to promoters of this arrangement. | - a liability for withholding tax arises because interest, though not paid, is dealt with on behalf of the non-resident or as the non-resident directs [3] - a loss is sufficiently certain under Division 230 - the arrangement is an equity interest under Division 974 - reassessment is triggered under Division 230 - a balancing adjustment arises under Division 230 - the commercial debt forgiveness provisions apply, or, where a forgiveness would give rise to ordinary income, subsection 230-15(1) applies [4] - the anti-avoidance provisions apply - the promoter penalty laws in Division 290 of Schedule 1 to the Taxation Administration Act 1953 apply to promoters of this arrangement. | What arrangements are we not concerned with? | We are not concerned with the mere fact that a deduction is claimed on an accruals basis under Division 230 while the corresponding withholding tax liability arises on entitlement to interest. To be seen as low risk, the taxpayer should be able to convincingly demonstrate, with evidence, that deferral of the entitlement to interest is driven by commercial non-tax factors [5] , and withholding tax is paid when the entitlement becomes due. | The more artificial the form of the instrument, and the less it reflects the natural commercial relationship between the parties, the more likely it is to be approached by us as high risk. | Tax issues | A taxpayer cannot claim deductions on an accruals basis under Subdivision 230-B if there is not a sufficiently certain loss within section 230-100. In deciding whether a loss is sufficiently certain, it is necessary to have regard to the commercial substance of the arrangement. [6] Furthermore, the accruals method does not apply if the arrangement is an equity interest. [7] | The return on the relevant arrangements may be capitalised or accrued. Liability for withholding tax will arise prior to actual payment where the interest is reinvested, accumulated, capitalised, carried to any reserve however designated, or otherwise dealt with on behalf of the non-resident or as the non-resident directs, under subsection 128A(2) of the ITAA 1936. There may be arrangements in which what is termed 'accrual' of interest has the same effect as capitalisation for the purposes of subsection 128A(2). The obligation to withhold arises when there is a withholding tax liability. Section 26-25 denies an accrual deduction if withholding tax has not been withheld and paid in these circumstances. | In some cases, key terms of the financial arrangement are subsequently varied. For example, the terms of a loan may be varied such that there is no obligation to repay the principal or the return, or the arrangement becomes an equity interest. This may indicate that the debt does not continue to exist, triggering the commercial debt forgiveness rules in Division 245 or giving rise to a gain (which has the character of income according to ordinary concepts) that is assessable under subsection 230-15(1). This feature may also indicate that a balancing adjustment has been triggered under section 230-435 or that a reassessment has been triggered under section 230-185. | In appropriate cases, Part IVA of the ITAA 1936 may apply, not limited to, but including, where there is a subsequent variation of the arrangement or the return is never paid. | Where the arrangement is varied, particularly in a way that has significant tax implications, we will review the arrangement and variation closely to determine whether that variation or similar was under serious contemplation from the commencement of the arrangement, and whether the arrangement should be treated from conception as incorporating the variation. In extreme cases, a subsequent 'variation' which was always intended to occur may not only go to the tax treatment of the arrangement, but also to whether the true arrangement has been obscured from the Commissioner.","We are currently reviewing these arrangements and engaging with taxpayers who have entered into, or are considering entering into these arrangements. Compliance activity and engagement will continue and we are developing our technical position on the facts and circumstances of each arrangement. | Taxpayers and advisors who enter into these types of arrangements will be subject to increased scrutiny.","If you have entered, or are contemplating entering into, an arrangement of this type, we recommend you seek independent professional advice. We also encourage you to: • discuss your situation with us by emailing Top1000program@ato.gov.au , or • contact the officer named in this Alert. | • discuss your situation with us by emailing Top1000program@ato.gov.au , or • contact the officer named in this Alert. | Commissioner of Taxation | © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). | Date of Issue: 20 December 2018 | Date of Effect: N/A | [1] All legislative references are to the ITAA 1997 unless otherwise specified. | [2] For this purpose, a 'related entity' includes both an entity which is a 'connected entity' of the other entity, and, where the funds are provided by an entity other than a retail investor, there is any level of ownership between the entities, or by another party in each of the entities. | [3] In accordance with subsection 128A(2) of the Income Tax Assessment Act 1936 (ITAA 1936). | [4] Under paragraph 245-85(1)(a) the gross forgiven amount is reduced by the amount that would be assessable pursuant to section 6-5, so, if the net forgiven amount is nil, any gain from a financial arrangement (included in assessable income under subsection 230-15(1)) will not be reduced under paragraph 230-470(b). | [5] An example of this situation might be where finance was provided for a project that was not expected to generate revenue during a construction phase. | [6] See section 230-115. | [7] See paragraph 230-40(4)(e). | Related Practice Statements: PS LA 2008/15 | Legislative References: ITAA 1936 ITAA 1936 128A(2) ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 6-5 ITAA 1997 26-25 ITAA 1997 Div 230 ITAA 1997 Subdiv 230-B ITAA 1997 230-15(1) ITAA 1997 230-40(4)(e) ITAA 1997 230-100 ITAA 1997 230-115 ITAA 1997 230-185 ITAA 1997 230-435 ITAA 1997 230-470(b) ITAA 1997 Div 245 ITAA 1997 245-85(1)(a) ITAA 1997 Div 974 TAA 1953 TAA 1953 Div 290 Sch 1 | Contact officer: Karen Price Email address: karen.price@ato.gov.au Phone: (02) 9374 1782",PS LA 2008/15 | ITAA 1936 | ITAA 1936 128A(2) | ITAA 1936 Pt IVA | ITAA 1997 | ITAA 1997 6-5 | ITAA 1997 26-25 | ITAA 1997 Div 230 | ITAA 1997 Subdiv 230-B | ITAA 1997 230-15(1) | ITAA 1997 230-40(4)(e) | ITAA 1997 230-100 | ITAA 1997 230-115 | ITAA 1997 230-185 | ITAA 1997 230-435 | ITAA 1997 230-470(b) | ITAA 1997 Div 245 | ITAA 1997 245-85(1)(a) | ITAA 1997 Div 974 | TAA 1953 | TAA 1953 Div 290 Sch 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20184/NAT/ATO/00001,
TA 2017/1,Re-characterisation of income from trading businesses,31 January 2017,Current,,"We are reviewing arrangements which attempt to fragment integrated trading businesses in order to re-characterise trading income into more favourably taxed passive income. Our concern arises where a single business is divided in a contrived way into separate businesses. The income that might be expected to be subject to company tax is artificially diverted into a trust where, on distribution from the trust, that income is ultimately subject to no tax or a lesser rate than the corporate rate of tax. | These arrangements have the potential to erode the corporate tax base, particularly where they are promoted to overseas investors as a way to acquire tax advantages in Australia. | Stapled structures are one mechanism being used in these arrangements, but our concerns are not limited to arrangements involving stapled structures. For simplicity, when we describe these arrangements: • Operating Entity is a company or corporate tax entity which carries on a trading business, is subject to tax at the corporate tax rate and claims a deduction in respect of payments it makes to Asset Trust, and • Asset Trust is purportedly a flow-through trust under Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) with the result that, generally, the income received by or through Asset Trust is purportedly subject to a rate of tax much lower than the corporate rate. | • Operating Entity is a company or corporate tax entity which carries on a trading business, is subject to tax at the corporate tax rate and claims a deduction in respect of payments it makes to Asset Trust, and • Asset Trust is purportedly a flow-through trust under Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) with the result that, generally, the income received by or through Asset Trust is purportedly subject to a rate of tax much lower than the corporate rate. | Transactions/structures to which this Alert does not apply | This Alert does not extend to an Australian real estate investment trust (A-REIT) which derives all or most of its rental income from unrelated third party tenants and which has not entered into any of the arrangements discussed in this Alert. | This Alert does not extend to privatisations of businesses which are effectively land (and land improvement) based or heavily reliant on particular land holdings and related improvements. | This Alert ceases to apply in relation to cross staple arrangements subject to the operation of the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax and Other Measures) Act 2019 (stapled structures law). The stapled structures law relevantly addresses certain cross staple rental arrangements. | We recognise there are businesses ('third party use of building' businesses) operated through a stapled structure where: • Asset Trust leases buildings of a traditional real estate nature to Operating Entity • Operating Entity makes those buildings available for use (typically as a dwelling) by independent end-users, albeit not in the form of a lease (such as a temporary licence to occupy the dwelling), and • a common observable market or practice already exists in that industry for building owners like Asset Trust to lease those types of buildings to unrelated third parties to carry on the same type of business Operating Entity carries on with the buildings. | • Asset Trust leases buildings of a traditional real estate nature to Operating Entity • Operating Entity makes those buildings available for use (typically as a dwelling) by independent end-users, albeit not in the form of a lease (such as a temporary licence to occupy the dwelling), and • a common observable market or practice already exists in that industry for building owners like Asset Trust to lease those types of buildings to unrelated third parties to carry on the same type of business Operating Entity carries on with the buildings. | We encourage taxpayers considering stapled structures for these types of businesses to engage with us. Generally, where we see such businesses, our concern will focus on the arrangements between entities within the stapled structure (such as ensuring Operating Entity retains a sufficient share of the profits), rather than the stapled structure itself.",,"Stapled structures have been used in the tax system for many years, generally in the commercial property investment sector. In traditional stapled structures, separate businesses that are capable of being operated entirely independently are combined. Cross-staple dealings tend to be immaterial compared to the core business operations of each entity and most significantly, Asset Trust receives all or most of its income, such as rent, from unrelated third party tenants in respect of its discrete passive investment activities. Like any business, these structures have general tax compliance issues to consider but the use of the stapled structure itself is not something we are concerned with. | The structures of concern in this Alert attempt to fragment an integrated trading business in order to re-characterise trading income into more favourably taxed passive income. The re-characterised income is diverted to a flow-through trust with the result that: • Asset Trust is assessed on a flow-through basis (that is, usually not taxed) • distributions from Asset Trust may be ultimately subject to taxation at a rate of commonly between 0 to 30%, and • although Operating Entity would be taxed at the corporate rate of tax, it is unlikely to have significant taxable income, largely because of deductions in respect of the payments to Asset Trust. | • Asset Trust is assessed on a flow-through basis (that is, usually not taxed) • distributions from Asset Trust may be ultimately subject to taxation at a rate of commonly between 0 to 30%, and • although Operating Entity would be taxed at the corporate rate of tax, it is unlikely to have significant taxable income, largely because of deductions in respect of the payments to Asset Trust. | But for these structures, it would be reasonable to expect the trading income to form part of the taxable income of a corporately taxed entity. | We are reviewing the effectiveness of these arrangements under the substantive provisions of the income tax legislation, applying to Asset Trust, Operating Entity and investors into these entities. Even if they are effective under the substantive provisions, we are concerned these arrangements are being entered into or carried out for the dominant purpose of obtaining a tax benefit. This might attract the operation of the anti-avoidance rule in Part IVA of the ITAA 1936.","We are engaging more closely with taxpayers who have proposed these arrangements to explore the issues of concern and ensure that arrangements of the type outlined above do not seek to avoid the payment of corporate tax. Taxpayers and advisors who implement these types of arrangements will be subject to increased scrutiny. | We are continuing to develop our technical position on these arrangements and expect to issue further guidance in respect of our concerns. | We are also seeking to develop public guidance for particular industries of the type described under rental staples, where the focus will be on cross staple transactions rather than the stapled structure itself.","We discourage taxpayers from entering into arrangements of these types. | If you are planning to enter or have entered into arrangements of these types we recommend you seek independent professional advice, review your arrangements and discuss your situation with us by emailing PGIAdvice@ato.gov.au | Date of amendment Part Comment 5 February 2020 Transactions/structures which this Alert does not apply Updated due to Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 . This legislation now addresses the mischief associated with (certain) rental staples as described in this Alert. Rental staple Updated to expressly carve out those rental staples that are caught under the new law. | Date of Issue: 31 January 2017 | Date of Effect: | Legislative References: Income Tax Assessment Act 1936 6(1) Div 6 of Part III Div 6C of Part III Part IVA Income Tax Assessment Act 1997 8-1 26-26 Div 230 Div 275 Subdiv 275-B Subdiv 275-L 275-10 Div 974 974-70 974-80 | Contact officer: Rebecca McGirr Business Line: Public Groups and International Phone: (02) 9374 2083",PS LA 2008/15 | 6(1) | Div 6 of Part III | Div 6C of Part III | Part IVA | 8-1 | 26-26 | Div 230 | Div 275 | Subdiv 275-B | Subdiv 275-L | 275-10 | Div 974 | 974-70 | 974-80,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20171/NAT/ATO/00001,"Description: There are four arrangements where we have seen this occur using stapled structures. While stapled structures are one mechanism we see regularly being adopted in these arrangements, our concerns exist even if the entities are not stapled. | 1. Finance staple: • Operating Entity carries on a business usually with external debt which would ordinarily require a certain level of equity. However, Operating Entity in fact carries much less than the expected level of equity. • Asset Trust receives trust equity from the investors as beneficiaries • Asset Trust's equity is lent to Operating Entity at interest (the cross-staple debt) • Operating Entity claims a tax deduction for the interest payments made to Asset Trust under the cross-staple debt, and • the interest is usually distributed to the investors. | • section 26-26 of the Income Tax Assessment Act 1997 (ITAA 1997) may deny deductions to Operating Entity (due to the application of sections 974-70 or 974-80), and • Asset Trust may control, or be able to control, Operating Entity for the purposes of Division 6C of Part III of the ITAA 1936. | An example of this would be where Operating Entity's continuation as a going concern is contingent on Asset Trust deciding not to exercise a right it has to trigger Operating Entity's insolvency. | 2. Synthetic equity staple: - profit-equivalent amounts to Asset Trust - turnover-equivalent amounts to Asset Trust, and/or - amounts which have a similar result as the above, in substance or effect. | • payments made under the cross-staple synthetic equity investment would not be deductible to Operating Entity under section 8-1 and/or Division 230 of the ITAA 1997 • Asset Trust may control, or be able to control, Operating Entity for the purposes of Division 6C of Part III of the ITAA 1936: An example of this would be where a cross-staple synthetic equity investment gives rights to Asset Trust that amounts to control. (If control does not arise under the investment, but Asset Trust has the primary economic exposure to the success and/or failure of Operating Entity's underlying business operations, it would be necessary to consider whether the absence of the control that would be naturally consistent with that exposure is for a tax purpose.) • where applicable, whether Asset Trust and the Investors satisfy the definition of a MIT and, consequently, the validity of any capital treatment choice under Subdivision 275-B of the ITAA 1997, and • where applicable, the cross-staple payment may be taxed as non-arm's length income under Subdivision 275-L of the ITAA 1997 on the basis the transactions entered into would not be ones that parties dealing with each other at arm's length in relation to the transactions would have entered into. | 3. Royalty staple: • Division 6C of Part III of the ITAA 1936 does not apply to Asset Trust because the investors of Asset Trust are such that Asset Trust cannot be a 'public unit trust' • Asset Trust holds assets such as intellectual property, mining tenements, industrial equipment, or other assets of a business that are purportedly capable of producing a royalty • Operating Entity pays a royalty or a purported royalty to Asset Trust • Operating Entity claims a tax deduction for the payments made to Asset Trust, and • the distributions from Asset Trust to non-resident investors are purportedly subject to royalty withholding tax (usually at a rate capped under a Treaty). | • a new business commences to be operated through this structure • an existing single business is restructured into this structure, without a change of ownership, and • the selected assets and business operations are acquired from a third party and held in this structure. | • the assets owned by Asset Trust may not be of a type in relation to which a royalty may be derived, and • even if the assets are of that type, the income Asset Trust derives may not be a royalty for the purposes of subsection 6(1) of the ITAA 1936. | 4. Rental staple: • Asset Trust owns selected assets, being assets which are usually purportedly land or a fixture on land • Operating Entity enters into one or more agreements with Asset Trust to lease or otherwise access the selected assets to enable Operating Entity to operate its business • the nature of the business is such that the transactions to divide the business in this manner are not transactions that third parties acting at arm's length would usually enter into, and it is often also the case that the business is not one capable of division in any commercially meaningful way • Operating Entity claims a tax deduction for the payments made to Asset Trust under the agreement(s), and • Asset Trust and Investors may also purportedly be a MIT under section 275-10 of the ITAA 1997. | • a new business commences to be operated through this structure • an existing single business is restructured into this structure, without a change of ownership, and • the selected assets and business operations are acquired from a third party into this structure. | The stapled structures law applies where an Asset Trust and Operating Entity have sufficient common ownership (broadly 80%), such that there is a 'cross staple arrangement'. Payments made which are attributable to the arrangement, and which are amounts in the assessable income of a MIT (this is specified as MIT cross staple arrangement income, a class of non-concessional MIT income ( NCMI )), will be subject to withholding from fund payments at a higher rate. | Hence, a MIT will no longer have access to the concessional MIT withholding rate on the basis that it is NCMI. The MIT withholding rate on fund payments attributable to NCMI will be increased to 30%. | The stapled structures law will not, however, apply where the income of the Asset Trust is not distributed through MITs or where Asset Trust and Operating Entity do not have 80% common ownership. In these cases, this Alert will continue to apply. | - the assets of Asset Trust may not constitute 'land' in the circumstances - the income Asset Trust derives may more appropriately be characterised as trading business income than rent income, and - Asset Trust may not be investing in land for the required 'purpose' where the overall structure is one which re-characterises trading business income. | As outlined in the introduction to the Alert, there will be some 'third party use of building' businesses where our concern will focus on the arrangements between entities within the stapled structure (such as ensuring Operating Entity retains a sufficient share of the profits), rather than the stapled structure itself."
TA 2017/2,Claiming the Research and Development Tax Incentive for construction activities,9 February 2017,Current,,"The ATO and AusIndustry are reviewing the arrangements of certain building and construction industry participants that are claiming the R&D Tax Incentive where some (or all) of the expenditure: • is incurred on building or construction activities which are expressly excluded from being taken into account in calculating an R&D tax offset, or • does not otherwise relate to eligible R&D activities. | • is incurred on building or construction activities which are expressly excluded from being taken into account in calculating an R&D tax offset, or • does not otherwise relate to eligible R&D activities. | The arrangements under review concern claimants of the R&D Tax Incentive who are involved in either: acquiring buildings, or extensions, alterations or improvements thereto (the acquirer); or whose business it is to construct, extend, alter or improve buildings (the builder). | These types of arrangements exhibit some or all of the following features: • A contract is entered into between the acquirer and the builder to construct, extend, alter or improve a building or buildings (construction). • The contract is a standard construction contract and is not for the provision of R&D services and does not specify that R&D will be carried out by the builder. • The acquirer or the builder registers one or more activities associated with the construction of the building for the R&D Tax Incentive, identifying the structure or construction techniques as purportedly involving untested or novel elements. • Some or all of the activities registered are broadly described and non-specific. For example, whole construction projects may be registered rather than the specific activities which are being undertaken. • Some or all of the registered activities are ordinary construction activities that are directed to fulfilling the requirements of the building or construction contract, or relate to expenditure that is expressly excluded from being taken into account in calculating an R&D Tax Incentive. • Frequently, the expenditure which is incurred relates to construction methods or techniques that are already known within the building industry, or involve the mere adaptation or integration of existing technology. • The acquirer or the builder claims the R&D Tax Incentive for expenditure that is not on eligible R&D activities, or for expenditure which is expressly excluded. | • A contract is entered into between the acquirer and the builder to construct, extend, alter or improve a building or buildings (construction). • The contract is a standard construction contract and is not for the provision of R&D services and does not specify that R&D will be carried out by the builder. • The acquirer or the builder registers one or more activities associated with the construction of the building for the R&D Tax Incentive, identifying the structure or construction techniques as purportedly involving untested or novel elements. • Some or all of the activities registered are broadly described and non-specific. For example, whole construction projects may be registered rather than the specific activities which are being undertaken. • Some or all of the registered activities are ordinary construction activities that are directed to fulfilling the requirements of the building or construction contract, or relate to expenditure that is expressly excluded from being taken into account in calculating an R&D Tax Incentive. • Frequently, the expenditure which is incurred relates to construction methods or techniques that are already known within the building industry, or involve the mere adaptation or integration of existing technology. • The acquirer or the builder claims the R&D Tax Incentive for expenditure that is not on eligible R&D activities, or for expenditure which is expressly excluded. | Background | The Australian Government supports companies that undertake eligible R&D activities through the R&D Tax Incentive. | Eligibility for the R&D Tax Incentive is based on specific R&D activities rather than on entire commercial projects. | In order to be eligible, there must be an experiment or experiments being carried out for the purpose of generating new knowledge. The outcome of the experiments cannot be able to be known or determined in advance by a competent professional in the field. The experiments being carried out must be based on principles of established science and must seek to prove whether specific technical hypotheses are right or wrong to resolve specific technical issues or risks. | Supporting activities may also be eligible if they are directly related to eligible experimental activities. It is not sufficient that these activities are related to the project more generally. Additionally, in some circumstances supporting activities must also be conducted for the dominant purpose of supporting the experimental activities. | Ordinary business activities are not generally carried out for the purpose of generating new knowledge. Such activities may include solving business problems using established products and existing knowledge, expertise or methodologies. Further, activities that produce or are directly related to producing goods or services are not usually undertaken for the dominant purpose of supporting experimental activities. | Under the R&D Tax Incentive, companies self-assess the eligibility of their activities and register through AusIndustry. Companies then claim a tax offset (the R&D Tax Incentive) for their 'notional deductions' relating to eligible expenditure through the annual company tax return. The registration of activities does not, by itself, render the activities described in a registration as eligible R&D activities for the purposes of the R&D Tax Incentive. The ATO and AusIndustry may review the eligibility of activities or expenditure after registration. | The R&D Tax Incentive claimed in a company's tax return must relate only to expenditure on eligible R&D activities. Further, certain types of expenditure are specifically excluded from being taken into account in calculating an R&D Tax Incentive claim.",,"The operators of some affected companies may believe (or have been advised) that their activities constitute eligible R&D activities. However, we are concerned that: • Activities may not fit within the stringent requirements of the laws that govern the R&D Tax Incentive. • Expenditure claimed may not relate to eligible R&D activities or may be specifically excluded from the calculation of the R&D Tax Incentive. • Taxpayers may not be applying adequate levels of governance and review to the registered activities and the claims made for the R&D Tax Incentive. | • Activities may not fit within the stringent requirements of the laws that govern the R&D Tax Incentive. • Expenditure claimed may not relate to eligible R&D activities or may be specifically excluded from the calculation of the R&D Tax Incentive. • Taxpayers may not be applying adequate levels of governance and review to the registered activities and the claims made for the R&D Tax Incentive. | Activities | We have observed a number of cases where the acquirer and/or the builder of a building have registered construction activities with AusIndustry which are, or appear to be, ineligible for the R&D Tax Incentive. The reasons these types of activities have been found to be ineligible include: • The activities are undertaken by the builder in the ordinary execution of the construction contract and are not undertaken for a significant purpose of generating new knowledge. • Project management, environmental, commercial or economic risks are mistaken for technical risks. • The activities are not experimental but rather involve solving issues by applying existing knowledge or methodologies and a suitably qualified and competent professional in the building and construction industry could have known or worked out the outcomes without conducting an experiment. For example, using and applying existing (even if they are quite new) building materials, designs, processes or modelling techniques to the local conditions or customer requirements. | • The activities are undertaken by the builder in the ordinary execution of the construction contract and are not undertaken for a significant purpose of generating new knowledge. • Project management, environmental, commercial or economic risks are mistaken for technical risks. • The activities are not experimental but rather involve solving issues by applying existing knowledge or methodologies and a suitably qualified and competent professional in the building and construction industry could have known or worked out the outcomes without conducting an experiment. For example, using and applying existing (even if they are quite new) building materials, designs, processes or modelling techniques to the local conditions or customer requirements. | Expenditure | We have also observed that often some or all of the expenses included in the calculation of the R&D Tax Incentive claim are not correct because: • The expenditure is specifically excluded from the R&D Tax Incentive, on the basis that it is incurred to acquire or construct: - a building or part of a building, or - an extension, alteration or improvement to a building. [1] • The expenditure included in the calculation of the R&D Tax Incentive is not for amounts that are incurred on eligible R&D activities; for example production costs of products sold to the market in the ordinary course of business. [2] • Expenditure is being apportioned between R&D activities and (ineligible) ordinary business activities in an unreasonable manner. For example: - Expenditure is included as part of overall overhead expenses which does not relate to R&D activities, for example advertising and sales expenses. - Overhead expenses are apportioned using a method that allocates an unreasonably large amount to R&D. • The activities are conducted under contract for the acquirer or owner of the building and not for the builder itself, resulting in activities that are not conducted on the builder's own behalf. Consequently, the expenditure incurred by the builder may not be at risk, as is required under the legislation. [3] | • The expenditure is specifically excluded from the R&D Tax Incentive, on the basis that it is incurred to acquire or construct: - a building or part of a building, or - an extension, alteration or improvement to a building. [1] • The expenditure included in the calculation of the R&D Tax Incentive is not for amounts that are incurred on eligible R&D activities; for example production costs of products sold to the market in the ordinary course of business. [2] • Expenditure is being apportioned between R&D activities and (ineligible) ordinary business activities in an unreasonable manner. For example: - Expenditure is included as part of overall overhead expenses which does not relate to R&D activities, for example advertising and sales expenses. - Overhead expenses are apportioned using a method that allocates an unreasonably large amount to R&D. • The activities are conducted under contract for the acquirer or owner of the building and not for the builder itself, resulting in activities that are not conducted on the builder's own behalf. Consequently, the expenditure incurred by the builder may not be at risk, as is required under the legislation. [3] | - a building or part of a building, or - an extension, alteration or improvement to a building. [1] | - Expenditure is included as part of overall overhead expenses which does not relate to R&D activities, for example advertising and sales expenses. - Overhead expenses are apportioned using a method that allocates an unreasonably large amount to R&D. | Corporate Governance | Companies are expected to distinguish eligible R&D activities from ineligible ordinary business activities at the time of registration and throughout the conduct of the activities. Proper, detailed and contemporaneous records must be kept to support the registration application and the claim for the R&D Tax Incentive. | We are also concerned that some companies are not applying adequate levels of governance and review to the R&D activities that have been registered and to the claims that are subsequently made for the R&D Tax Incentive on their behalf. For example, we have observed: • Suitably qualified company officers or employees who understand the relevant activities failing to undertake reviews and approvals of the company's R&D registration applications. • Company management deferring responsibility for distinguishing ordinary business activities from R&D activities to external advisors, without checking whether the external advisors' understanding of the eligible activities aligns with that of the company's officers or employees. • Accounting systems or records being kept which do not contemporaneously or adequately segregate R&D expenses from other expenses. | • Suitably qualified company officers or employees who understand the relevant activities failing to undertake reviews and approvals of the company's R&D registration applications. • Company management deferring responsibility for distinguishing ordinary business activities from R&D activities to external advisors, without checking whether the external advisors' understanding of the eligible activities aligns with that of the company's officers or employees. • Accounting systems or records being kept which do not contemporaneously or adequately segregate R&D expenses from other expenses. | We have observed that these practices can result in activities being registered as R&D activities and expenditures being claimed under the R&D Tax Incentive that should not be.","The ATO and AusIndustry are working together to alert taxpayers and their advisors to practices that may result in increased risk of registering ineligible activities and incorrectly claiming the R&D Tax Incentive. | We will be contacting companies directly to advise them of our concerns with their registered activities and/or their R&D Tax Incentive claims if: • Advisors who may apply high risk practices are involved in the preparation of the registration application and/or claim. • The registration of R&D activities continues with the use of broad descriptions that fail to distinguish them from ordinary business activities. • The level of expenditure claimed for the R&D Tax Incentive is high for the industry or stage of business. | • Advisors who may apply high risk practices are involved in the preparation of the registration application and/or claim. • The registration of R&D activities continues with the use of broad descriptions that fail to distinguish them from ordinary business activities. • The level of expenditure claimed for the R&D Tax Incentive is high for the industry or stage of business. | Innovation and Science Australia will continue to issue Findings to companies confirming whether activities qualify for the R&D Tax Incentive. | We have developed a Specific Issue Guidance product to assist companies engaged in the construction industry, and their accountants and advisors, to correctly identify and document eligible R&D activities in that industry. This product is available on www.business.gov.au","You should consider whether our concerns apply to you. The onus is on you to ensure that your registration and claim for the R&D Tax Incentive are correct. We encourage you to: • Review your registration to ensure you are registering only eligible R&D activities. • Ensure your claim for the R&D Tax Incentive is correct and that you are not claiming expenditure related to ineligible activities. • Have the records to demonstrate the R&D activities being undertaken and support the associated R&D Tax Incentive claim. | • Review your registration to ensure you are registering only eligible R&D activities. • Ensure your claim for the R&D Tax Incentive is correct and that you are not claiming expenditure related to ineligible activities. • Have the records to demonstrate the R&D activities being undertaken and support the associated R&D Tax Incentive claim. | If you consider that our concerns apply, you may want to: • Phone us at the contact details provided below. • Seek independent professional advice. • Ask the ATO for our view through a private ruling or apply for a Finding from Innovation and Science Australia. • Apply to AusIndustry to amend or withdraw your registration or make a voluntary disclosure to the ATO or amend your tax return. | • Phone us at the contact details provided below. • Seek independent professional advice. • Ask the ATO for our view through a private ruling or apply for a Finding from Innovation and Science Australia. • Apply to AusIndustry to amend or withdraw your registration or make a voluntary disclosure to the ATO or amend your tax return. | Penalties may apply if you have incorrectly claimed the R&D Tax Incentive but will be significantly reduced if you make a voluntary disclosure. Generally, the reduction is greater if you make the disclosure before we notify you of an examination of your tax affairs. | Sanctions under criminal law may apply to fraudulent claims. | Registered tax agents, including R&D consultants, advising companies to incorrectly claim ordinary business activities may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. Promoter penalty laws may also apply under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters of schemes to access the R&D Tax Incentive for ineligible activities. | For more information about eligible R&D activities, what can be claimed under the R&D Tax Incentive and recordkeeping, refer to Research and development tax incentive",PS LA 2008/15 | 355-210(1)(a) | 355-225(1)(a) | 355-465 | Tax Agent Services Act 2009 | Div 290 of Sch 1 | TA 2017/3,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20172/NAT/ATO/00001,"This Alert has been jointly developed by the Australian Taxation Office (ATO) and Department of Industry, Innovation and Science. | The Research and Development (R & D) Tax Incentive is jointly administered by Innovation and Science Australia (supported by AusIndustry within the Department of Industry, Innovation and Science) and the ATO. | Updated ATO tip-off hotline number | Date of Effect: [1] See paragraph 355-225(1)(a) of the Income Tax Assessment Act 1997 . | [2] Note, specific legislation applies to feedstock; see section 355-465 of the Income Tax Assessment Act 1997 or refer to the ATO Factsheet on Feedstock. | [2] See paragraph 355-210(1)(a) of the Income Tax Assessment Act 1997 . | Private Groups and High Wealth Individuals"
TA 2017/3,Claiming the Research and Development Tax Incentive for ordinary business activities,9 February 2017,Current,,"The ATO and AusIndustry are reviewing arrangements of companies that are claiming the R&D Tax Incentive where some (or all) of the expenditure that is incurred relates to their ordinary business activities and not to eligible R&D activities. | These types of arrangements exhibit some or all of the following features: • A company registers one or more activities for the R&D Tax Incentive. • Some or all of the activities registered are broadly described and non-specific. For example, projects may be registered instead of the specific activities undertaken. • Some or all of the activities registered are ordinary business activities that are not eligible for the R&D Tax Incentive. • Some or all of the activities were undertaken in the course of their ordinary business activities and recharacterised as R&D activities at a later time. • The company claims the R&D Tax Incentive for expenditure that is not on eligible R&D activities. | • A company registers one or more activities for the R&D Tax Incentive. • Some or all of the activities registered are broadly described and non-specific. For example, projects may be registered instead of the specific activities undertaken. • Some or all of the activities registered are ordinary business activities that are not eligible for the R&D Tax Incentive. • Some or all of the activities were undertaken in the course of their ordinary business activities and recharacterised as R&D activities at a later time. • The company claims the R&D Tax Incentive for expenditure that is not on eligible R&D activities. | Background | The Australian Government supports companies that undertake eligible R&D activities through the R&D Tax Incentive. | Eligibility for the R&D Tax Incentive is based on specific R&D activities rather than on entire commercial projects. | In order to be eligible, there must be an experiment or experiments being carried out for the purpose of generating new knowledge. The outcome of the experiments cannot be able to be known or determined in advance by a competent professional in the field. The experiments being carried out must be based on principles of established science and must seek to prove whether specific technical hypotheses are right or wrong to resolve specific technical issues or risks. | Supporting activities may also be eligible if they are directly related to eligible experimental activities. It is not sufficient that these activities are related to the project more generally. Additionally, in some circumstances supporting activities must also be conducted for the dominant purpose of supporting the experimental activities. | Ordinary business activities are not generally carried out for the purpose of generating new knowledge. Such activities may include solving business problems using established products and existing knowledge, expertise or methodologies. Further, activities that produce or are directly related to producing goods or services are not usually undertaken for the dominant purpose of supporting experimental activities. | Under the R&D Tax Incentive, companies self-assess the eligibility of their activities and register through AusIndustry. Companies then claim a tax offset (the R&D Tax Incentive) for their 'notional deductions' relating to eligible expenditure through the annual company tax return. The registration of activities does not, by itself, render the activities described in a registration as eligible R&D activities for the purposes of the R&D Tax Incentive. The ATO and AusIndustry may review the eligibility of activities or expenditure after registration. | The R&D Tax Incentive claimed in a company's tax return must relate only to expenditure on eligible R&D activities.",,"The operators of some affected companies may believe (or have been advised) that their activities constitute eligible R&D activities. However, we are concerned that: • Activities may not fit within the stringent requirements of the laws that govern the R&D Tax Incentive. • Expenditure claimed may not relate to eligible R&D activities. • Taxpayers may not be applying adequate levels of governance and review to the registered activities and the claims made for the R&D Tax Incentive. | • Activities may not fit within the stringent requirements of the laws that govern the R&D Tax Incentive. • Expenditure claimed may not relate to eligible R&D activities. • Taxpayers may not be applying adequate levels of governance and review to the registered activities and the claims made for the R&D Tax Incentive. | Activities | We have observed a number of cases where the company's ineligible ordinary business activities have not been distinguished from any eligible R&D activities. For example: • No R&D activities are being conducted at all; only ineligible ordinary business activities are being conducted. • The scope of claimed activities includes a mixture of eligible R&D activities and ineligible ordinary business activities. • R&D activities which were being carried on have transitioned into ordinary business activities but claims for the R&D Tax Incentive are still being made. | • No R&D activities are being conducted at all; only ineligible ordinary business activities are being conducted. • The scope of claimed activities includes a mixture of eligible R&D activities and ineligible ordinary business activities. • R&D activities which were being carried on have transitioned into ordinary business activities but claims for the R&D Tax Incentive are still being made. | Activities may not be eligible for the R&D Tax Incentive because: • Their purpose is not sufficiently concerned with the generation of new knowledge. For example: - The activities have no significant knowledge-generating purpose; or the generation of knowledge is merely incidental to an ordinary business activity. - Activities which were formerly carried on to generate new knowledge have achieved that purpose and are now ordinary business activities. • The activities do not involve an application of the scientific method; that is, proving or disproving a hypothesis through experiments. • The activities are not directly related to experimental activities or do not have a dominant purpose of supporting such activities. • Project management, environmental, commercial or economic risks are mistaken for technical risks. | • Their purpose is not sufficiently concerned with the generation of new knowledge. For example: - The activities have no significant knowledge-generating purpose; or the generation of knowledge is merely incidental to an ordinary business activity. - Activities which were formerly carried on to generate new knowledge have achieved that purpose and are now ordinary business activities. • The activities do not involve an application of the scientific method; that is, proving or disproving a hypothesis through experiments. • The activities are not directly related to experimental activities or do not have a dominant purpose of supporting such activities. • Project management, environmental, commercial or economic risks are mistaken for technical risks. | - The activities have no significant knowledge-generating purpose; or the generation of knowledge is merely incidental to an ordinary business activity. - Activities which were formerly carried on to generate new knowledge have achieved that purpose and are now ordinary business activities. | Expenditure | We have also observed that often some of the expenses included in the calculation of the R&D Tax Incentive claim are not for amounts that relate to eligible R&D activities, for example, ordinary production costs of products sold to the market in the ordinary course of business. [1] | In some cases expenditure is being claimed under the R&D Tax Incentive even though no R&D activities are being conducted. | In other cases, expenditure is being apportioned between R&D activities and ineligible business activities in an unreasonable manner. For example: • Expenditure is included as part of overall overhead expenses which does not relate to R&D activities for example, advertising and sales expenses. • Overhead expenses are apportioned using a method that allocates an unreasonably large amount to R&D. | • Expenditure is included as part of overall overhead expenses which does not relate to R&D activities for example, advertising and sales expenses. • Overhead expenses are apportioned using a method that allocates an unreasonably large amount to R&D. | Corporate Governance | Companies are expected to distinguish eligible R&D activities from ineligible ordinary business activities at the time of registration and throughout the conduct of the activities. Proper, detailed and contemporaneous records must be kept to support the registration application and the claim for the R&D Tax Incentive. | We are also concerned that some companies are not applying adequate levels of governance and review to the R&D activities that have been registered and to the claims that are subsequently made for the R&D Tax Incentive on their behalf. For example, we have observed: • Suitably qualified company officers or employees who understand the relevant activities failing to undertake reviews and approvals of the company's R&D registration applications. • Company management deferring responsibility for distinguishing ordinary business activities from R&D activities to external advisors, without checking whether the external advisors' understanding of the eligible activities aligns with that of the company's officers or employees. • Accounting systems or records being kept which do not contemporaneously or adequately segregate R&D expenses from other expenses. | • Suitably qualified company officers or employees who understand the relevant activities failing to undertake reviews and approvals of the company's R&D registration applications. • Company management deferring responsibility for distinguishing ordinary business activities from R&D activities to external advisors, without checking whether the external advisors' understanding of the eligible activities aligns with that of the company's officers or employees. • Accounting systems or records being kept which do not contemporaneously or adequately segregate R&D expenses from other expenses. | We have observed that these practices can result in activities being registered as R&D activities and expenditures being claimed under the R&D Tax Incentive that should not be.","The ATO and AusIndustry are working together to alert taxpayers and their advisors to practices that may result in increased risk of registering ineligible activities and incorrectly claiming the R&D Tax Incentive. | We will be contacting companies directly to advise them of our concerns with their registered activities and/or their R&D Tax Incentive claims if: • Advisors who may apply high risk practices are involved in the preparation of the registration application and/or claim. • The registration of R&D activities continues with the use of broad descriptions that fail to distinguish them from ordinary operational business activities. • The level of expenditure claimed for the R&D Tax Incentive is high for the industry or stage of business. | • Advisors who may apply high risk practices are involved in the preparation of the registration application and/or claim. • The registration of R&D activities continues with the use of broad descriptions that fail to distinguish them from ordinary operational business activities. • The level of expenditure claimed for the R&D Tax Incentive is high for the industry or stage of business. | Innovation and Science Australia will continue to issue Findings to companies confirming whether activities qualify for the R&D Tax Incentive. | We have developed further guidance products to assist companies, and their accountants and advisors, to correctly identify and document eligible R&D activities. This product is available on www.business.gov.au","You should consider whether our concerns apply to you. The onus is on you to ensure that your registration and claim for the R&D Tax Incentive are correct. We would encourage you to: • Review your registration to ensure you are registering only eligible R&D activities. • Ensure your claim for the R&D Tax Incentive is correct and that you are not claiming expenditure related to ineligible ordinary business activities. • Have the records to demonstrate the R&D activities being undertaken and support the associated R&D Tax Incentive claim. | • Review your registration to ensure you are registering only eligible R&D activities. • Ensure your claim for the R&D Tax Incentive is correct and that you are not claiming expenditure related to ineligible ordinary business activities. • Have the records to demonstrate the R&D activities being undertaken and support the associated R&D Tax Incentive claim. | If you consider that our concerns apply, you may want to: • Phone us at the contact details provided below. • Seek independent professional advice. • Ask the ATO for our view through a private ruling or apply for a Finding from Innovation and Science Australia. • Apply to AusIndustry to amend or withdraw your registration or make a voluntary disclosure to the ATO or amend your tax return. | • Phone us at the contact details provided below. • Seek independent professional advice. • Ask the ATO for our view through a private ruling or apply for a Finding from Innovation and Science Australia. • Apply to AusIndustry to amend or withdraw your registration or make a voluntary disclosure to the ATO or amend your tax return. | Penalties may apply if you have incorrectly claimed the R&D Tax Incentive but will be significantly reduced if you make a voluntary disclosure. Generally, the reduction is greater if you make the disclosure before we notify you of an examination of your tax affairs. | Sanctions under criminal law may apply to fraudulent claims. | Registered tax agents, including R&D Consultants, advising companies to incorrectly claim ordinary business activities may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. Promoter penalty laws may also apply under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters of schemes to access the R&D Tax Incentive for ineligible activities. | For more information about eligible R&D activities, what can be claimed under the R&D Tax Incentive and recordkeeping, refer to Research and development tax incentive.",PS LA 2008/15 | 355-465 | Tax Agent Services Act 2009 | Div 290 of Sch 1 | TA 2017/2,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20173/NAT/ATO/00001,"This Alert has been jointly developed by the Australian Taxation Office (ATO) and Department of Industry, Innovation and Science. | The Research and Development (R & D) Tax Incentive is jointly administered by Innovation and Science Australia (supported by AusIndustry within the Department of Industry, Innovation and Science) and the ATO. | Updated ATO tip-off hotline number | Date of Effect: [1] Note specific legislation applies to feedstock; see section 355-465 of the Income Tax Assessment Act 1997 or refer to the ATO Factsheet on Feedstock. | Private Groups and High Wealth Individuals"
TA 2017/4,Claiming the Research and Development Tax Incentive for agricultural activities,20 February 2017,Current,,"The ATO and AusIndustry are reviewing the arrangements of entities that are claiming the R&D Tax Incentive in respect of agricultural activities where some (or all) of the expenditure incurred is on activities which are not eligible R&D activities. | In Taxpayer Alert TA 2015/3 we highlighted our concern with entities involved in broadacre grain farming. We are now concerned that other entities engaged in agricultural activities, such as those operating orchards, vineyards, olive groves, forestry operations and fibre growing businesses, may be inappropriately claiming the R&D Tax Incentive under similar circumstances. | These types of arrangements exhibit some or all of the following features: • An agricultural business is being carried on, often by an entity that is not eligible for the R&D Incentive, for example a family trust. • The operators of the agricultural business are approached by a promoter/R&D consultant advising that the farming activities that are being carried on are eligible for the R&D Tax Incentive. • Where necessary, a new special purpose R&D company may be incorporated in order that the activities are conducted by an entity that is able to claim the R&D tax offset. • A company registers one or more activities for the R&D Tax Incentive. • The registered activities involve the application of farm products or practices across all or a significant part of a farm or farms. • Some or all of the registered activities have the character of ordinary farming activities whose main purpose is the production of crops. • The company claims the R&D Tax Incentive for expenditure that is not on eligible R&D activities. | • An agricultural business is being carried on, often by an entity that is not eligible for the R&D Incentive, for example a family trust. • The operators of the agricultural business are approached by a promoter/R&D consultant advising that the farming activities that are being carried on are eligible for the R&D Tax Incentive. • Where necessary, a new special purpose R&D company may be incorporated in order that the activities are conducted by an entity that is able to claim the R&D tax offset. • A company registers one or more activities for the R&D Tax Incentive. • The registered activities involve the application of farm products or practices across all or a significant part of a farm or farms. • Some or all of the registered activities have the character of ordinary farming activities whose main purpose is the production of crops. • The company claims the R&D Tax Incentive for expenditure that is not on eligible R&D activities. | Background | The Australian Government supports companies that undertake eligible R&D activities through the R&D Tax Incentive. | Eligibility for the R&D Tax Incentive is based on specific R&D activities rather than on entire commercial projects. | In order to be eligible, there must be an experiment or experiments being carried out for the purpose of generating new knowledge. The outcome of the experiments cannot be able to be known or determined in advance by a competent professional in the field. The experiments being carried out must be based on principles of established science and must seek to prove whether specific technical hypotheses are right or wrong to resolve specific technical issues or risks. | Supporting activities may also be eligible if they are directly related to eligible experimental activities. It is not sufficient that these activities are related to the project more generally. Additionally, in some circumstances supporting activities must also be conducted for the dominant purpose of supporting the experimental activities. | Ordinary business activities are not generally carried out for the purpose of generating new knowledge. Such activities may include solving business problems using established products and existing knowledge, expertise or methodologies. Further, activities that produce or are directly related to producing goods or services are not usually undertaken for the dominant purpose of supporting experimental activities. | Under the R&D Tax Incentive, companies self-assess the eligibility of their activities and register through AusIndustry. Companies then claim a tax offset (the R&D Tax Incentive) for their 'notional deductions' relating to eligible expenditure through the annual company tax return. The registration of activities does not, by itself, render the activities described in a registration as eligible R&D activities for the purposes of the R&D Tax Incentive. The ATO and AusIndustry may review the eligibility of activities or expenditure after registration. | The R&D Tax Incentive claimed in a company's tax return must relate only to expenditure on eligible R&D activities.",,"The operators of some affected companies may believe (or have been advised) that their activities constitute eligible R&D activities. However, we are concerned that: • Activities may not fit within the stringent requirements of the laws that govern the R&D Tax Incentive. • Expenditure claimed may not relate to eligible R&D activities. • Taxpayers may not be applying adequate levels of governance and review to the registered activities and the claims made for the R&D Tax Incentive. | • Activities may not fit within the stringent requirements of the laws that govern the R&D Tax Incentive. • Expenditure claimed may not relate to eligible R&D activities. • Taxpayers may not be applying adequate levels of governance and review to the registered activities and the claims made for the R&D Tax Incentive. | Activities | We have observed a number of cases where companies have registered agricultural activities with AusIndustry which are, or appear to be, ineligible for the R&D Tax Incentive. The reasons these types of activities have been found to be ineligible include: • The activities form part (or all) of the entity's ordinary business activities [1] , such as the production of agricultural goods, and are not for the purpose of generating new knowledge or for the dominant purpose of supporting core R&D activities. • The activities involve the application of established products and existing methodologies and a competent professional in the field could have known or worked out the outcomes without conducting an experiment. For example, applying different irrigation or pruning methods, commissioning new equipment or applying soil improvers in different concentrations. • The activities are not experimental and are not undertaken to prove a hypothesis right or wrong. This is evidenced by the scale of the activities which is disproportionate with the scale of any data collection, observation and evaluation. • The activities are replicated across several farms to test the suitability on different soil types and the activities involve products and techniques that are known to work and are not for the purpose of developing new knowledge. • The activities are not directly related to eligible experimental activities and do not have a dominant purpose of supporting such activities. | • The activities form part (or all) of the entity's ordinary business activities [1] , such as the production of agricultural goods, and are not for the purpose of generating new knowledge or for the dominant purpose of supporting core R&D activities. • The activities involve the application of established products and existing methodologies and a competent professional in the field could have known or worked out the outcomes without conducting an experiment. For example, applying different irrigation or pruning methods, commissioning new equipment or applying soil improvers in different concentrations. • The activities are not experimental and are not undertaken to prove a hypothesis right or wrong. This is evidenced by the scale of the activities which is disproportionate with the scale of any data collection, observation and evaluation. • The activities are replicated across several farms to test the suitability on different soil types and the activities involve products and techniques that are known to work and are not for the purpose of developing new knowledge. • The activities are not directly related to eligible experimental activities and do not have a dominant purpose of supporting such activities. | Expenditure | We have also observed that often some of the expenses included in the calculation of the R&D Tax Incentive claim are not for amounts that relate to eligible R&D activities; for example, ordinary production costs of products sold to the market in the ordinary course of business. [2] | In some cases expenditure is being claimed under the R&D Tax Incentive even though no R&D activities are being conducted. | In other cases, expenditure is being apportioned between R&D activities and ineligible business activities in an unreasonable manner. For example: • Expenditure is included as part of overall overhead expenses which does not relate to R&D activities. • Overhead expenses are apportioned using a method that allocates an unreasonably large amount to R&D. | • Expenditure is included as part of overall overhead expenses which does not relate to R&D activities. • Overhead expenses are apportioned using a method that allocates an unreasonably large amount to R&D. | Other issues | We are also concerned that the structures being used may lead to other issues that will make the activities or expenditure ineligible for the R&D Tax Incentive including: • Whether the activities are being conducted by the company on its own behalf or for the entity carrying on the agricultural business. • Whether arrangements between related entities are conducted on an arm's length basis. • Whether amounts billed to the R&D company by related entities are paid. • Whether the documentation between related entities adequately demonstrates who is undertaking the activities, who has paid for the activities and who benefits from the results of the activities. | • Whether the activities are being conducted by the company on its own behalf or for the entity carrying on the agricultural business. • Whether arrangements between related entities are conducted on an arm's length basis. • Whether amounts billed to the R&D company by related entities are paid. • Whether the documentation between related entities adequately demonstrates who is undertaking the activities, who has paid for the activities and who benefits from the results of the activities. | Corporate Governance | Companies are expected to distinguish eligible R&D activities from ineligible ordinary business activities at the time of registration and throughout the conduct of the activities. Proper, detailed and contemporaneous records must be kept to support the registration application and the claim for the R&D Tax Incentive. | We are also concerned that some companies are not applying adequate levels of governance and review to the R&D activities that have been registered and to the claims that are subsequently made for the R&D Tax Incentive on their behalf. For example, we have observed: • Suitably qualified company officers or employees who understand the relevant activities failing to undertake reviews and approvals of the company's R&D registration applications. • Company management deferring responsibility for distinguishing ordinary business activities from R&D activities to external advisors, without checking whether the external advisors' understanding of the eligible activities aligns with that of the company's officers or employees. • Accounting systems or records being kept which do not contemporaneously or adequately segregate R&D expenses from other expenses. | • Suitably qualified company officers or employees who understand the relevant activities failing to undertake reviews and approvals of the company's R&D registration applications. • Company management deferring responsibility for distinguishing ordinary business activities from R&D activities to external advisors, without checking whether the external advisors' understanding of the eligible activities aligns with that of the company's officers or employees. • Accounting systems or records being kept which do not contemporaneously or adequately segregate R&D expenses from other expenses. | We have observed that these practices can result in activities being registered as R&D activities and expenditures being claimed under the R&D Tax Incentive that should not be.","The ATO and AusIndustry are working together to alert taxpayers and their advisors to practices that may result in increased risk of registering ineligible activities and incorrectly claiming the R&D Tax Incentive. | We will be contacting companies directly to advise them of our concerns with their registered activities and/or their R&D Tax Incentive claims if: • Advisors who may apply high risk practices are involved in the preparation of the registration application and/or claim. • The registration of R&D activities continues with the use of broad descriptions that fail to distinguish them from ordinary business activities. • The level of expenditure claimed for the R&D Tax Incentive is high for the industry or stage of business. | • Advisors who may apply high risk practices are involved in the preparation of the registration application and/or claim. • The registration of R&D activities continues with the use of broad descriptions that fail to distinguish them from ordinary business activities. • The level of expenditure claimed for the R&D Tax Incentive is high for the industry or stage of business. | Innovation and Science Australia will continue to issue Findings to companies confirming whether activities qualify for the R&D Tax Incentive. | We have developed a Specific Issue Guidance product to assist companies engaged in the farming industry, and their accountants and advisors, to correctly identify and document eligible R&D activities in that industry. This product is available on www.business.gov.au","You should consider whether our concerns apply to you. The onus is on you to ensure that your registration and claim for the R&D Tax Incentive are correct. We encourage you to: • Review your registration to ensure you are registering only eligible R&D activities. • Ensure your claim for the R&D Tax Incentive is correct and that you are not claiming expenditure related to ineligible activities. • Have the records to demonstrate the R&D activities being undertaken and support the associated R&D Tax Incentive claim. | • Review your registration to ensure you are registering only eligible R&D activities. • Ensure your claim for the R&D Tax Incentive is correct and that you are not claiming expenditure related to ineligible activities. • Have the records to demonstrate the R&D activities being undertaken and support the associated R&D Tax Incentive claim. | If you consider that our concerns apply, you may want to: • Phone us at the contact details provided below. • Seek independent professional advice. • Ask the ATO for our view through a private ruling or apply for a Finding from Innovation and Science Australia. • Apply to AusIndustry to amend or withdraw your registration or make a voluntary disclosure to the ATO or amend your tax return. | • Phone us at the contact details provided below. • Seek independent professional advice. • Ask the ATO for our view through a private ruling or apply for a Finding from Innovation and Science Australia. • Apply to AusIndustry to amend or withdraw your registration or make a voluntary disclosure to the ATO or amend your tax return. | Penalties may apply if you have incorrectly claimed the R&D Tax Incentive but will be significantly reduced if you make a voluntary disclosure. Generally, the reduction is greater if you make the disclosure before we notify you of an examination of your tax affairs. | Sanctions under criminal law may apply to fraudulent claims. | Registered tax agents, including R&D Consultants, advising companies to incorrectly claim ordinary business activities may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. Promoter penalty laws may also apply under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters of schemes to access the R&D Tax Incentive for ineligible activities. | For more information about eligible R&D activities, what can be claimed under the R&D Tax Incentive and recordkeeping, refer to Research and development tax incentive .",PS LA 2008/15 | 355-465 | The Act | Div 290 of Sch 1 | TA 2015/3 | TA 2017/3 | TA 2017/5,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20174/NAT/ATO/00001,"This Alert has been jointly developed by the Australian Taxation Office (ATO) and Department of Industry, Innovation and Science. | The Research and Development (R & D) Tax Incentive is jointly administered by Innovation and Science Australia (supported by AusIndustry within the Department of Industry, Innovation and Science) and the ATO. | Updated ATO tip-off hotline number | Date of Effect: [1] See Taxpayer Alert TA 2017/3 for more information. | [2] Note specific legislation applies to feedstock; see section 355-465 of the Income Tax Assessment Act 1997 or refer to the ATO Factsheet on Feedstock. | Private Groups and High Wealth Individuals"
TA 2017/5,Claiming the Research and Development Tax Incentive for software development activities,20 February 2017,Current,,"The ATO and AusIndustry are reviewing the arrangements of companies that are claiming the R&D Tax Incentive on software development projects where some (or all) of the expenditure incurred is on activities which are not eligible R&D activities. | These types of arrangements exhibit some or all of the following features: • A company undertakes a software development project that involves one or more of the following: - developing new software - modifying, customising or upgrading existing software, and - acquiring and modifying off-the-shelf software. • The software development project includes one or more of the following: - undertaking activities that use existing software development knowledge and expertise to achieve the required technical outcomes - undertaking activities that involve business risk rather than technical uncertainty - undertaking activities to replace manual work processes using software technologies that are available in the market and adapted to the requirements of the company, and - using existing software technologies as they were intended to be used. • Some or all of the registered R&D activities are broadly described and non-specific. For example, they may describe project objectives or business and system requirements that the company is seeking to design and implement. • All of the project, or a substantial part of it, is registered as R&D activities. • The company includes the whole, or a large proportion, of their expenditure on the software development project in the calculation of their R&D Tax Incentive claim. | • A company undertakes a software development project that involves one or more of the following: - developing new software - modifying, customising or upgrading existing software, and - acquiring and modifying off-the-shelf software. • The software development project includes one or more of the following: - undertaking activities that use existing software development knowledge and expertise to achieve the required technical outcomes - undertaking activities that involve business risk rather than technical uncertainty - undertaking activities to replace manual work processes using software technologies that are available in the market and adapted to the requirements of the company, and - using existing software technologies as they were intended to be used. • Some or all of the registered R&D activities are broadly described and non-specific. For example, they may describe project objectives or business and system requirements that the company is seeking to design and implement. • All of the project, or a substantial part of it, is registered as R&D activities. • The company includes the whole, or a large proportion, of their expenditure on the software development project in the calculation of their R&D Tax Incentive claim. | - developing new software - modifying, customising or upgrading existing software, and - acquiring and modifying off-the-shelf software. | - undertaking activities that use existing software development knowledge and expertise to achieve the required technical outcomes - undertaking activities that involve business risk rather than technical uncertainty - undertaking activities to replace manual work processes using software technologies that are available in the market and adapted to the requirements of the company, and - using existing software technologies as they were intended to be used. | Background | The Australian Government supports companies that undertake eligible R&D activities through the R&D Tax Incentive. | Eligibility under the R&D Tax Incentive is based on specific R&D activities rather than on entire projects. | In order to be eligible, there must be an experiment or experiments being carried out for the purpose of generating new knowledge. The outcome of the experiments cannot be able to be known or determined in advance by a competent professional in the field. The experiments being carried out must be based on principles of established science and must seek to prove whether specific technical hypotheses are right or wrong to resolve specific technical issues or risks. | Supporting activities may also be eligible if they are directly related to eligible experimental activities. It is not sufficient that these activities are related to the project more generally. Additionally, in some circumstances supporting activities must also be conducted for the dominant purpose of supporting the experimental activities. | Companies undertaking software development projects sometimes assume or assert that software development activities are by their nature eligible R&D activities. However, it is extremely unlikely that all of the work involved in a software development project will meet the legislative criteria for eligible R&D activities. While a project may involve some experimental activities, that does not qualify the entire project as an eligible R&D activity. | The processes of developing, modifying or customising software can appear superficially similar to the process of performing eligible R&D activities. They are by definition systematic and can be iterative and cyclical and almost always involve testing. However, the application of a software development lifecycle does not automatically mean that eligible experimental activities are taking place, nor that the outcome of any technical issues being solved are not using existing knowledge, information or expertise. | There are routine testing steps in software development projects that are frequently incorrectly claimed as core R&D activities. Activities such as bug, beta and user acceptance testing are often claimed as core R&D regardless of the stage of development of a software project. Activities such as these can only be claimed as core R&D activities when they are being done as experiments that are resolving hypotheses about specific technical issues. Examples of activities that are not eligible unless there is evidence they are being done as experiments to test a hypothesis are: • Bug testing • Beta testing • System testing • Requirements testing • User Acceptance Testing • Data mapping and data migration testing • Testing the efficiency of different algorithms that are already known to work, and • Testing websites in operation by measuring the number of hits. | • Bug testing • Beta testing • System testing • Requirements testing • User Acceptance Testing • Data mapping and data migration testing • Testing the efficiency of different algorithms that are already known to work, and • Testing websites in operation by measuring the number of hits. | The activities listed above, however, may be eligible as supporting R&D activities if they are directly related to core R&D activities. | Under the R&D Tax Incentive, companies self-assess the eligibility of their activities and register through AusIndustry. Companies then claim a tax offset (the R&D Tax Incentive) for their 'notional deductions' relating to eligible expenditure through the annual company tax return. The registration of activities does not, by itself, render the activities described in a registration as eligible R&D activities for the purposes of the R&D Tax Incentive. The ATO and AusIndustry may review the eligibility of activities or expenditure after registration. | The R&D Tax Incentive claimed in a company's tax return must relate only to expenditure on eligible R&D activities. Further, software development projects that are for the sole or dominant purpose of internal use by the company (or related entities) for their administration or the administration of their business functions are not eligible for the R&D Tax Incentive. [1]",,"The operators of some affected companies may believe (or have been advised) that their activities are innovative or constitute eligible R&D activities. However, we are concerned that: • Activities may not fit within the stringent requirements of the laws that govern the R&D Tax Incentive. • Expenditure claimed may not relate to eligible R&D activities. • Taxpayers may not be applying adequate levels of governance and review to the registered activities and the claims made for the R&D Tax Incentive. | • Activities may not fit within the stringent requirements of the laws that govern the R&D Tax Incentive. • Expenditure claimed may not relate to eligible R&D activities. • Taxpayers may not be applying adequate levels of governance and review to the registered activities and the claims made for the R&D Tax Incentive. | Activities | We have observed a number of cases where companies have registered software development activities with AusIndustry which are ineligible for the R&D Tax Incentive. | The reasons these types of activities have been found to be ineligible include: • The software development project has been registered on a whole of project basis, without distinguishing eligible R&D activities from ineligible activities. For example, developing and rolling out a new online customer platform may be incorrectly identified as a single eligible R&D activity. • The activities do not have the purpose of generating new knowledge. The purpose of generating new knowledge must be substantial enough to characterise the activity as being conducted for that purpose. • The activities are not undertaken to prove or disprove a hypothesis or hypotheses through experiments. • There is no clearly identified technical uncertainty being addressed by the activity. The software development lifecycle can be complex and highly technical. While this complexity poses risks, it does not mean that all activities involve a specific technical knowledge gap that requires the formulation of a hypothesis and the undertaking of experimental activities to test that hypothesis. • Project management, commercial or economic risks are mistaken for technical risks. For example, a bank develops a mobile banking application and the delivery of the application is quite certain on the basis of current knowledge, information and experience. There is, however, a risk that existing or future customers may not embrace the application. This risk is commercial in nature only and hence the relevant activities do not constitute eligible R&D activities. • The activities involve the purchase of 'off-the-shelf' software and subsequent modification to integrate it into the existing environment. Most or all of the activities involve the application of existing knowledge and expertise rather than the generation of new knowledge through experiments. • The activities are not directly related to experimental activities or do not have a dominant purpose of supporting such activities. | • The software development project has been registered on a whole of project basis, without distinguishing eligible R&D activities from ineligible activities. For example, developing and rolling out a new online customer platform may be incorrectly identified as a single eligible R&D activity. • The activities do not have the purpose of generating new knowledge. The purpose of generating new knowledge must be substantial enough to characterise the activity as being conducted for that purpose. • The activities are not undertaken to prove or disprove a hypothesis or hypotheses through experiments. • There is no clearly identified technical uncertainty being addressed by the activity. The software development lifecycle can be complex and highly technical. While this complexity poses risks, it does not mean that all activities involve a specific technical knowledge gap that requires the formulation of a hypothesis and the undertaking of experimental activities to test that hypothesis. • Project management, commercial or economic risks are mistaken for technical risks. For example, a bank develops a mobile banking application and the delivery of the application is quite certain on the basis of current knowledge, information and experience. There is, however, a risk that existing or future customers may not embrace the application. This risk is commercial in nature only and hence the relevant activities do not constitute eligible R&D activities. • The activities involve the purchase of 'off-the-shelf' software and subsequent modification to integrate it into the existing environment. Most or all of the activities involve the application of existing knowledge and expertise rather than the generation of new knowledge through experiments. • The activities are not directly related to experimental activities or do not have a dominant purpose of supporting such activities. | Expenditure | We have also observed that often some or all of the expenses included in the calculation of the R&D Tax Incentive claim are not correct because: • Expenditure incurred in acquiring, or in acquiring the right to use, technology cannot be claimed as a notional deduction. [2] • The expenditure included in the calculation is not for amounts that are incurred on one or more eligible R&D activities; for example production costs of software sold to the market in the ordinary course of business. [3] • Expenditure is being apportioned between R&D activities and ineligible business activities in an unreasonable manner. For example: - expenditure is included as part of overall overhead expenses which does not relate to R&D activities, for example advertising and sales expenses, or - overhead expenses are apportioned using a method that allocates an unreasonably large amount to R&D. • Expenditure is incurred on R&D activities that have, to a significant extent, been 'conducted for' another entity. [4] Where the company undertaking the activity is recompensed by another entity under a contract, the expenditure may also not be at risk as required by legislation. [5] • Expenditure is claimed twice, that is, it is claimed as a notional deduction under the R&D tax incentive and also as an actual deduction in the calculation of taxable income. | • Expenditure incurred in acquiring, or in acquiring the right to use, technology cannot be claimed as a notional deduction. [2] • The expenditure included in the calculation is not for amounts that are incurred on one or more eligible R&D activities; for example production costs of software sold to the market in the ordinary course of business. [3] • Expenditure is being apportioned between R&D activities and ineligible business activities in an unreasonable manner. For example: - expenditure is included as part of overall overhead expenses which does not relate to R&D activities, for example advertising and sales expenses, or - overhead expenses are apportioned using a method that allocates an unreasonably large amount to R&D. • Expenditure is incurred on R&D activities that have, to a significant extent, been 'conducted for' another entity. [4] Where the company undertaking the activity is recompensed by another entity under a contract, the expenditure may also not be at risk as required by legislation. [5] • Expenditure is claimed twice, that is, it is claimed as a notional deduction under the R&D tax incentive and also as an actual deduction in the calculation of taxable income. | - expenditure is included as part of overall overhead expenses which does not relate to R&D activities, for example advertising and sales expenses, or - overhead expenses are apportioned using a method that allocates an unreasonably large amount to R&D. | Corporate Governance | Companies are expected to distinguish eligible R&D activities from ineligible ordinary business activities at the time of registration and throughout the conduct of the activities. Proper, detailed and contemporaneous records must be kept to support the registration application and the claim for the R&D Tax Incentive. | We are also concerned that some companies are not applying adequate levels of governance and review to the R&D activities that have been registered and to the claims that are subsequently made for the R&D Tax Incentive on their behalf. For example, we have observed: • Suitably qualified company officers or employees who understand the relevant activities failing to undertake reviews and approvals of the company's R&D registration applications. • Company management deferring responsibility for distinguishing ordinary business activities from R&D activities to external advisors, without checking whether the external advisors' understanding of the eligible activities aligns with that of the company's officers or employees. • Accounting systems or records being kept which do not contemporaneously or adequately segregate R&D expenses from other expenses. | • Suitably qualified company officers or employees who understand the relevant activities failing to undertake reviews and approvals of the company's R&D registration applications. • Company management deferring responsibility for distinguishing ordinary business activities from R&D activities to external advisors, without checking whether the external advisors' understanding of the eligible activities aligns with that of the company's officers or employees. • Accounting systems or records being kept which do not contemporaneously or adequately segregate R&D expenses from other expenses. | We have observed that these practices can result in activities being registered as R&D activities and expenditures being claimed under the R&D Tax Incentive that should not be.","The ATO and AusIndustry are working together to alert taxpayers and their advisors to practices that may result in increased risk of registering ineligible activities and incorrectly claiming the R&D Tax Incentive. | We will be contacting companies directly to advise them of our concerns with their registered activities and/or their R&D Tax Incentive claims if: • Advisors who may apply high risk practices are involved in the preparation of the registration application and/or claim. • The registration of R&D activities continues with the use of broad descriptions that fail to distinguish them from ordinary business activities. • The level of expenditure claimed for the R&D Tax Incentive is high for the industry or stage of business. | • Advisors who may apply high risk practices are involved in the preparation of the registration application and/or claim. • The registration of R&D activities continues with the use of broad descriptions that fail to distinguish them from ordinary business activities. • The level of expenditure claimed for the R&D Tax Incentive is high for the industry or stage of business. | Innovation and Science Australia will continue to issue Findings to companies confirming whether activities qualify for the R&D Tax Incentive. | We have developed a Specific Issue Guidance product to assist companies engaged in software development, and their accountants and advisors, to correctly identify and document eligible R&D activities in that industry. This product is available on www.business.gov.au","You should consider whether our concerns apply to you. The onus is on you to ensure that your registration and claim for the R&D Tax Incentive are correct. We would encourage you to: • Review your registration to ensure you are registering only eligible R&D activities. • Ensure your claim for the R&D Tax Incentive is correct and that you are not claiming expenditure related to ineligible ordinary business activities. • Have the records to demonstrate the R&D activities being undertaken and support the associated R&D Tax Incentive claim. | • Review your registration to ensure you are registering only eligible R&D activities. • Ensure your claim for the R&D Tax Incentive is correct and that you are not claiming expenditure related to ineligible ordinary business activities. • Have the records to demonstrate the R&D activities being undertaken and support the associated R&D Tax Incentive claim. | If you consider that our concerns apply, you may want to: • Phone us at the contact details provided below. • Seek independent professional advice. • Ask the ATO for our view through a private ruling or apply for a Finding from Innovation and Science Australia. • Apply to AusIndustry to amend or withdraw your registration or make a voluntary disclosure to the ATO or amend your tax return. | • Phone us at the contact details provided below. • Seek independent professional advice. • Ask the ATO for our view through a private ruling or apply for a Finding from Innovation and Science Australia. • Apply to AusIndustry to amend or withdraw your registration or make a voluntary disclosure to the ATO or amend your tax return. | Penalties may apply if you have incorrectly claimed the R&D Tax Incentive but will be significantly reduced if you make a voluntary disclosure. Generally, the reduction is greater if you make the disclosure before we notify you of an examination of your tax affairs. | Sanctions under criminal law may apply to fraudulent claims. | Registered tax agents, including R&D Consultants, advising companies to incorrectly claim ordinary business activities may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. Promoter penalty laws may also apply under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters of schemes to access the R&D Tax Incentive for ineligible activities. | For more information about eligible R&D activities, what can be claimed under the R&D Tax Incentive and recordkeeping, refer to Research and development tax incentive",PS LA 2008/15 | 355-25(2)(h) | 355-210(1) | 355-225(2) | 355-405 | 355-465 | The Act | Div 290 of Sch 1 | TA 2017/2 | TA 2017/3 | TA 2017/4 | View changes,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20175/NAT/ATO/00001,"The Research and Development (R & D) Tax Incentive is jointly administered by Innovation and Science Australia (supported by AusIndustry within the Department of Industry, Innovation and Science) and the ATO. | Updated ATO tip-off hotline number | Date of Effect: [1] See paragraph 355-25(2)(h) of the Income Tax Assessment Act 1997 . | [2] See subsection 355-225(2) of the Income Tax Assessment Act 1997 . | [3] Note, specific legislation applies to feedstock; see section 355-465 of the Income Tax Assessment Act 1997 or refer to the ATO Factsheet on Feedstock. | [4] See subsection 355-210(1) of the Income Tax Assessment Act 1997 . | [5] See section 355-405 of the Income Tax Assessment Act 1997 . | Private Groups and High Wealth Individuals | View changes made to this Taxpayer Alert."
TA 2017/5A,Claiming the Research and Development Tax Incentive for software development activities,24 February 2017,Current,,"This Alert has been jointly developed by the Australian Taxation Office (ATO) and Department of Industry, Innovation and Science. The Research and Development (R & D) Tax Incentive is jointly administered by Innovation and Science Australia (supported by AusIndustry within the Department of Industry, Innovation and Science) and the ATO. View the updated version of TA 2017/5. | This Alert has been jointly developed by the Australian Taxation Office (ATO) and Department of Industry, Innovation and Science. | The Research and Development (R & D) Tax Incentive is jointly administered by Innovation and Science Australia (supported by AusIndustry within the Department of Industry, Innovation and Science) and the ATO. | View the updated version of TA 2017/5. | This Addendum amends Taxpayer Alert TA 2017/5 to further clarify when routine testing steps in software development projects should not be claimed and when they may be eligible R&D activities. | TA 2017/5 is amended as follows: | 1. Under the heading ""Background"" Omit the following paragraph: A test or trial that does not set out to test causal relationships between technical variables to experimentally resolve an outcome that cannot be determined with existing knowledge or expertise, will not be an eligible core R&D activity under the R&D Tax Incentive. Examples of these types of activities include, but are not limited to: • Bug testing • Beta testing • System testing • Requirements testing • User Acceptance Testing • Data mapping and data migration testing • Testing the efficiency of different algorithms that are already known to work, and • Testing websites in operation by measuring the number of hits. And substititute with the following: There are routine testing steps in software development projects that are frequently incorrectly claimed as core R&D activities. Activities such as bug, beta and user acceptance testing are often claimed as core R&D regardless of the stage of development of a software project. Activities such as these can only be claimed as core R&D activities when they are being done as experiments that are resolving hypotheses about specific technical issues. Examples of activities that are not eligible unless there is evidence they are being done as experiments to test a hypothesis are: • Bug testing • Beta testing • System testing • Requirements testing • User Acceptance Testing • Data mapping and data migration testing • Testing the efficiency of different algorithms that are already known to work, and • Testing websites in operation by measuring the number of hits. The activities listed above, however, may be eligible as supporting R&D activities if they are directly related to core R&D activities. | Omit the following paragraph: A test or trial that does not set out to test causal relationships between technical variables to experimentally resolve an outcome that cannot be determined with existing knowledge or expertise, will not be an eligible core R&D activity under the R&D Tax Incentive. Examples of these types of activities include, but are not limited to: • Bug testing • Beta testing • System testing • Requirements testing • User Acceptance Testing • Data mapping and data migration testing • Testing the efficiency of different algorithms that are already known to work, and • Testing websites in operation by measuring the number of hits. | • Bug testing • Beta testing • System testing • Requirements testing • User Acceptance Testing • Data mapping and data migration testing • Testing the efficiency of different algorithms that are already known to work, and • Testing websites in operation by measuring the number of hits. | And substititute with the following: There are routine testing steps in software development projects that are frequently incorrectly claimed as core R&D activities. Activities such as bug, beta and user acceptance testing are often claimed as core R&D regardless of the stage of development of a software project. Activities such as these can only be claimed as core R&D activities when they are being done as experiments that are resolving hypotheses about specific technical issues. Examples of activities that are not eligible unless there is evidence they are being done as experiments to test a hypothesis are: • Bug testing • Beta testing • System testing • Requirements testing • User Acceptance Testing • Data mapping and data migration testing • Testing the efficiency of different algorithms that are already known to work, and • Testing websites in operation by measuring the number of hits. The activities listed above, however, may be eligible as supporting R&D activities if they are directly related to core R&D activities. | • Bug testing • Beta testing • System testing • Requirements testing • User Acceptance Testing • Data mapping and data migration testing • Testing the efficiency of different algorithms that are already known to work, and • Testing websites in operation by measuring the number of hits. | This Addendum applies on and from 20 February 2017.",,,,,updated version | TA 2017/5,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20175A/NAT/ATO/00001,
TA 2016/1,Inappropriate recognition of internally generated intangible assets and revaluation of intangible assets for thin capitalisation purposes,26 April 2016,Current,,"The ATO is reviewing arrangements where internally generated intangible items have been inappropriately recognised as assets, or have been over valued or inappropriately re-valued, with the consequence of increasing an entity's maximum allowable debt limit for thin capitalisation purposes. We have concerns that in some cases these items are not capable of meeting the definition of an intangible asset for recognition under the applicable accounting standard (as modified by the relevant statutory provisions discussed below). | We are currently reviewing arrangements which display the following features: • As part of calculating asset values for thin capitalisation purposes, an entity - • identifies an internally generated intangible item, the purported economic value of which is not disclosed in the entity's financial accounts; or • identifies an intangible asset disclosed in the financial accounts, the purported current economic value of which is not reflected in the entity's financial accounts. • The entity makes a choice pursuant to subsection 820-683(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to recognise the internally generated intangible item as an asset for the purposes of its thin capitalisation calculation, in circumstances where such an asset would not otherwise qualify for recognition under the applicable accounting standards, and then determines the value of that item for those purposes. • Alternatively, the entity makes a choice pursuant to subsection 820-684(2) of the ITAA 1997 to revalue an intangible asset for the purposes of its thin capitalisation calculation, in circumstances where such an asset would not otherwise qualify for revaluation under the applicable accounting standards. • The effect of either choice is to significantly increase the average value of assets for the purpose of the thin capitalisation calculation, allowing an increase in the calculated maximum allowable debt amount. • The choices to recognise an internally generated asset or revalue an intangible asset appear to be outside the scope of the special rules that modify the application of accounting standards for thin capitalisation purposes. • The value of the internally generated intangible item or revalued intangible asset is often materially large compared to the value of other assets disclosed in the entity's financial statements. • The additional maximum allowable debt capacity created by the recognition or revaluation allows the entity to claim additional debt deductions that would otherwise have been denied by the thin capitalisation limits or increases the debt loading capacity of the entity for future income years. | • As part of calculating asset values for thin capitalisation purposes, an entity - • identifies an internally generated intangible item, the purported economic value of which is not disclosed in the entity's financial accounts; or • identifies an intangible asset disclosed in the financial accounts, the purported current economic value of which is not reflected in the entity's financial accounts. • The entity makes a choice pursuant to subsection 820-683(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to recognise the internally generated intangible item as an asset for the purposes of its thin capitalisation calculation, in circumstances where such an asset would not otherwise qualify for recognition under the applicable accounting standards, and then determines the value of that item for those purposes. • Alternatively, the entity makes a choice pursuant to subsection 820-684(2) of the ITAA 1997 to revalue an intangible asset for the purposes of its thin capitalisation calculation, in circumstances where such an asset would not otherwise qualify for revaluation under the applicable accounting standards. • The effect of either choice is to significantly increase the average value of assets for the purpose of the thin capitalisation calculation, allowing an increase in the calculated maximum allowable debt amount. • The choices to recognise an internally generated asset or revalue an intangible asset appear to be outside the scope of the special rules that modify the application of accounting standards for thin capitalisation purposes. • The value of the internally generated intangible item or revalued intangible asset is often materially large compared to the value of other assets disclosed in the entity's financial statements. • The additional maximum allowable debt capacity created by the recognition or revaluation allows the entity to claim additional debt deductions that would otherwise have been denied by the thin capitalisation limits or increases the debt loading capacity of the entity for future income years. | • identifies an internally generated intangible item, the purported economic value of which is not disclosed in the entity's financial accounts; or • identifies an intangible asset disclosed in the financial accounts, the purported current economic value of which is not reflected in the entity's financial accounts.",,"We are concerned that in some circumstances entities are making choices to recognise internally generated items, where the item chosen falls outside the scope of the intangible asset recognition criteria in Australian Accounting Standards Board's standard AASB 138 Intangible Assets (AASB 138). As a consequence these internally generated intangible items do not satisfy the special asset value rules that modify the application of accounting standards for thin capitalisation purposes (sections 820-683 and 820-684 of the ITAA 1997). | Whilst a taxpayer may expend resources to internally generate intangible items, not all of these items will meet the definition of an intangible asset (refer to paragraphs 9 and 10 of AASB 138). For example, such expenditure might not be recognised as an asset because it does not result in the creation of an identifiable resource which is separable from the internally generated goodwill of a business. | We are concerned about the following arrangements: • Inappropriate recognition of internally generated intangible items pursuant to section 820-683 of the ITAA 1997. In particular, certain arrangements do not take into account that section 820-683 only modifies the 'cost' requirement for recognition under the accounting standard AASB 138. All other recognition criteria of that standard (identifiability, control over a resource and existence of future benefits) are still required to be satisfied for the item to qualify as an internally generated intangible asset (refer to paragraph 10 of AASB 138). Accordingly, we are concerned with choices made to recognise internally generated intangible items where - • the item cannot be separated from the entity (either individually or together with a related contract) or does not arise from contractual or other legal rights; • the entity does not have the requisite control over the internally generated item; or • all the potential future economic benefits of the intangible item do not flow to the taxpayer. Examples of inappropriately recognised items include (from our compliance activities) - • market related items such as 'customer relationships' or 'customer loyalty'; • human resource items, including 'skilled staff', 'management' or 'key employees/training'; • organisational resource items, including 'internal policies', 'internal meeting protocols', 'procedures' and 'manuals'; and • assets not owned and controlled by the taxpayer. • From an asset revaluation perspective, some of our currently identified concerns are in respect of the following: • Applying unsupportable or questionable management assumptions. For example - • Software valuations which assume a useful life of 25 years or more • Growth rates in excess of historic and probable market indicators. • Generic material such as internal policies, internal meeting protocols and procedures being revalued. • Double counting of asset value across multiple intangibles (e.g. recognition and revaluation of separate 'business processes' items connected to intellectual property), including failure to correspondingly impair other intangible assets where the 'revalued' intangible asset relies on the same underlying economic returns. • Revaluing the intangible asset based on economic returns which do not accrue to the taxpayer. • Entities not impairing assets where the fair value or the cash generating unit has declined (as required by AASB 136 Impairment of Assets). | • Inappropriate recognition of internally generated intangible items pursuant to section 820-683 of the ITAA 1997. In particular, certain arrangements do not take into account that section 820-683 only modifies the 'cost' requirement for recognition under the accounting standard AASB 138. All other recognition criteria of that standard (identifiability, control over a resource and existence of future benefits) are still required to be satisfied for the item to qualify as an internally generated intangible asset (refer to paragraph 10 of AASB 138). Accordingly, we are concerned with choices made to recognise internally generated intangible items where - • the item cannot be separated from the entity (either individually or together with a related contract) or does not arise from contractual or other legal rights; • the entity does not have the requisite control over the internally generated item; or • all the potential future economic benefits of the intangible item do not flow to the taxpayer. Examples of inappropriately recognised items include (from our compliance activities) - • market related items such as 'customer relationships' or 'customer loyalty'; • human resource items, including 'skilled staff', 'management' or 'key employees/training'; • organisational resource items, including 'internal policies', 'internal meeting protocols', 'procedures' and 'manuals'; and • assets not owned and controlled by the taxpayer. • From an asset revaluation perspective, some of our currently identified concerns are in respect of the following: • Applying unsupportable or questionable management assumptions. For example - • Software valuations which assume a useful life of 25 years or more • Growth rates in excess of historic and probable market indicators. • Generic material such as internal policies, internal meeting protocols and procedures being revalued. • Double counting of asset value across multiple intangibles (e.g. recognition and revaluation of separate 'business processes' items connected to intellectual property), including failure to correspondingly impair other intangible assets where the 'revalued' intangible asset relies on the same underlying economic returns. • Revaluing the intangible asset based on economic returns which do not accrue to the taxpayer. • Entities not impairing assets where the fair value or the cash generating unit has declined (as required by AASB 136 Impairment of Assets). | • the item cannot be separated from the entity (either individually or together with a related contract) or does not arise from contractual or other legal rights; • the entity does not have the requisite control over the internally generated item; or • all the potential future economic benefits of the intangible item do not flow to the taxpayer. | • market related items such as 'customer relationships' or 'customer loyalty'; • human resource items, including 'skilled staff', 'management' or 'key employees/training'; • organisational resource items, including 'internal policies', 'internal meeting protocols', 'procedures' and 'manuals'; and • assets not owned and controlled by the taxpayer. | • Applying unsupportable or questionable management assumptions. For example - • Software valuations which assume a useful life of 25 years or more • Growth rates in excess of historic and probable market indicators. • Generic material such as internal policies, internal meeting protocols and procedures being revalued. • Double counting of asset value across multiple intangibles (e.g. recognition and revaluation of separate 'business processes' items connected to intellectual property), including failure to correspondingly impair other intangible assets where the 'revalued' intangible asset relies on the same underlying economic returns. • Revaluing the intangible asset based on economic returns which do not accrue to the taxpayer. | • Software valuations which assume a useful life of 25 years or more • Growth rates in excess of historic and probable market indicators.","We are currently reviewing these arrangements and have commenced compliance activities in relation to a number of cases. We have received external expert advice on the application of the relevant accounting standards. | Our compliance activities have resulted in adjustments where the intangible item has not qualified as an internally generated asset as defined under AASB 138 (as modified by section 820-683 of the ITAA 1997), or where the revaluation of an intangible asset has been excessive. Similarly we have made adjustments where subsequent impairment of revalued assets should have occurred. | The Commissioner is also considering the extent of his power under section 820-690 of the ITAA 1997 to substitute more appropriate asset values where the Commissioner considers that an entity has overvalued its assets, and the circumstance in which it would, or might be appropriate to exercise this power. | Compliance activity will continue and we will provide further guidance on the technical accounting and legal positions of these arrangements. We will also canvass our concerns as well as practices we find acceptable in further detail in guidance products and professional forums.","If you have made a choice to recognise or revalue intangible assets for your thin capitalisation calculation, or are contemplating doing so, we recommend that you seek independent advice, review your arrangement or discuss your situation with us by emailing us at PGIAdvice@ato.gov.au | Date of Issue: 26 April 2016 | Date of Effect: | Subject References: Thin capitalisation Asset values Revaluation Intangible assets Debt deduction | Contact officer: Paul Korganow Business line: Public Groups and International Phone: (03) 8601 9505",Treasury Law Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Act 2024 | PS LA 2008/15,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20161/NAT/ATO/00001,"o fixed ratio test o group ratio test o third party debt test | ADIs, securitisation vehicles and certain special purpose entities are excluded from the debt deduction creation rules. | Entities that are Australian plantation forestry entities are excluded from the new rules. For these entities, the previous rules will continue to apply."
TA 2016/2,Interim arrangements in response to the Multinational Anti Avoidance Law (MAAL),26 April 2016,Current,"We are currently reviewing certain arrangements implemented by taxpayers with effect from 1 January 2016 in response to the new Multinational Anti-Avoidance Law (MAAL). These arrangements have been put in place as interim measures until taxpayers transition to long term, MAAL-compliant structures. | Whilst we have seen interim arrangements that are commercially and economically realistic, we are concerned that some taxpayers are entering into artificial and contrived arrangements to avoid the application of the MAAL. In addition, these arrangements may not be legally effective in achieving their purpose, and may also themselves be schemes to which the anti-avoidance rules in the Income Tax Assessment Acts apply. | One such scheme involves the foreign and Australian entities swapping their roles via contracts. These contracts purport to make the Australian entity the distributor of the products or services and the foreign entity an agent of the Australian entity, collecting the sales revenue from customers on its behalf. This is despite no changes being made to the underlying functions performed by the entities. | This arrangement purports to result in no supply being made by the foreign entity and, potentially, the foreign entity becoming a permanent establishment of the Australian entity in the foreign entity's jurisdiction (which opens an opportunity to argue that income from the Australian sales should continue to be returned in the foreign tax jurisdiction). | Royalty payments made by the foreign entity that makes supplies to Australian customers (payments which are usually made to another foreign related party within the group) might be subject to Australian royalty withholding tax under the MAAL. In some cases, contrary to the parties' previous arrangements, these payments have been re characterised as a distribution fee in an attempt to escape these withholding tax obligations. | We caution companies to take care that structures or arrangements used in response to the MAAL do not themselves amount to schemes to avoid tax. We reiterate our advice that companies should work with the ATO on arrangements they are considering for the purpose of avoiding the application of the MAAL. This will help ensure that their new arrangements reflect the substance of their activities in Australia, including appropriately reflecting the functions performed, assets used and risk assumed in Australia. There should also be an appropriate consideration of any withholding tax obligations. | We caution intermediaries to make sure that they are not promoting a scheme to avoid tax. Again, working with the ATO on arrangements being developed can ensure that this does not happen.","The MAAL applies to multinational entities that: • enter into or carry out schemes designed to avoid or reduce the attribution of income to a permanent establishment (PE) in Australia • the principal purpose, or one of the principal purposes, of the scheme was to obtain an Australian tax benefit or to obtain both an Australian tax benefit and reduction in a foreign tax liability. | • enter into or carry out schemes designed to avoid or reduce the attribution of income to a permanent establishment (PE) in Australia • the principal purpose, or one of the principal purposes, of the scheme was to obtain an Australian tax benefit or to obtain both an Australian tax benefit and reduction in a foreign tax liability. | The MAAL empowers the Commissioner of Taxation (Commissioner) to cancel any tax benefits that the foreign entity and/or its related parties derived from the scheme on or after 1 January 2016. | We are aware of taxpayers seeking to use artificial and contrived interim arrangements with the sole aim of avoiding a potential MAAL liability from 1 January 2016. Such arrangements appear artificial, are inconsistent with the policy intent of the MAAL, and will result in closer scrutiny from the ATO. | One example is where, prior to the restructure, a multinational's structure fulfils the MAAL criteria set out in subsection 177DA(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936), but under the interim arrangement: • Australian customers continue to enter into contracts with the foreign entity • the foreign entity grants the right to distribute and/or supply products or services to an associate entity in Australia • the Australian entity enters into an undisclosed agency agreement with the foreign entity to supply these products on behalf of the Australian entity, with the aim of swapping the entities' roles despite no changes being made to the underlying functions performed by the entities • the foreign entity does not recognise a PE in Australia. | • Australian customers continue to enter into contracts with the foreign entity • the foreign entity grants the right to distribute and/or supply products or services to an associate entity in Australia • the Australian entity enters into an undisclosed agency agreement with the foreign entity to supply these products on behalf of the Australian entity, with the aim of swapping the entities' roles despite no changes being made to the underlying functions performed by the entities • the foreign entity does not recognise a PE in Australia. | Under this arrangement, the foreign entity continues to supply the products or services to Australian customers but purports to avoid the application of the MAAL by arguing that: • the supply function is undertaken wholly as agent on behalf of an Australian entity and thus no supply is made by a foreign entity (see subsection 177DA(1)(a)(i) of the ITAA 1936); and • no income is derived by the foreign entity from the supply (see subsection 177DA(1)(a)(iv) of the ITAA 1936). | • the supply function is undertaken wholly as agent on behalf of an Australian entity and thus no supply is made by a foreign entity (see subsection 177DA(1)(a)(i) of the ITAA 1936); and • no income is derived by the foreign entity from the supply (see subsection 177DA(1)(a)(iv) of the ITAA 1936). | Variations to the above arrangement may include a disclosed agency agreement, with which the ATO would have similar concerns. | The purported agency arrangement described above might display the following features: 1. The foreign entity enters into a limited risk distribution agreement with an Australian group entity with effect from 1 January 2016. 2. At the same time, the parties enter into an agency agreement with a stated purpose of giving full operational effect to the distribution agreement. The parties state that it is necessary to enter into this agency agreement, and thus reverse the roles of the principal and agent under the distribution agreement, in order to give legal effect to the distribution agreement in relation to customer arrangements. In some instances, the distribution and agency relationship only covers new customer arrangements and contracts, and not existing arrangements and contracts. 3. There is no material change to the functions that were undertaken by the employees of each of the parties (regarding the supply to Australian customers) before and after these agreements were entered into. 4. The foreign entity continues to enter into contracts with Australian customers for the supply of products or services, including contracts that supply Australian customers with licences for the use of products or services. These customer contracts are purported to be entered into by the foreign entity as agent on behalf of the Australian distributor. However, the requisite rights have not been assigned to the distributor under the distribution agreement which would enable it to makes such supplies. In particular, the Australian distributor has no legal right to license Australian customers to use the product or service and only the foreign entity holds this legal right. As the Australian company does not have the right to authorise the use of the intellectual property by the Australian customers, to that extent at least, this demonstrates that the foreign entity would be contracting with Australian customers as principal, rather than agent. 5. The foreign entity already has the right to enter into contracts in its own right with Australian customers regardless of the agency agreement, i.e. it can license the use of software and distribute the products in its own right. By comparison, under the agency and distribution agreements, the Australian distributor is only deemed to acquire rights to the products, excluding intellectual property rights, and then immediately pass those rights to the Australian customer. | 1. The foreign entity enters into a limited risk distribution agreement with an Australian group entity with effect from 1 January 2016. 2. At the same time, the parties enter into an agency agreement with a stated purpose of giving full operational effect to the distribution agreement. The parties state that it is necessary to enter into this agency agreement, and thus reverse the roles of the principal and agent under the distribution agreement, in order to give legal effect to the distribution agreement in relation to customer arrangements. In some instances, the distribution and agency relationship only covers new customer arrangements and contracts, and not existing arrangements and contracts. 3. There is no material change to the functions that were undertaken by the employees of each of the parties (regarding the supply to Australian customers) before and after these agreements were entered into. 4. The foreign entity continues to enter into contracts with Australian customers for the supply of products or services, including contracts that supply Australian customers with licences for the use of products or services. These customer contracts are purported to be entered into by the foreign entity as agent on behalf of the Australian distributor. However, the requisite rights have not been assigned to the distributor under the distribution agreement which would enable it to makes such supplies. In particular, the Australian distributor has no legal right to license Australian customers to use the product or service and only the foreign entity holds this legal right. As the Australian company does not have the right to authorise the use of the intellectual property by the Australian customers, to that extent at least, this demonstrates that the foreign entity would be contracting with Australian customers as principal, rather than agent. 5. The foreign entity already has the right to enter into contracts in its own right with Australian customers regardless of the agency agreement, i.e. it can license the use of software and distribute the products in its own right. By comparison, under the agency and distribution agreements, the Australian distributor is only deemed to acquire rights to the products, excluding intellectual property rights, and then immediately pass those rights to the Australian customer. | In other cases, the foreign entity that makes supplies to Australian customers has previously been making a royalty payment under a licensing agreement with another foreign related party within the group for the use of intellectual property. This was in order for the foreign entity to have the legal right to supply to Australian and other customers. This licensing agreement has been replaced with a distribution agreement that does not give the foreign entity the right to use any of the intellectual property. However, there has been no change in the functions of the foreign entity or the supply to Australian customers (including the contractual arrangements and rights). The royalty payment that might be subject to royalty Australian withholding tax under the MAAL has been re-characterised as a distribution fee in an attempt to escape these withholding tax obligations, contrary to the parties' previous arrangements.",,"It is recognised that many taxpayers have not been able to restructure into MAAL-compliant arrangements by 1 January 2016 due to a range of legitimate commercial and operational reasons, and have therefore needed to adopt interim arrangements. | Interim arrangements must in all cases reflect commercial reality and ensure that the right amount of tax is being paid in Australia with respect to periods commencing from 1 January 2016. | We have seen arrangements that broadly recognise this principle. These include, for example, taxpayers recognising that a foreign entity has a PE in Australia and attributing the appropriate income to it, as well as recognising the appropriate royalty and interest withholding tax obligations. | It is likely, however, that certain interim arrangements we have seen (as described above) will not be effective in avoiding the application of the MAAL and they are clearly inconsistent with its underlying policy intent. We are concerned that these arrangements: • are artificially structured to avoid the application of the MAAL • do not involve a true agency relationship • do not accurately reflect the relevant capacity in which the foreign entity is contracting with Australian customers • do not result in the Australian entity having the necessary licensing rights over the intangible assets needed to contract with Australian customers • may otherwise involve changes to licensing arrangements in the taxpayer's global structure which do not recognise the rights needed to supply products or services to Australian customers. | • are artificially structured to avoid the application of the MAAL • do not involve a true agency relationship • do not accurately reflect the relevant capacity in which the foreign entity is contracting with Australian customers • do not result in the Australian entity having the necessary licensing rights over the intangible assets needed to contract with Australian customers • may otherwise involve changes to licensing arrangements in the taxpayer's global structure which do not recognise the rights needed to supply products or services to Australian customers. | We are therefore concerned that these arrangements do not result in the appropriate amount of income tax being paid in Australia and do not involve an appropriate allocation of functions undertaken, assets used and risk assumed that would occur if the parties had been dealing in commercial arrangements at arm's length. The main technical issues that arise with these types of arrangements are: • whether the agreements are legally effective in establishing the distribution and agency relationship in the manner sought • whether section 177DA in Part IVA of the ITAA 1936 still applies to the arrangement • whether section 177D in Part IVA of the ITAA 1936 applies to the arrangement • whether the contractual arrangements between the related parties, including the licensing rights, are consistent with the contractual licensing arrangements with third party Australian customers • the application of Subdivision 815-B of the Income Tax Assessment Act 1997 to the related party agreements between the Australian distributor and the relevant foreign entity(ies) and whether the allocation of functions performed, risks borne and assets owned/used to the Australian operations is not artificial or contrived and accords with economic and business imperatives of those operations • whether the Australian entity has a foreign PE in the country of residence of the foreign entity with which it enters into the arrangements and whether any income attributable to such PE is returned as non-assessable non-exempt income under section 23AH of the ITAA 1936 • whether the Australian entity is entitled to a foreign income tax offset on foreign tax paid on any income attributable to its foreign PE, to the extent it is not returned as non-assessable non-exempt income under section 23AH of the ITAA 1936. | • whether the agreements are legally effective in establishing the distribution and agency relationship in the manner sought • whether section 177DA in Part IVA of the ITAA 1936 still applies to the arrangement • whether section 177D in Part IVA of the ITAA 1936 applies to the arrangement • whether the contractual arrangements between the related parties, including the licensing rights, are consistent with the contractual licensing arrangements with third party Australian customers • the application of Subdivision 815-B of the Income Tax Assessment Act 1997 to the related party agreements between the Australian distributor and the relevant foreign entity(ies) and whether the allocation of functions performed, risks borne and assets owned/used to the Australian operations is not artificial or contrived and accords with economic and business imperatives of those operations • whether the Australian entity has a foreign PE in the country of residence of the foreign entity with which it enters into the arrangements and whether any income attributable to such PE is returned as non-assessable non-exempt income under section 23AH of the ITAA 1936 • whether the Australian entity is entitled to a foreign income tax offset on foreign tax paid on any income attributable to its foreign PE, to the extent it is not returned as non-assessable non-exempt income under section 23AH of the ITAA 1936. | With respect to cases involving re-characterisation of royalty payments to distribution fees, the ATO has similar concerns about the foreign entity making supplies to Australian customers where it does not have the rights, as purported by the contractual arrangement, necessary to make such supplies.","We are engaging with taxpayers who have put forward these arrangements to explore the issues of concern and to ensure that any restructuring arrangements do not seek to avoid the application of the MAAL in an artificial and contrived manner. | The ATO has processes in place to work collaboratively with taxpayers during the transition to MAAL-compliant structures that address, among other things, the tax liabilities arising between the commencement of the MAAL, i.e. 1 January 2016, and the point at which a final structure is put in place. Information on these processes can be found here . | Taxpayers and advisors who put forward these types of arrangements will be subject to increased scrutiny. This includes consideration of whether the distribution and agency structure is tax driven and legally effective, and whether the arrangement is inconsistent with the economic substance and commercial reality of the activities carried out in Australia and not in line with the MAAL's policy intent. | We will initiate compliance review activities if necessary to address such arrangements and this may result in substantial penalties of up to 120% of the tax avoided being imposed. | Given the nature of the arrangements, any entity involved in the promotion of such arrangements may be considered a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. We will be allocating compliance resources to consider the effectiveness of the arrangements and the potential application of Division 290.","If you have entered into a similar arrangement to that described in this alert, you may wish to seek advice as to the legal and tax consequences of the arrangement. We would also encourage you to email us at MAAL@ato.gov.au or contact the officer named in this Taxpayer Alert to discuss your arrangement.","PS LA 2008/15 | MT 2012/3 | LCG 2015/2 | PS LA 2007/7 | PS LA 2007/24 | PS LA 2008/6 | Section 6 | Section 23AH | Part IVA | Section 177D | Section 177DA | Subdivision 815-B | Schedule 1, Division 290",False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20162/NAT/ATO/00001,Tax agents who would like to provide information about individuals or companies potentially promoting arrangements covered by this Taxpayer Alert should also use the above contact details.
TA 2016/3,Arrangements involving related party foreign currency denominated finance with related party cross currency interest rate swaps,26 April 2016,Current,,"We are currently reviewing arrangements which appear to be designed to increase the cost of corporate borrowings by Australian companies from their overseas related parties and/or avoid interest withholding taxes. Under these arrangements, companies use their related party financing arrangements to create an alleged need to swap currencies and periodical payments for questionable commercial reasons. The related party cross currency interest rate swap agreements we have reviewed have involved the Australian company becoming liable to further payments to an offshore related party. These payments represent additional financing costs but are not in the legal form of interest. We are concerned that these arrangements achieve contrived thin capitalisation, withholding tax and transfer pricing outcomes. | The arrangements being reviewed involve the economic conversion of a lower interest rate currency related party borrowing (usually US dollars (USD)) into a higher cost related party currency loan (usually Australian dollars (AUD)) for which the Australian entity: • claims significantly more deductions by way of the additional amounts payable under the related party derivative; and/or • does not pay interest withholding tax on any of the amounts payable under the related party derivative. | • claims significantly more deductions by way of the additional amounts payable under the related party derivative; and/or • does not pay interest withholding tax on any of the amounts payable under the related party derivative. | For the purposes of simplicity, references in this alert will generally be to AUD and USD, although should be read as extending to similar arrangements using any higher interest rate currency and lower interest rate currency. | In many cases the global economic group will have itself funded the related party debt funding from existing cash reserves and/or from external borrowing in the lower rate currency. | Our concerns about these arrangements are that the funding has been implemented in an excessively complex manner for tax purposes, rather than in a simpler manner more appropriate in the circumstances such as funding by AUD loans, USD loans (without swaps) or equity inclusive funding. | The potential tax consequences are primarily in relation to the application of the rules relating to general deductibility, non-arm's length conditions, i.e. transfer pricing, and the general anti-avoidance rules including withholding tax benefits. | The exact features of the arrangement, and our concerns, will differ depending on various factors including: • The 'natural' currency of the Australian entity, i.e. the currency in which it will be earning the revenues to repay the loan • The accounting functional currency of the Australian entity • The Australian tax functional currency of the Australian entity. | • The 'natural' currency of the Australian entity, i.e. the currency in which it will be earning the revenues to repay the loan • The accounting functional currency of the Australian entity • The Australian tax functional currency of the Australian entity. | The diagram below shows a simplified example of the type of arrangement being reviewed: | These arrangements typically display all or several of the following features: • The accounting functional currency of the Australian entity's global group is a foreign currency. • The Australian entity enters into a significant offshore related party financing arrangement or refinancing arrangement under which the Australian entity assumes lower interest rate foreign currency denominated liabilities (usually USD). The financing arrangement may be in the form of loans or instruments treated as debt for Australian tax purposes, which could be hybrids not treated as debt in the overseas jurisdiction. • The 'natural currency' of the Australian entity will sometimes be USD, in that: • the Australian taxpayer entity needs foreign currency, for example, to meet foreign currency liabilities for capital expenditure, working capital or refinancing purposes • the relevant operations in Australia generate revenue and cash flows predominantly in foreign currency and this foreign currency is reasonably considered to be the 'natural' currency of the Australian taxpayer entity. • Where the natural currency of the Australian entity is instead AUD, depending on the extent of the Australian entity's Australian dollar funding requirements and Australian dollar revenues, the net effect of all the relevant related party transactions is that the Australian entity obtains AUD and/or settles its obligations in AUD. • Where the offshore related party borrowing is denominated in a foreign currency, the Australian entity, or a member of the entity's Australian tax consolidated or multiple entry consolidated (MEC) group, enters into a related party cross currency swap or other foreign currency derivative with an offshore related party. Under the related party derivative, the Australian entity is liable to pay a higher interest rate currency, usually AUD, and is entitled to receive the foreign currency, being the foreign currency in which the Australian entity's offshore related party borrowings are denominated. There may or may not be actual exchange or payment of Australian dollars or foreign currency under the derivative. • The rights and obligations under the related party derivative are reasonably expected to result in net periodic amounts payable by the Australian entity to the offshore related counterparty due to the reasonably anticipated potential changes in the exchange rate for the relevant foreign currency. • Use of hybrid entities or instruments in the Australian tax consolidated or MEC group of the Australian taxpayer entity such that: • the other side of the related party derivative is untaxed in the relevant overseas jurisdiction • payments under the derivative are deducted twice, i.e. once in Australia and once by the hybrid entity's overseas owners in the overseas jurisdiction; and/or • the level of net Australian debt appears to be a function of the Australian tax savings. • The rights and obligations of the offshore related counterparty under the derivative are not offset through third party transactions, either directly or indirectly via back-to-back transactions involving other members of the global group. • The offshore related party may not be in a position to utilise foreign tax credits arising from Australian withholding tax payments. • For an Australian entity with an Australian dollar functional currency for Australian tax purposes, the tax consequences of payment of the 'principal' leg of the related party derivative is purported to offset potential Australian tax payable by the Australian entity on any foreign currency exchange gain when the related party borrowing by the entity matures or is otherwise repaid or terminated. • Where the revenues of the Australian entity are primarily in the foreign currency, the related party derivative does not hedge or otherwise offset any commensurate cash flow exposure in relation to the liability resulting from movement in relevant currency exchange rates, other than the aforementioned potential Australian tax payable. • The net effect of all the relevant related party transactions is that the Australian entity increases its deductible financing costs from the relatively lower foreign currency financing costs to the relatively higher Australian dollar financing costs, potentially without being subject to interest withholding tax on the incremental financing costs which would have been subject to interest withholding tax in the case of economically equivalent AUD financing. | • The accounting functional currency of the Australian entity's global group is a foreign currency. • The Australian entity enters into a significant offshore related party financing arrangement or refinancing arrangement under which the Australian entity assumes lower interest rate foreign currency denominated liabilities (usually USD). The financing arrangement may be in the form of loans or instruments treated as debt for Australian tax purposes, which could be hybrids not treated as debt in the overseas jurisdiction. • The 'natural currency' of the Australian entity will sometimes be USD, in that: • the Australian taxpayer entity needs foreign currency, for example, to meet foreign currency liabilities for capital expenditure, working capital or refinancing purposes • the relevant operations in Australia generate revenue and cash flows predominantly in foreign currency and this foreign currency is reasonably considered to be the 'natural' currency of the Australian taxpayer entity. • Where the natural currency of the Australian entity is instead AUD, depending on the extent of the Australian entity's Australian dollar funding requirements and Australian dollar revenues, the net effect of all the relevant related party transactions is that the Australian entity obtains AUD and/or settles its obligations in AUD. • Where the offshore related party borrowing is denominated in a foreign currency, the Australian entity, or a member of the entity's Australian tax consolidated or multiple entry consolidated (MEC) group, enters into a related party cross currency swap or other foreign currency derivative with an offshore related party. Under the related party derivative, the Australian entity is liable to pay a higher interest rate currency, usually AUD, and is entitled to receive the foreign currency, being the foreign currency in which the Australian entity's offshore related party borrowings are denominated. There may or may not be actual exchange or payment of Australian dollars or foreign currency under the derivative. • The rights and obligations under the related party derivative are reasonably expected to result in net periodic amounts payable by the Australian entity to the offshore related counterparty due to the reasonably anticipated potential changes in the exchange rate for the relevant foreign currency. • Use of hybrid entities or instruments in the Australian tax consolidated or MEC group of the Australian taxpayer entity such that: • the other side of the related party derivative is untaxed in the relevant overseas jurisdiction • payments under the derivative are deducted twice, i.e. once in Australia and once by the hybrid entity's overseas owners in the overseas jurisdiction; and/or • the level of net Australian debt appears to be a function of the Australian tax savings. • The rights and obligations of the offshore related counterparty under the derivative are not offset through third party transactions, either directly or indirectly via back-to-back transactions involving other members of the global group. • The offshore related party may not be in a position to utilise foreign tax credits arising from Australian withholding tax payments. • For an Australian entity with an Australian dollar functional currency for Australian tax purposes, the tax consequences of payment of the 'principal' leg of the related party derivative is purported to offset potential Australian tax payable by the Australian entity on any foreign currency exchange gain when the related party borrowing by the entity matures or is otherwise repaid or terminated. • Where the revenues of the Australian entity are primarily in the foreign currency, the related party derivative does not hedge or otherwise offset any commensurate cash flow exposure in relation to the liability resulting from movement in relevant currency exchange rates, other than the aforementioned potential Australian tax payable. • The net effect of all the relevant related party transactions is that the Australian entity increases its deductible financing costs from the relatively lower foreign currency financing costs to the relatively higher Australian dollar financing costs, potentially without being subject to interest withholding tax on the incremental financing costs which would have been subject to interest withholding tax in the case of economically equivalent AUD financing. | • the Australian taxpayer entity needs foreign currency, for example, to meet foreign currency liabilities for capital expenditure, working capital or refinancing purposes • the relevant operations in Australia generate revenue and cash flows predominantly in foreign currency and this foreign currency is reasonably considered to be the 'natural' currency of the Australian taxpayer entity. | • the other side of the related party derivative is untaxed in the relevant overseas jurisdiction • payments under the derivative are deducted twice, i.e. once in Australia and once by the hybrid entity's overseas owners in the overseas jurisdiction; and/or • the level of net Australian debt appears to be a function of the Australian tax savings. | Accounting and capital extraction | Some taxpayers have sought to argue that these arrangements have been entered into for accounting (at local entity and/or whole of group level) or ease of capital extraction purposes. On closer examination, these purposes have generally been found to be ancillary at most and/or addressed at protecting against the potential adverse tax consequences of other tax structuring elements of the financing, in particular the use of hybrid entities and arrangements. In some cases, there may be an effect in International Financial Reporting Standards (IFRS) or Financial Accounting Standards Board (FASB) accounting results, but the economic group's primary reporting to the market 'normalises' this effect. | It may also be necessary to consider whether the accounting and capital extraction result could have been achieved through simpler financing mechanisms, including ordinary equity.",,"We are concerned that the funding has been implemented in an excessively complex manner for Australian tax purposes, rather than in a simpler manner more appropriate in the circumstances, such as funding by AUD loans, USD loans (without swaps) or equity inclusive funding. | We are particularly concerned with arrangements with the following features: • The cross border related party derivative transaction - • does not hedge or offset a commensurate commercial exposure of the Australian entity • is claimed to 'hedge' a contingent liability to pay Australian tax on any foreign currency gain that might arise when the related party foreign currency loan is repaid or terminated; and/or • hedges or offsets an exposure that was created by another cross border related party transaction. • Any economic and/or accounting exposure or risk which the derivative is claimed to hedge is not required to be further addressed at the global group level. For example - • the exposure and risk are offset or otherwise substantially netted off against assets, rights or obligations elsewhere in the global group • the derivative is expected to generate a loss to 'hedge' against accounting risks at the Australian group level that cause no substantive issues for the global group • the accounting risk is ancillary, could be easily addressed through other simpler financing mechanisms and/or may be existent in IFRS/FASB accounts but is excluded from external reporting of normalised earnings or similar; and/or • the residual economic or accounting risk relates to the tax consequences of the financing, in particular tax consequences arising as a result of asymmetric taxation of the lender and borrower. • The net pre-tax financial outcome to the Australian group is neutral or negative, as compared with other forms of funding, with the net financial benefit to the group instead flowing from the Australian tax savings from the arrangement. • Incorrect pricing or mispricing of the related party derivative and/or an embedded high profit margin for the offshore related derivative counterparty (akin to a bank's margin). | • The cross border related party derivative transaction - • does not hedge or offset a commensurate commercial exposure of the Australian entity • is claimed to 'hedge' a contingent liability to pay Australian tax on any foreign currency gain that might arise when the related party foreign currency loan is repaid or terminated; and/or • hedges or offsets an exposure that was created by another cross border related party transaction. • Any economic and/or accounting exposure or risk which the derivative is claimed to hedge is not required to be further addressed at the global group level. For example - • the exposure and risk are offset or otherwise substantially netted off against assets, rights or obligations elsewhere in the global group • the derivative is expected to generate a loss to 'hedge' against accounting risks at the Australian group level that cause no substantive issues for the global group • the accounting risk is ancillary, could be easily addressed through other simpler financing mechanisms and/or may be existent in IFRS/FASB accounts but is excluded from external reporting of normalised earnings or similar; and/or • the residual economic or accounting risk relates to the tax consequences of the financing, in particular tax consequences arising as a result of asymmetric taxation of the lender and borrower. • The net pre-tax financial outcome to the Australian group is neutral or negative, as compared with other forms of funding, with the net financial benefit to the group instead flowing from the Australian tax savings from the arrangement. • Incorrect pricing or mispricing of the related party derivative and/or an embedded high profit margin for the offshore related derivative counterparty (akin to a bank's margin). | • does not hedge or offset a commensurate commercial exposure of the Australian entity • is claimed to 'hedge' a contingent liability to pay Australian tax on any foreign currency gain that might arise when the related party foreign currency loan is repaid or terminated; and/or • hedges or offsets an exposure that was created by another cross border related party transaction. | • the exposure and risk are offset or otherwise substantially netted off against assets, rights or obligations elsewhere in the global group • the derivative is expected to generate a loss to 'hedge' against accounting risks at the Australian group level that cause no substantive issues for the global group • the accounting risk is ancillary, could be easily addressed through other simpler financing mechanisms and/or may be existent in IFRS/FASB accounts but is excluded from external reporting of normalised earnings or similar; and/or • the residual economic or accounting risk relates to the tax consequences of the financing, in particular tax consequences arising as a result of asymmetric taxation of the lender and borrower. | We are concerned these arrangements are being used for the purpose, or for purposes which include, the non-payment of interest withholding tax or the claiming of increased deductions by the relevant Australian entities. This might attract the operation of the anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) or other anti-avoidance rules. | We are also concerned about: • the deductibility of the payments under the related party derivative; and/or • whether the related party derivative and/or the related party borrowing - • are on conditions that are not the conditions that might be expected to operate between independent parties dealing wholly independently with each other for the purposes of applying Division 815-A or Division 815-B of the Income Tax Assessment Act 1997, or • involved non-arm's length consideration for the purposes of applying section 136AD of ITAA 1936. | • the deductibility of the payments under the related party derivative; and/or • whether the related party derivative and/or the related party borrowing - • are on conditions that are not the conditions that might be expected to operate between independent parties dealing wholly independently with each other for the purposes of applying Division 815-A or Division 815-B of the Income Tax Assessment Act 1997, or • involved non-arm's length consideration for the purposes of applying section 136AD of ITAA 1936. | • are on conditions that are not the conditions that might be expected to operate between independent parties dealing wholly independently with each other for the purposes of applying Division 815-A or Division 815-B of the Income Tax Assessment Act 1997, or • involved non-arm's length consideration for the purposes of applying section 136AD of ITAA 1936.",We are currently reviewing these arrangements and have commenced compliance activities in relation to a number of cases. Compliance activity will continue and we are developing our technical position on the arrangements. | We will canvass our concerns in more detail in due course.,"If you have entered into, or are contemplating entering into, an arrangement of this type we encourage you to discuss your situation with us by emailing PGIAdvice@ato.gov.au | Date of Issue: 26 April 2016 | Date of Effect: | Contact officer: Stephanie Long Business line: Public Groups and International Phone: (02) 9374 2040",Treasury Law Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Act 2024 | PS LA 2008/15,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20163/NAT/ATO/00001,"o fixed ratio test o group ratio test o third party debt test | ADIs, securitisation vehicles and certain special purpose entities are excluded from the debt deduction creation rules. | Entities that are Australian plantation forestry entities are excluded from the new rules. For these entities, the previous rules will continue to apply."
TA 2016/4,Cross-border leasing arrangements involving mobile assets,26 April 2016,Current,,"We are currently reviewing various cross-border leasing arrangements involving mobile assets, for example vessels. Multinational enterprises (MNEs) currently use a wide range of legal arrangements for bringing assets into Australia for commercial purposes. Often related legal entities are interposed to lease an asset from a foreign owner to an Australian operator. Our concerns relate, firstly, to whether the inter-positioned company has been put there for the purpose of gaining favourable tax treaty treatment. Anti-avoidance rules in our tax laws may apply if this is the case. Secondly, we are concerned about whether the amount brought to tax is consistent with the contribution made by the Australian operations, including the use of the mobile asset, and whether this meets the arm's length requirements of the transfer pricing provisions of our tax laws.","The diagram below illustrates one of these arrangements, commonly referred to as a lease-in lease-out (LILO) arrangement. | This LILO arrangement has the following features: • The Head Lessor, a foreign resident, legally owns an asset and leases the asset to the Sub-Lessor, also a foreign resident, who sub-leases the asset to the Sub-Lessee. • The Australian Sub-Lessee provides services to an Australian third party customer in relation to the asset. • The asset is substantial equipment. • The use of the asset in Australia under the sub-lease results in the Sub-Lessor having a permanent establishment (PE) in Australia under the relevant tax treaty. • The Sub-Lessee is responsible for operating the asset, sourcing the crew and dealing with the third party customer. • The Sub-Lessor provides services to the Sub-Lessee in relation to the operation of the asset. | • The Head Lessor, a foreign resident, legally owns an asset and leases the asset to the Sub-Lessor, also a foreign resident, who sub-leases the asset to the Sub-Lessee. • The Australian Sub-Lessee provides services to an Australian third party customer in relation to the asset. • The asset is substantial equipment. • The use of the asset in Australia under the sub-lease results in the Sub-Lessor having a permanent establishment (PE) in Australia under the relevant tax treaty. • The Sub-Lessee is responsible for operating the asset, sourcing the crew and dealing with the third party customer. • The Sub-Lessor provides services to the Sub-Lessee in relation to the operation of the asset.",We are concerned with the following: • The use of transfer pricing and profit attribution approaches that result in lower taxable profits in Australia which are not consistent with an arm's length leasing arrangement and do not reflect the true economic contribution of the Australian operations. • Withholding tax may apply to the lease payments depending on the specific circumstances. • The Head Lessor may be liable to tax because the relevant tax treaty deems the head lease payments to have an Australian source for the purposes of Australia's domestic tax law provisions. • The Sub-Lessor has limited commercial activities or there are limited sound commercial reasons for its position in the leasing arrangement. Part IVA of the Income Tax Assessment Act 1936 may apply if the inclusion of the sub-lease is for the dominant purpose of obtaining a tax benefit. | • The use of transfer pricing and profit attribution approaches that result in lower taxable profits in Australia which are not consistent with an arm's length leasing arrangement and do not reflect the true economic contribution of the Australian operations. • Withholding tax may apply to the lease payments depending on the specific circumstances. • The Head Lessor may be liable to tax because the relevant tax treaty deems the head lease payments to have an Australian source for the purposes of Australia's domestic tax law provisions. • The Sub-Lessor has limited commercial activities or there are limited sound commercial reasons for its position in the leasing arrangement. Part IVA of the Income Tax Assessment Act 1936 may apply if the inclusion of the sub-lease is for the dominant purpose of obtaining a tax benefit.,We are currently reviewing these arrangements and have been consulting with taxpayers and representatives to develop our commercial understanding and tax technical views. We are developing guidance on the transfer pricing and profit attribution issues associated with common cross-border leasing arrangements.,"If you have entered into, or are contemplating entering into, an arrangement of this type we recommend that you seek independent advice, review your arrangement or discuss your situation with us by emailing PGIAdvice@ato.gov.au | Date of Issue: 26 April 2016 | Date of Effect: | Related Rulings/Determinations: TR 2001/13 TR 2002/5 TR 2008/8 TR 2007/10 TR 2007/11 TR 2014/2 TR 2014/3 TR 2014/8 | Subject References: Cross-border leasing Substantial equipment Transfer pricing Arm's length conditions Permanent establishment attribution Part IVA | Contact officer: Glen Hutchings Business line: Public Groups and International Phone: (02) 9374 2690",PS LA 2008/15 | TR 2001/13 | TR 2002/5 | TR 2008/8 | TR 2007/10 | TR 2007/11 | TR 2014/2 | TR 2014/3 | TR 2014/8,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20164/NAT/ATO/00001,
TA 2016/5,Purported tax-exempt non-profit 'foundations' used to evade or avoid taxation obligations,29 April 2016,Current,,"We are currently reviewing arrangements where taxpayers are purporting to stream their untaxed employment, contractor or business income through an unincorporated 'foundation' that they treat as not being subject to income tax. The foundations and the persons who control them also frequently do not comply with their other tax obligations, such as those relating to superannuation and GST. | In a typical arrangement: 1. An advisor or promoter assists individuals (participants) with setting up a 'private' 'foundation' which is then claimed to be exempt from all taxes. The advisor or promoter tells participants that, by operating their business or income producing activities through such a foundation, participants are able to 'opt out of,' or disregard the tax system. A small portion of the income that is streamed through the foundation may be paid to humanitarian or social causes, such as through charities, and these payments are sometimes presented as a justification for the foundation's purported tax-free status. 2. The structure of a foundation, whatever called or however described, has all or most of the following features: a. Articles of Association (Articles) or a similar document, often supplied by the advisor or promoter, typically describe the structure as a 'non-profit private foundation'. The Articles typically state that participants, who are sometimes described as 'principal participants', are responsible for carrying on the activities of their foundations. The Articles often describe other individuals, who assist the participants in conducting the day-to-day affairs of the foundation, as 'volunteers'. b. Bank accounts are opened in the name of the foundation with the participants as signatories. The advisor or promoter may sometimes facilitate the opening of the bank accounts. c. The foundation is not registered for a Tax File Number or an Australian Business Number. d. The foundation is not registered as a charity with the Australian Charities and Not-for-profits Commission, nor does it have 'deductible gift recipient' status or otherwise meet the requirements for tax exemption under tax legislation. e. The foundation may notify the ATO that it is excused from withholding tax obligations on the basis that any payment from the foundation is exempt income. Participants often do not lodge income tax returns for themselves with some notifying the ATO that lodgement is not required, or that they have nil income to report. Some participants lodge income tax returns, but omit from their assessable income, business or personal receipts that have been streamed through the foundation. 3. Participants may: a. purport to carry on one or more businesses through, or in the name of, the foundation b. carry on a business separately from the foundation, perhaps using a company or trust, while arranging for business income to be received directly into the foundation's bank accounts c. arrange for an employer to pay salary and wages, from which tax has not been withheld, directly into the foundation's bank accounts or to an intermediary which then remits the payments to the foundation's bank accounts, and/or d. arrange for remuneration generated through the provision of personal services to be paid directly into the foundation's bank accounts or to an intermediary which then remits the payments to the foundation's bank accounts. 4. Amounts that are received by the foundation, or which are paid by the foundation to participants or volunteers, are not reported for tax purposes. 5. While participants may contribute some of the money received by their foundation to humanitarian or social causes, they primarily use such monies for personal consumption and investment, and the participants remain in control of the way in which the monies are used by their foundation. | 1. An advisor or promoter assists individuals (participants) with setting up a 'private' 'foundation' which is then claimed to be exempt from all taxes. The advisor or promoter tells participants that, by operating their business or income producing activities through such a foundation, participants are able to 'opt out of,' or disregard the tax system. A small portion of the income that is streamed through the foundation may be paid to humanitarian or social causes, such as through charities, and these payments are sometimes presented as a justification for the foundation's purported tax-free status. 2. The structure of a foundation, whatever called or however described, has all or most of the following features: a. Articles of Association (Articles) or a similar document, often supplied by the advisor or promoter, typically describe the structure as a 'non-profit private foundation'. The Articles typically state that participants, who are sometimes described as 'principal participants', are responsible for carrying on the activities of their foundations. The Articles often describe other individuals, who assist the participants in conducting the day-to-day affairs of the foundation, as 'volunteers'. b. Bank accounts are opened in the name of the foundation with the participants as signatories. The advisor or promoter may sometimes facilitate the opening of the bank accounts. c. The foundation is not registered for a Tax File Number or an Australian Business Number. d. The foundation is not registered as a charity with the Australian Charities and Not-for-profits Commission, nor does it have 'deductible gift recipient' status or otherwise meet the requirements for tax exemption under tax legislation. e. The foundation may notify the ATO that it is excused from withholding tax obligations on the basis that any payment from the foundation is exempt income. Participants often do not lodge income tax returns for themselves with some notifying the ATO that lodgement is not required, or that they have nil income to report. Some participants lodge income tax returns, but omit from their assessable income, business or personal receipts that have been streamed through the foundation. 3. Participants may: a. purport to carry on one or more businesses through, or in the name of, the foundation b. carry on a business separately from the foundation, perhaps using a company or trust, while arranging for business income to be received directly into the foundation's bank accounts c. arrange for an employer to pay salary and wages, from which tax has not been withheld, directly into the foundation's bank accounts or to an intermediary which then remits the payments to the foundation's bank accounts, and/or d. arrange for remuneration generated through the provision of personal services to be paid directly into the foundation's bank accounts or to an intermediary which then remits the payments to the foundation's bank accounts. 4. Amounts that are received by the foundation, or which are paid by the foundation to participants or volunteers, are not reported for tax purposes. 5. While participants may contribute some of the money received by their foundation to humanitarian or social causes, they primarily use such monies for personal consumption and investment, and the participants remain in control of the way in which the monies are used by their foundation. | a. Articles of Association (Articles) or a similar document, often supplied by the advisor or promoter, typically describe the structure as a 'non-profit private foundation'. The Articles typically state that participants, who are sometimes described as 'principal participants', are responsible for carrying on the activities of their foundations. The Articles often describe other individuals, who assist the participants in conducting the day-to-day affairs of the foundation, as 'volunteers'. b. Bank accounts are opened in the name of the foundation with the participants as signatories. The advisor or promoter may sometimes facilitate the opening of the bank accounts. c. The foundation is not registered for a Tax File Number or an Australian Business Number. d. The foundation is not registered as a charity with the Australian Charities and Not-for-profits Commission, nor does it have 'deductible gift recipient' status or otherwise meet the requirements for tax exemption under tax legislation. e. The foundation may notify the ATO that it is excused from withholding tax obligations on the basis that any payment from the foundation is exempt income. Participants often do not lodge income tax returns for themselves with some notifying the ATO that lodgement is not required, or that they have nil income to report. Some participants lodge income tax returns, but omit from their assessable income, business or personal receipts that have been streamed through the foundation. | a. purport to carry on one or more businesses through, or in the name of, the foundation b. carry on a business separately from the foundation, perhaps using a company or trust, while arranging for business income to be received directly into the foundation's bank accounts c. arrange for an employer to pay salary and wages, from which tax has not been withheld, directly into the foundation's bank accounts or to an intermediary which then remits the payments to the foundation's bank accounts, and/or d. arrange for remuneration generated through the provision of personal services to be paid directly into the foundation's bank accounts or to an intermediary which then remits the payments to the foundation's bank accounts.",,"These types of foundation structures are artificial and contrived, and the purpose of their design is simply to evade or avoid tax. We are concerned that participants and volunteers who are using these arrangements are not properly reporting their assessable income by representing that their income has not been derived by them and that it belongs instead to an entity that is not taxable. | It is likely that the proliferation of such arrangements will undermine public confidence in the good work done by those in the community who legitimately use charities and not-for-profit entities in order to improve the wellbeing of others. | Based on our review of these arrangements to date: • The proper amount of tax is not being paid by those involved in the use of the foundation. • They may constitute shams, as there is no intention by the parties to establish a genuine non-profit foundation, and their purpose is to give the Commissioner and others the impression that it is a genuine tax-exempt entity. The associated arrangements that purport to stream employment or business income to, or through, the foundation may also be shams. • Amounts received by the foundation under this arrangement may comprise ordinary income that has been derived by the participants and which is assessable to the participants under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Amounts of money received by the foundation may also comprise statutory income (eg net capital gains) which is assessable to the participants under section 6-10 of the ITAA 1997. • The purported diversion of income to the foundation may be income derived by the participants under subsection 6-5(4) of the ITAA 1997 as amounts applied or dealt with on behalf of, or as directed by, the participants. • Where a foundation has more than one participant and is being used to carry on a business, or is being used to receive income from an investment that is held in the foundation's name, there may be a partnership, at least for the purposes of the income tax law. If so, Division 5 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) may apply. • In some circumstances, it may be that a trust relationship arises between the persons involved in a foundation, either as a participant or volunteer, and Division 6 of Part III of the ITAA 1936 may apply. • Where an intermediary receives monies that it then remits to a foundation, the personal services income regime in Part 2-42 of the ITAA 1997 may apply. • The general anti-avoidance rules in Part IVA of the ITAA 1936 may apply to cancel tax benefits obtained by the participants. • There may be breaches of, or failure to comply with, other taxation laws such as PAYG withholding and superannuation obligations and payment of GST. • There may also be possible serious offences committed by the promoters or participants under either the taxation law or the Criminal Code. | • The proper amount of tax is not being paid by those involved in the use of the foundation. • They may constitute shams, as there is no intention by the parties to establish a genuine non-profit foundation, and their purpose is to give the Commissioner and others the impression that it is a genuine tax-exempt entity. The associated arrangements that purport to stream employment or business income to, or through, the foundation may also be shams. • Amounts received by the foundation under this arrangement may comprise ordinary income that has been derived by the participants and which is assessable to the participants under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Amounts of money received by the foundation may also comprise statutory income (eg net capital gains) which is assessable to the participants under section 6-10 of the ITAA 1997. • The purported diversion of income to the foundation may be income derived by the participants under subsection 6-5(4) of the ITAA 1997 as amounts applied or dealt with on behalf of, or as directed by, the participants. • Where a foundation has more than one participant and is being used to carry on a business, or is being used to receive income from an investment that is held in the foundation's name, there may be a partnership, at least for the purposes of the income tax law. If so, Division 5 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) may apply. • In some circumstances, it may be that a trust relationship arises between the persons involved in a foundation, either as a participant or volunteer, and Division 6 of Part III of the ITAA 1936 may apply. • Where an intermediary receives monies that it then remits to a foundation, the personal services income regime in Part 2-42 of the ITAA 1997 may apply. • The general anti-avoidance rules in Part IVA of the ITAA 1936 may apply to cancel tax benefits obtained by the participants. • There may be breaches of, or failure to comply with, other taxation laws such as PAYG withholding and superannuation obligations and payment of GST. • There may also be possible serious offences committed by the promoters or participants under either the taxation law or the Criminal Code.",We are currently reviewing these arrangements and engaging with a number of entities who we believe are already involved. Compliance action may also be undertaken in respect of other taxpayers who we identify as having entered into this type of arrangement.,"If you have entered into, or are contemplating entering into, an arrangement of this type we encourage you to: a) phone or email us at the contact details provided below b) ask us for our view through a private ruling c) seek independent professional advice, or d) make a voluntary disclosure to reduce penalties that may apply. | a) phone or email us at the contact details provided below b) ask us for our view through a private ruling c) seek independent professional advice, or d) make a voluntary disclosure to reduce penalties that may apply. | Penalties may apply to participants and promoters of this type of arrangement, including serious penalties under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20165/NAT/ATO/00001,Updated ATO tip-off hotline number | Private Groups and High Wealth Individuals
TA 2016/6,Diverting personal services income to self-managed superannuation funds,29 April 2016,Current,,"We are currently reviewing arrangements where individuals (typically self-managed superannuation fund (SMSF) members at or approaching retirement age) purport to divert income earned from their personal services to a SMSF to minimise or avoid tax on their income. | These arrangements typically display all or most of the following features: 1. An individual performs services for a client, or an acquirer of the personal services (client), for which the individual does not directly receive any (or adequate) consideration for the services provided. 2. The client does not pay or remit funds to the individual directly; rather the client remits the consideration for, or in respect of, the services provided by the individual to a company, trust or other non-individual entity (entity). The entity may be an unrelated third party. 3. The entity then distributes the income to a SMSF, of which the individual is a member, purportedly as a return on an investment of the SMSF in the entity. 4. The trustee of the SMSF treats the income received as subject to a concessional rate of tax, or as exempt current pension income of the SMSF. | 1. An individual performs services for a client, or an acquirer of the personal services (client), for which the individual does not directly receive any (or adequate) consideration for the services provided. 2. The client does not pay or remit funds to the individual directly; rather the client remits the consideration for, or in respect of, the services provided by the individual to a company, trust or other non-individual entity (entity). The entity may be an unrelated third party. 3. The entity then distributes the income to a SMSF, of which the individual is a member, purportedly as a return on an investment of the SMSF in the entity. 4. The trustee of the SMSF treats the income received as subject to a concessional rate of tax, or as exempt current pension income of the SMSF. | The arrangement may also include one or more of the following characteristics or variations: 5. The income may be remitted by the entity to the SMSF via a written or oral agreement between the entity and SMSF, instead of as a return on an investment in the entity. 6. The SMSF may receive the income from more than one entity or through a chain of entities. Alternatively, the entity may distribute the income to more than one SMSF of which the individual and/or associates are members. | 5. The income may be remitted by the entity to the SMSF via a written or oral agreement between the entity and SMSF, instead of as a return on an investment in the entity. 6. The SMSF may receive the income from more than one entity or through a chain of entities. Alternatively, the entity may distribute the income to more than one SMSF of which the individual and/or associates are members.",,"We are concerned that in order to avoid paying tax at their personal marginal rate these arrangements are being entered into by individuals in an attempt to divert their personal services income to an SMSF, where the income is concessionally taxed, or treated as exempt current pension income. | We consider that: • The arrangement may be ineffective at alienating income such that it remains the assessable income of the individual under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). • The income may be included in the individual's assessable income as personal services income under Part 2-42 of the ITAA 1997. • The amounts received by the SMSF may constitute non-arm's length income of the SMSF under section 295-550 of the ITAA 1997 such that the income is not eligible to be concessionally taxed and is not exempt current pension income. • The general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 may apply to cancel tax benefits obtained by the individual. • Other compliance issues for arrangements of this type may include: - the amounts received by the SMSF under the arrangement may be a contribution to the fund and subject to the contributions caps which may have excess contributions tax consequences, and/or - superannuation regulatory issues, in particular the SMSF is maintained for purposes other than those set out in section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA). Breaches of the SISA may lead to the SMSF being made non-complying or the disqualification of an individual as a trustee. | • The arrangement may be ineffective at alienating income such that it remains the assessable income of the individual under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). • The income may be included in the individual's assessable income as personal services income under Part 2-42 of the ITAA 1997. • The amounts received by the SMSF may constitute non-arm's length income of the SMSF under section 295-550 of the ITAA 1997 such that the income is not eligible to be concessionally taxed and is not exempt current pension income. • The general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 may apply to cancel tax benefits obtained by the individual. • Other compliance issues for arrangements of this type may include: - the amounts received by the SMSF under the arrangement may be a contribution to the fund and subject to the contributions caps which may have excess contributions tax consequences, and/or - superannuation regulatory issues, in particular the SMSF is maintained for purposes other than those set out in section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA). Breaches of the SISA may lead to the SMSF being made non-complying or the disqualification of an individual as a trustee. | - the amounts received by the SMSF under the arrangement may be a contribution to the fund and subject to the contributions caps which may have excess contributions tax consequences, and/or - superannuation regulatory issues, in particular the SMSF is maintained for purposes other than those set out in section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA). Breaches of the SISA may lead to the SMSF being made non-complying or the disqualification of an individual as a trustee.",We are currently undertaking reviews of a number of cases involving arrangements of this type and we will be engaging with taxpayers whose affairs concern us over the coming months. | For general information about personal services income regime refer to this ATO fact sheet .,"If you have entered into, or are contemplating entering into, an arrangement of this type we encourage you to: a) phone or email us at the contact details provided below b) ask us for our view through a private ruling c) seek independent professional advice, or d) make a voluntary disclosure to reduce penalties that may apply. | a) phone or email us at the contact details provided below b) ask us for our view through a private ruling c) seek independent professional advice, or d) make a voluntary disclosure to reduce penalties that may apply. | Penalties may apply to participants and promoters of this type of arrangement, including serious penalties under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009 .",PS LA 2008/15,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20166/NAT/ATO/00001,Updated ATO tip-off hotline number | Private Groups and High Wealth Individuals
TA 2016/8,GST implications of arrangements entered into in response to the Multinational Anti-Avoidance Law (MAAL),10 August 2016,Current,"We are currently reviewing arrangements entered into in response to the Multinational Anti-Avoidance Law (MAAL). As part of this review, we are considering the Goods and Services Tax (GST) consequences of the arrangements involving the distribution of intangible products and services into Australia. | We have encountered arrangements which involve foreign and Australian entities swapping their roles via contracts. These contracts purport to make the Australian entity the distributor of the intangible products or services and the foreign entity an agent of the Australian entity, collecting the sales revenue from customers on its behalf. | Under this arrangement it is purported that while an Australian entity contracts with Australian customers to avoid the application of the MAAL, no GST is payable on the supplies. It is argued that no GST is payable on the basis the supplies are not made through an enterprise carried on in the indirect tax zone for the purposes of paragraph 9-25(5)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). | We caution companies to take care that structures or arrangements used in response to the MAAL consider the appropriate GST outcomes. We also caution companies to ensure that these structures or arrangements do not themselves amount to schemes to avoid GST. | Additionally, we caution intermediaries to make sure they are not promoting a scheme to avoid GST.","The arrangements are discussed in Taxpayer Alert TA 2016/2, and may involve the following features: • A foreign entity, which supplied intangible products or services to Australian customers prior to the arrangement, enters into a distribution agreement with an existing or newly formed associated Australian entity (the Australian distributor) with effect from 1 January 2016 (or some later date). The agreement purportedly authorises the Australian entity to distribute the intangible products or services to Australian customers. The Australian distributor then purportedly becomes the 'supplier' of the intangible products or services. To avoid doubt, the parties are claiming the Australian distributor is supplying in its own right, not as agent for the foreign entity. • The Australian distributor may be a new entity, notwithstanding that an existing associated Australian entity already provides marketing and other support services connected with the intangible products or services being distributed to Australian customers. • The foreign entity and the Australian distributor may enter into an agency agreement, with effect from the same date as the distribution agreement, under which the foreign entity is purportedly appointed as the Australian distributor's agent. • The foreign entity continues to distribute intangible products or perform services (albeit it now purportedly does so on behalf of the Australian distributor). • Some or all of the income will be attributed to the Australian distributor in Australia. | • A foreign entity, which supplied intangible products or services to Australian customers prior to the arrangement, enters into a distribution agreement with an existing or newly formed associated Australian entity (the Australian distributor) with effect from 1 January 2016 (or some later date). The agreement purportedly authorises the Australian entity to distribute the intangible products or services to Australian customers. The Australian distributor then purportedly becomes the 'supplier' of the intangible products or services. To avoid doubt, the parties are claiming the Australian distributor is supplying in its own right, not as agent for the foreign entity. • The Australian distributor may be a new entity, notwithstanding that an existing associated Australian entity already provides marketing and other support services connected with the intangible products or services being distributed to Australian customers. • The foreign entity and the Australian distributor may enter into an agency agreement, with effect from the same date as the distribution agreement, under which the foreign entity is purportedly appointed as the Australian distributor's agent. • The foreign entity continues to distribute intangible products or perform services (albeit it now purportedly does so on behalf of the Australian distributor). • Some or all of the income will be attributed to the Australian distributor in Australia. | It is argued that no supply is being made by the Australian distributor through an enterprise that it carries on in the indirect tax zone for the purposes of paragraph 9-25(5)(b) of the GST Act.",,"In addition to the concerns raised in Taxpayer Alert TA 2016/2, we consider these arrangements will not be effective in avoiding GST and are clearly inconsistent with the underlying policy intent of both the MAAL and the GST Act. | In relation to GST, we are concerned that these arrangements: • are artificially structured to avoid the application of the GST • adopt inconsistent positions for the purposes of income tax and GST • do, insofar as they are legally effective, involve the intangible products or services being supplied through an enterprise the Australian distributor carries on in the indirect tax zone for the purposes of paragraph 9-25(5)(b) of the GST Act • may, insofar as they are not legally effective, result in the foreign entity supplying intangible products or services that are connected with the indirect tax zone for the purposes of paragraph 9-25(5)(b) of the GST Act. | • are artificially structured to avoid the application of the GST • adopt inconsistent positions for the purposes of income tax and GST • do, insofar as they are legally effective, involve the intangible products or services being supplied through an enterprise the Australian distributor carries on in the indirect tax zone for the purposes of paragraph 9-25(5)(b) of the GST Act • may, insofar as they are not legally effective, result in the foreign entity supplying intangible products or services that are connected with the indirect tax zone for the purposes of paragraph 9-25(5)(b) of the GST Act. | If the arrangements are legally effective in achieving the intended result of a supply being made by the Australian distributor, we consider the supply would be made by that entity through an enterprise carried on by it in the indirect tax zone (contrary to what is being purported) and that GST will apply to that supply.","We are currently reviewing taxpayers' responses to MAAL for their GST consequences. We are engaging with taxpayers who have put forward these arrangements to explore the issues of concern and to ensure any restructuring arrangements do not seek to avoid the application of the GST and/or the MAAL in an artificial and contrived manner. | The ATO has processes in place to work collaboratively with taxpayers during the transition to MAAL-compliant structures that address, among other things, the tax liabilities arising between the commencement of the MAAL, that is 1 January 2016, and the point at which a final structure is put in place. Information on these processes can be found in the MAAL client experience roadmap . | Taxpayers who adopt these types of arrangements and their advisors will be subject to increased scrutiny. This includes consideration of whether the distribution and agency structure is tax driven and legally effective, and whether the arrangement is inconsistent with the economic substance and commercial reality of the activities carried out in Australia. | We will initiate compliance review activities, if necessary, to address such arrangements. In respect of any GST shortfall, this may result in substantial penalties of up to 75% of the tax avoided being imposed. | Given the nature of the arrangements, any entity involved in the promotion of such arrangements may be considered a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. We will be allocating compliance resources to consider the effectiveness of the arrangements and the potential application of Division 290.","If you have entered into a similar arrangement to that described in this Taxpayer Alert, you may wish to seek advice as to the legal and tax consequences of the arrangement. We would also encourage you to email us at GSTmail@ato.gov.au (GST queries), MAAL@ato.gov.au (general queries), or contact the officer named in this Taxpayer Alert to discuss your arrangement.","PS LA 2008/15 | GSTR 2000/31 | LCG 2015/2 | Section 9-25 | Division 165 | Section 177DA | Schedule 1, Division 290 | TA 2016/2",False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20168/NAT/ATO/00001,Tax agents who would like to provide information about individuals or companies potentially promoting arrangements covered by this Taxpayer Alert should also use the above contact details.
TA 2016/9,Thin capitalisation - Incorrect calculation of the value of 'debt capital' treated wholly or partly as equity for accounting purposes,10 August 2016,Current,,"We are reviewing arrangements where taxpayers have taken the view that their 'debt capital' for the purposes of the thin capitalisation rules (under Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997)) does not include the value of a 'debt interest' that has been treated wholly or partly as equity for accounting purposes. This has the effect of reducing what would otherwise have been the taxpayer's 'adjusted average debt' and may consequently reduce the amount of debt deductions disallowed under the thin capitalisation regime. | The arrangements we are reviewing typically have the following features: • A taxpayer enters into a financial arrangement that is a 'debt interest' under Division 974 of the ITAA 1997. • The financial arrangement is treated wholly or partly as equity in accordance with AASB 132 Financial Instruments: Presentation. • On that basis, the taxpayer does not include the value of the accounting equity component of the financial arrangement in its 'debt capital' for thin capitalisation purposes. • The taxpayer claims all debt deductions associated with the financial arrangement. | • A taxpayer enters into a financial arrangement that is a 'debt interest' under Division 974 of the ITAA 1997. • The financial arrangement is treated wholly or partly as equity in accordance with AASB 132 Financial Instruments: Presentation. • On that basis, the taxpayer does not include the value of the accounting equity component of the financial arrangement in its 'debt capital' for thin capitalisation purposes. • The taxpayer claims all debt deductions associated with the financial arrangement.","ABC Ltd (ABC) issues a loan note to raise $75 million. The loan note offers a coupon at the rate of 4.5%. Based on the particular terms of issue of the loan note, it is treated as a debt interest under Division 974 of the ITAA 1997 and is classified as an equity instrument for accounting purposes under AASB 132 Financial Instruments: Presentation. | ABC does not include the value of the note in determining its adjusted average debt for thin capitalisation purposes because it is equity for accounting purposes. ABC nevertheless claims debt deductions for the annual payments in respect of the note. | XYZ Ltd (XYZ) issues 30,000 Mandatorily Redeemable Preference Shares (MRPS) at $1,000 each to raise $30 million. Under the terms of the MRPS, a cumulative dividend of 4.5% is paid per annum. The MRPS must be redeemed by XYZ within nine years of issue. | XYZ records the present value of the redemption amount in its financial statements as a liability. The residual value of the MRPS is allocated to equity in XYZ's financial statements, as required under AASB 132 Financial Instruments: Presentation. | In this case, the MRPS is treated as a debt interest for tax purposes. However, XYZ does not include the component of the MRPS that is treated as equity for accounting purposes in the ""value"" of its debt capital. XYZ nevertheless claims a debt deduction for all dividend payments made in respect of the MRPS.","In arrangements similar to that described in this Taxpayer Alert, taxpayers are incorrectly adopting a treatment under the thin capitalisation provisions that may result in claims for higher debt deductions. | This is a consequence of some taxpayers incorrectly calculating the value of their debt capital because they are excluding the component of a debt interest that is separately disclosed as an equity component in the statement of financial position for accounting purposes. Whereas, our position is that taxpayers should calculate the value of that debt interest under the accounting standards as the sum of the value attributed to the accounting equity component and the value attributed to any accounting liability component. | Further, taxpayers involved in these types of arrangements may not have taken into account the operation of the Commissioner's discretion under section 820-690 of the ITAA 1997 to substitute a more appropriate value of debt capital, or the application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to the arrangement.","We are currently reviewing debt capital values utilised in thin capitalisation calculations to identify taxpayers who have implemented these types of arrangements and have commenced compliance activities in relation to a number of cases. | We will take the approach that the sum of the accounting value of the equity component and the accounting value of the liability component of the debt interest on issue must be used in the calculation of the average value of debt capital. We will also generally take into account all relevant accounting entries, such as distributions to holders, such that the full face value of the debt interest will be used in the calculation of adjusted average debt. | In addition, if the Commissioner determines that a taxpayer has undervalued its debt capital, the Commissioner may apply section 820-690 of the ITAA 1997 to substitute an appropriate value, having regard to the accounting standards and the thin capitalisation regime. | Alternatively, the Commissioner may apply Part IVA of the ITAA 1936 to disallow a deduction if a taxpayer has entered into the form of arrangement described in this Taxpayer Alert for the sole or dominant purpose of obtaining a tax benefit. | If a taxpayer participates in an arrangement similar to that described in this Taxpayer Alert, and the taxpayer does not have a private ruling or class ruling in respect of the arrangement, the taxpayer may be liable to penalties (in addition to being required to pay any tax that is avoided). More information on penalties is available on the interest and penalties page on our website. (hyperlink is https://www.ato.gov.au/General/Interest-and-penalties/ ). Penalties of up to 90% (which may include a penalty uplift factor of 20%) of the tax avoided can apply. | Furthermore, any entity involved in the promotion of such arrangements may be considered a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . We will be allocating compliance resources to consider the potential application of Division 290.","If you have entered into an arrangement that falls within the scope of this Taxpayer Alert, or are contemplating entering into such an arrangement, we recommend that you seek independent advice, review your arrangement or discuss your situation with us by emailing PGIAdvice@ato.gov.au | Tax agents who would like to provide information about individuals or companies potentially promoting arrangements covered by this Taxpayer Alert should also use the above contact details. | Date of Issue: 10 August 2016 | Date of Effect: | Legislative References: Income Tax Assessment Act 1936 Part IVA Income Tax Assessment Act 1997 Section 820-690 Division 820 Division 974 Taxation Administration Act 1953 Schedule 1, Division 290 | Contact officer: Paul Korganow Business Line: Public Groups and International Phone: (03) 8601 9505","Treasury Law Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Act 2024 | PS LA 2008/15 | Part IVA | Section 820-690 | Division 820 | Division 974 | Schedule 1, Division 290",False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20169/NAT/ATO/00001,"o fixed ratio test o group ratio test o third party debt test | ADIs, securitisation vehicles and certain special purpose entities are excluded from the debt deduction creation rules. | Entities that are Australian plantation forestry entities are excluded from the new rules. For these entities, the previous rules will continue to apply."
TA 2016/10,Cross-Border Round Robin Financing Arrangements,15 September 2016,Current,,"We are reviewing cross-border round robin type arrangements that involve funding of an overseas entity or operations by an Australian entity, where the funds are subsequently provided back to the Australian entity or its Australian associate in a manner which purportedly generates Australian tax deductions while not generating corresponding Australian assessable income. | One example of this kind of arrangement was considered by the Federal Court in Orica Limited v FCT [2015] FCA 1399; 2015 ATC 20-547. | The arrangements being reviewed essentially involve the round robin movement of funds where: • an entity claims income tax deductions in Australia for costs of borrowing or obtaining other financial benefits (including satisfaction of liabilities) from an overseas party • the loan or other financial benefit provided by the overseas party is in substance funded, directly or indirectly, by an investment by the entity claiming the deductions or its Australian associate • the return on the Australian investment, reflecting the financing costs payable to the overseas party, comes back to Australia in a non-taxable or concessionally taxed form, for example, as a distribution from an overseas subsidiary which is not assessable under Subdivision 768-A of the Income Tax Assessment Act 1997 (ITAA 1997). | • an entity claims income tax deductions in Australia for costs of borrowing or obtaining other financial benefits (including satisfaction of liabilities) from an overseas party • the loan or other financial benefit provided by the overseas party is in substance funded, directly or indirectly, by an investment by the entity claiming the deductions or its Australian associate • the return on the Australian investment, reflecting the financing costs payable to the overseas party, comes back to Australia in a non-taxable or concessionally taxed form, for example, as a distribution from an overseas subsidiary which is not assessable under Subdivision 768-A of the Income Tax Assessment Act 1997 (ITAA 1997). | The potential tax consequences are primarily in relation to applying the: • rules relating to deductibility of financing costs • rules for income qualifying as not assessable under section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936) or Subdivision 768-A of the ITAA 1997 • rules relating to attribution of expenses and income to operations carried on or through a permanent establishment • rules that treat cross border dealings as on conditions which might be expected between independent parties dealing wholly independently (i.e. transfer pricing rules) • general anti-avoidance rules. | • rules relating to deductibility of financing costs • rules for income qualifying as not assessable under section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936) or Subdivision 768-A of the ITAA 1997 • rules relating to attribution of expenses and income to operations carried on or through a permanent establishment • rules that treat cross border dealings as on conditions which might be expected between independent parties dealing wholly independently (i.e. transfer pricing rules) • general anti-avoidance rules. | Relevant arrangements may display some or all of the following features: a. the entity claiming the Australian tax deductions is related to the overseas party providing the loan or other financial benefit b. the overseas party is an entity resident in a low tax jurisdiction, or is otherwise not taxable in the overseas country on any financing costs payable by the entity claiming the deductions, for example, because it can claim foreign tax credits or tax losses in the overseas country c. use of hybrid entities or instruments such that: i. the financing costs payable to the overseas party which are deducted in Australia are not taxable in the relevant overseas jurisdiction, or ii. the financing costs are deducted twice, i.e. once in Australia and once by the hybrid entity or the hybrid entity's owners in the overseas jurisdiction d. the financing costs payable to the overseas party is not income taxable in Australia under Australia's controlled foreign company (CFC) provisions e. the non-assessable foreign sourced income distributed to the Australian entity increases its 'conduit foreign income' balance so it can distribute unfranked dividends funded from its Australian profits to its foreign shareholders free of dividend withholding tax f. there is no cash transfer of relevant funds and relevant steps are said to be carried out by journal entries g. the arrangement produces a commercial outcome or achieves an overall advantage to the global group because of the Australian tax benefits. | a. the entity claiming the Australian tax deductions is related to the overseas party providing the loan or other financial benefit b. the overseas party is an entity resident in a low tax jurisdiction, or is otherwise not taxable in the overseas country on any financing costs payable by the entity claiming the deductions, for example, because it can claim foreign tax credits or tax losses in the overseas country c. use of hybrid entities or instruments such that: i. the financing costs payable to the overseas party which are deducted in Australia are not taxable in the relevant overseas jurisdiction, or ii. the financing costs are deducted twice, i.e. once in Australia and once by the hybrid entity or the hybrid entity's owners in the overseas jurisdiction d. the financing costs payable to the overseas party is not income taxable in Australia under Australia's controlled foreign company (CFC) provisions e. the non-assessable foreign sourced income distributed to the Australian entity increases its 'conduit foreign income' balance so it can distribute unfranked dividends funded from its Australian profits to its foreign shareholders free of dividend withholding tax f. there is no cash transfer of relevant funds and relevant steps are said to be carried out by journal entries g. the arrangement produces a commercial outcome or achieves an overall advantage to the global group because of the Australian tax benefits. | i. the financing costs payable to the overseas party which are deducted in Australia are not taxable in the relevant overseas jurisdiction, or ii. the financing costs are deducted twice, i.e. once in Australia and once by the hybrid entity or the hybrid entity's owners in the overseas jurisdiction | The below diagrams show simplified examples of some of the arrangements we are reviewing.","• An Australian resident entity (Aus SubCo2) funds the acquisition of equity in its non-resident subsidiary (For Co) and For Co makes a loan at interest to another subsidiary member (Aus SubCo1) within the same Australian consolidated group (Australian Consolidated Group). • Head Co (as the head company of Australian Consolidated Group) claims interest deductions in Australia on the borrowing from For Co under section 8-1 or section 25-90 of the ITAA 1997. • For Co utilises tax losses under the tax rules of the overseas jurisdiction resulting in no tax paid in the overseas jurisdiction on interest payable to For Co by Aus SubCo1. • For Co's profits, which include the interest payable by Aus SubCo1, are distributed to Aus SubCo2. The distributions are not assessable in Australia because of the operation of Subdivision 768-A of the ITAA 1997. | • An Australian resident entity (Aus SubCo2) funds the acquisition of equity in its non-resident subsidiary (For Co) and For Co makes a loan at interest to another subsidiary member (Aus SubCo1) within the same Australian consolidated group (Australian Consolidated Group). • Head Co (as the head company of Australian Consolidated Group) claims interest deductions in Australia on the borrowing from For Co under section 8-1 or section 25-90 of the ITAA 1997. • For Co utilises tax losses under the tax rules of the overseas jurisdiction resulting in no tax paid in the overseas jurisdiction on interest payable to For Co by Aus SubCo1. • For Co's profits, which include the interest payable by Aus SubCo1, are distributed to Aus SubCo2. The distributions are not assessable in Australia because of the operation of Subdivision 768-A of the ITAA 1997. | Diagram of example 1 | • A general partnership established under the laws of Delaware in the United States of America (USGP) has borrowed funds from the Financier. The Financier may or may not be a related party. • USGP is treated as a subsidiary member of the Australian consolidated group (Australian Consolidated Group) for Australian income tax purposes because all the partners in USGP are other subsidiary members of the Australian Consolidated Group. • USGP is taxed as a corporation in the US as a result of the US 'check the box' tax rules. USGP is the head company of a US consolidated group (US Consolidated Group) under US tax rules which includes US SubCo1 and US SubCo2. Accordingly, a deduction is claimed twice, once in the US and once in Australia, for the interest on the borrowing from the Financier. If the Financier is a foreign resident, Australian withholding tax may be withheld by USGP on the interest payable to the Financier. • At this point in time, there is purportedly a ""double deduction"" for the external financing, sometimes referred to as a ""double dip"". • USGP invests these borrowed funds in US SubCo1, which invests the funds in US SubCo2. • At some point, the funds are loaned back by US SubCo2 to USGP and used to repay the external borrowing from the Financier. • Head Co (as head company of Australian Consolidated Group) now claims interest deductions in Australia on the borrowing by USGP from US SubCo2 under section 8-1 or section 25-90 of the ITAA 1997. • Australian withholding tax may be withheld by USGP on the interest payable to US SubCo2 (USGP may be able to claim a foreign tax credit in the US for this withholding tax). • US SubCo2's profits, which include the interest payable by USGP, are distributed to US SubCo1 then USGP. The distribution is not taxable in the US because USGP, US SubCo1 and US SubCo2 are members of the US Consolidated Group. The distributions are not assessable to Head Co (as head company of Australian Consolidated Group) because of the operation of Subdivision 768-A of the ITAA 1997. • At this point in time, a deduction is being claimed with no external financing cost, sometimes referred to as a ""free dip"". | • A general partnership established under the laws of Delaware in the United States of America (USGP) has borrowed funds from the Financier. The Financier may or may not be a related party. • USGP is treated as a subsidiary member of the Australian consolidated group (Australian Consolidated Group) for Australian income tax purposes because all the partners in USGP are other subsidiary members of the Australian Consolidated Group. • USGP is taxed as a corporation in the US as a result of the US 'check the box' tax rules. USGP is the head company of a US consolidated group (US Consolidated Group) under US tax rules which includes US SubCo1 and US SubCo2. Accordingly, a deduction is claimed twice, once in the US and once in Australia, for the interest on the borrowing from the Financier. If the Financier is a foreign resident, Australian withholding tax may be withheld by USGP on the interest payable to the Financier. • At this point in time, there is purportedly a ""double deduction"" for the external financing, sometimes referred to as a ""double dip"". • USGP invests these borrowed funds in US SubCo1, which invests the funds in US SubCo2. • At some point, the funds are loaned back by US SubCo2 to USGP and used to repay the external borrowing from the Financier. • Head Co (as head company of Australian Consolidated Group) now claims interest deductions in Australia on the borrowing by USGP from US SubCo2 under section 8-1 or section 25-90 of the ITAA 1997. • Australian withholding tax may be withheld by USGP on the interest payable to US SubCo2 (USGP may be able to claim a foreign tax credit in the US for this withholding tax). • US SubCo2's profits, which include the interest payable by USGP, are distributed to US SubCo1 then USGP. The distribution is not taxable in the US because USGP, US SubCo1 and US SubCo2 are members of the US Consolidated Group. The distributions are not assessable to Head Co (as head company of Australian Consolidated Group) because of the operation of Subdivision 768-A of the ITAA 1997. • At this point in time, a deduction is being claimed with no external financing cost, sometimes referred to as a ""free dip"". | Diagram of example 2 | • A foreign owned company operates in Australia through two Australian consolidated groups (Australia Consolidated Group 1 and Australia Consolidated Group 2). • A limited liability partnership is incorporated in the UK (UK LLP). UK LLP is treated as a subsidiary member of Australian Consolidated Group 1 for Australian income tax purposes because all the partners in UK LLP are other members of Australian Consolidated Group 1. • The UK LLP is generally predominantly financed by loans or redeemable partnership interests. • UK LLP makes a loan to a subsidiary member (Aus SubCo2) of Australian Consolidated Group 2 purportedly in the course of its operations carried on through its UK permanent establishment (UK PE). • Head Co 2 (as head company of Australian Consolidated Group 2) claims an interest deduction in Australia on the borrowing from UK PE. Australian withholding tax may be withheld by Aus SubCo2 on the interest payable to UK PE. • Any interest income paid on the borrowing from UK PE is treated as not assessable to Head Co 1 (as head company of Australian Consolidated Group 1) under section 23AH of the ITAA 1936. In addition, this non-assessable income is used to increase the 'conduit foreign income' balance of Australian Consolidated Group 1 so Head Co 1 can distribute unfranked dividends funded from its Australian profits to For Co free of dividend withholding tax. | • A foreign owned company operates in Australia through two Australian consolidated groups (Australia Consolidated Group 1 and Australia Consolidated Group 2). • A limited liability partnership is incorporated in the UK (UK LLP). UK LLP is treated as a subsidiary member of Australian Consolidated Group 1 for Australian income tax purposes because all the partners in UK LLP are other members of Australian Consolidated Group 1. • The UK LLP is generally predominantly financed by loans or redeemable partnership interests. • UK LLP makes a loan to a subsidiary member (Aus SubCo2) of Australian Consolidated Group 2 purportedly in the course of its operations carried on through its UK permanent establishment (UK PE). • Head Co 2 (as head company of Australian Consolidated Group 2) claims an interest deduction in Australia on the borrowing from UK PE. Australian withholding tax may be withheld by Aus SubCo2 on the interest payable to UK PE. • Any interest income paid on the borrowing from UK PE is treated as not assessable to Head Co 1 (as head company of Australian Consolidated Group 1) under section 23AH of the ITAA 1936. In addition, this non-assessable income is used to increase the 'conduit foreign income' balance of Australian Consolidated Group 1 so Head Co 1 can distribute unfranked dividends funded from its Australian profits to For Co free of dividend withholding tax. | Diagram of example 3 | Note: Reference should also be had to Taxpayer Alert TA 2016/7 Arrangements involving offshore permanent establishments. | Note: Reference should also be had to Taxpayer Alert TA 2016/7 Arrangements involving offshore permanent establishments.","We are concerned that the taxpayer may not be entitled to a deduction under section 8-1, section 25-85, section 25-90 or section 230-15 of the ITAA 1997, as the case may be, because the borrowing may not have the sufficient necessary nexus with the requisite kind of income. Depending upon the facts, the principles in Taxation Determination TD 2009/21 or Taxation Determination TD 2016/6 may be applicable. | Even if effective under the substantive provisions, we are concerned that these arrangements are being used for the purpose, or for purposes which include, the claiming of Australian tax deductions or the artificial creation of conduit foreign income to avoid payment of Australian dividend withholding tax on unfranked dividends funded from Australian profits. This might attract the application of Part IVA of the ITAA 1936. | We are also concerned about whether the actual commercial or financial dealings between the Australian entities and the overseas related parties are on conditions that might be expected to operate between independent parties dealing wholly independently with each other for the purposes of applying Subdivision 815-A or Subdivision 815-B of the ITAA 1997, or involve non-arm's length consideration for the purposes of applying section 136AD of the ITAA 1936.",We are currently reviewing these arrangements and have commenced compliance activities in relation to a number of cases. Compliance activity will continue and we are developing our technical position on arrangements.,"If you have entered into, or are contemplating entering into, an arrangement of this type we recommend that you seek independent professional advice, review your arrangement or discuss your situation with us by emailing PGIAdvice@ato.gov.au | Date of Issue: 15 September 2016 | Date of Effect: | Related Rulings/Determinations: TD 2009/21 TD 2016/6 | Legislative References: Income Tax Assessment Act 1936 23AH 136AD Part IVA Income Tax Assessment Act 1997 8-1 25-85 25-90 230-15 Subdiv 768-A Subdiv 815-A Subdiv 815-B | Case References: Orica Limited v FCT [2015] FCA 1399 2015 ATC 20-547 | Orica Limited v FCT [2015] FCA 1399 2015 ATC 20-547 | Contact officer: Stephanie Long Business Line: Public Groups and International Phone: 02 9374 2040",Treasury Law Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Act 2024 | PS LA 2008/15 | TD 2009/21 | TD 2016/6 | 23AH | 136AD | Part IVA | 8-1 | 25-85 | 25-90 | 230-15 | Subdiv 768-A | Subdiv 815-A | Subdiv 815-B | 2015 ATC 20-547,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA201610/NAT/ATO/00001,"o fixed ratio test o group ratio test o third party debt test | ADIs, securitisation vehicles and certain special purpose entities are excluded from the debt deduction creation rules. | Entities that are Australian plantation forestry entities are excluded from the new rules. For these entities, the previous rules will continue to apply."
TA 2016/11,Restructures in response to the Multinational Anti Avoidance Law (MAAL) involving foreign partnerships,15 September 2016,Current,"We are currently reviewing arrangements implemented by taxpayers with effect from 1 January 2016 in response to the Multinational Anti-Avoidance Law (MAAL). | Following taxpayer alerts TA 2016/2 and TA 2016/8 relating to arrangements in response to the MAAL, we have continued to work with taxpayers restructuring into arrangements that reflect their commercial and economic circumstances. We remain concerned, however, that some taxpayers are entering into artificial and contrived arrangements in attempts to avoid the application of the MAAL. | This Alert identifies another scheme we consider is artificial and contrived. We consider this scheme may not be legally effective in achieving its purpose and may potentially enliven other general anti-avoidance rules across the taxation system. This scheme is an iteration of those described in TA 2016/2 and this Alert should be read in light of our previously stated concerns and actions. | The scheme that has come to our attention involves interposing an entity described as a partnership between the foreign entity originally making supplies to Australian customers and the Australian customers. The partnership has one resident corporate partner with a minority interest in the partnership, therefore purporting to characterise the partnership as an 'Australian entity' for the purposes of the MAAL. Agreements entered into purport to make the partnership the distributor of the products or services and the foreign entity its agent. The arrangements have little, if any, commercial basis and no changes are made to the underlying functions. | By purporting to treat the partnership as an 'Australian entity', the scheme seeks to artificially circumvent the application of the MAAL by contending there is no supply being made or income being derived by a foreign entity. | Further to TA 2016/2 and TA 2016/8, we reiterate that taxpayers should work with the ATO on arrangements they are considering in response to the MAAL. | Additionally, we caution intermediaries to make sure they are not promoting a scheme to avoid tax. Again, working with the ATO on arrangements being developed can ensure this does not happen.","The MAAL applies: • to multinational entities who enter into or carry out schemes designed to avoid or reduce the attribution of income to a permanent establishment in Australia • where the principal purpose, or one of the principal purposes, of the scheme was to obtain an Australian tax benefit or to obtain both an Australian tax benefit and reduction in a foreign tax liability. | • to multinational entities who enter into or carry out schemes designed to avoid or reduce the attribution of income to a permanent establishment in Australia • where the principal purpose, or one of the principal purposes, of the scheme was to obtain an Australian tax benefit or to obtain both an Australian tax benefit and reduction in a foreign tax liability. | The MAAL empowers the Commissioner of Taxation to cancel any tax benefits the foreign entity and/or its related parties derived from the scheme on or after 1 January 2016. | Further to our release of taxpayer alerts TA 2016/2 and 2016/8 we have become aware of additional restructures that have been implemented that appear artificial and are inconsistent with the policy intent of the MAAL, which is to address schemes that avoid an Australian taxable presence. | One such example is where, prior to the restructure, a multinational group fulfilled the MAAL criteria set out in paragraph 177DA(1)(a) of the Income Tax Assessment Act 1936 [1] including making supplies of products or services to Australian customers through a foreign entity, with that foreign entity deriving ordinary and/or statutory income from the supply. | Under the restructuring arrangement: 1. The multinational group forms an entity described as a partnership. The partnership has two newly incorporated companies as partners; one Australian resident partner and a non-resident partner. The resident partner holds a minority interest in the partnership. 2. The resident partner does not have the right to be involved in the management or conduct of the business of the partnership. 3. The partnership agreement specifies all management decisions regarding the partnership will be conducted outside Australia. 4. Further complexity is introduced into the existing structure through the creation of additional entities; the transfer of legal rights and obligations; changes in contractual relationships with customers; and additional intra-group services agreements. • For example, the existing foreign entity that previously made supplies to, and derived income from, Australian customers enters into a distribution agreement with the partnership to transfer the right to distribute the products or services to Australian customers to the partnership, thereby purporting to attribute profit to the partnership. • At the same time, the partnership enters into an agency agreement that purports to authorise the existing foreign entity to continue to make supplies to Australian customers as an agent of the partnership. This is intended to give full effect to the distribution agreement. 5. There is no material change to the operational activities undertaken by the group in making supplies to Australian customers. | 1. The multinational group forms an entity described as a partnership. The partnership has two newly incorporated companies as partners; one Australian resident partner and a non-resident partner. The resident partner holds a minority interest in the partnership. 2. The resident partner does not have the right to be involved in the management or conduct of the business of the partnership. 3. The partnership agreement specifies all management decisions regarding the partnership will be conducted outside Australia. 4. Further complexity is introduced into the existing structure through the creation of additional entities; the transfer of legal rights and obligations; changes in contractual relationships with customers; and additional intra-group services agreements. • For example, the existing foreign entity that previously made supplies to, and derived income from, Australian customers enters into a distribution agreement with the partnership to transfer the right to distribute the products or services to Australian customers to the partnership, thereby purporting to attribute profit to the partnership. • At the same time, the partnership enters into an agency agreement that purports to authorise the existing foreign entity to continue to make supplies to Australian customers as an agent of the partnership. This is intended to give full effect to the distribution agreement. 5. There is no material change to the operational activities undertaken by the group in making supplies to Australian customers. | • For example, the existing foreign entity that previously made supplies to, and derived income from, Australian customers enters into a distribution agreement with the partnership to transfer the right to distribute the products or services to Australian customers to the partnership, thereby purporting to attribute profit to the partnership. • At the same time, the partnership enters into an agency agreement that purports to authorise the existing foreign entity to continue to make supplies to Australian customers as an agent of the partnership. This is intended to give full effect to the distribution agreement. | The claimed consequences of the restructure are: 1. The MAAL is said to be technically avoided by arguing the partnership is an 'Australian entity' under subsection 177A(1) such that the entity making the supply to Australian customers is purportedly outside the scope of the 'foreign entity' definition in subsection 177A(1). The requirement in subparagraph 177DA(1)(a)(i) that there be a supply made by a foreign entity is therefore purportedly circumvented. 2. Additionally • only the Australian resident partner would return their share of partnership net income in Australia • there is no GST payable on supplies the partnership makes to Australian customers. [2] | 1. The MAAL is said to be technically avoided by arguing the partnership is an 'Australian entity' under subsection 177A(1) such that the entity making the supply to Australian customers is purportedly outside the scope of the 'foreign entity' definition in subsection 177A(1). The requirement in subparagraph 177DA(1)(a)(i) that there be a supply made by a foreign entity is therefore purportedly circumvented. 2. Additionally • only the Australian resident partner would return their share of partnership net income in Australia • there is no GST payable on supplies the partnership makes to Australian customers. [2] | • only the Australian resident partner would return their share of partnership net income in Australia • there is no GST payable on supplies the partnership makes to Australian customers. [2]",,"We are concerned the arrangements: • are structured in an artificial and contrived manner solely to avoid the application of the MAAL and are not aligned with the MAAL's policy intent and commercial reality • do not involve any substantive changes to the underlying business carried on by the multinational group in Australia and the functions undertaken by its constituent entities in relation to the supplies to Australian customers pre- and post-MAAL • are not effective in avoiding the MAAL's application. | • are structured in an artificial and contrived manner solely to avoid the application of the MAAL and are not aligned with the MAAL's policy intent and commercial reality • do not involve any substantive changes to the underlying business carried on by the multinational group in Australia and the functions undertaken by its constituent entities in relation to the supplies to Australian customers pre- and post-MAAL • are not effective in avoiding the MAAL's application. | These concerns should be read in conjunction with concerns previously outlined in TA 2016/2 regarding agency and distribution arrangements. | These arrangements will result in closer scrutiny from the ATO in conjunction with our broader examination of the MAAL's application to relevant taxpayers. | Some of the main technical issues that arise include, whether: • the partnership is effective at law • the transfer of legal rights and obligations is effective • the new intercompany agreements achieve the purported outcome of the restructure and whether the parties actually act in accordance with these terms • the enterprise has a permanent establishment in Australia • section 177DA applies to the arrangement • section 177D applies to the arrangement • GST is payable on the supplies made after the restructure. | • the partnership is effective at law • the transfer of legal rights and obligations is effective • the new intercompany agreements achieve the purported outcome of the restructure and whether the parties actually act in accordance with these terms • the enterprise has a permanent establishment in Australia • section 177DA applies to the arrangement • section 177D applies to the arrangement • GST is payable on the supplies made after the restructure.","We are engaging with taxpayers who have put forward these arrangements to explore the issues of concern and to ensure any restructuring arrangements do not seek to avoid the application of the MAAL in an artificial and contrived manner. | The ATO has processes in place to work collaboratively with taxpayers during the transition to MAAL-compliant structures. Information on these processes can be found at Combating multinational tax avoidance - a targeted anti-avoidance law on www.ato.gov.au . | Taxpayers and advisors who put forward these types of arrangements will be subject to increased scrutiny. | We will initiate compliance activity, if necessary, to address such arrangements and this may result in substantial penalties of up to 120% of the tax avoided being imposed. | Given the nature of the arrangements, any entity involved in the promotion of such arrangements may be considered a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. We will be allocating compliance resources to consider the effectiveness of the arrangements and the potential application of Division 290.","If you have entered into a similar arrangement to that described in this Alert, you may wish to seek advice as to the legal and tax consequences of the arrangement. We would also encourage you to email us at MAAL@ato.gov.au or contact the officer named in this Alert to discuss your arrangement.","PS LA 2008/15 | LCG 2015/2 | MT 2012/3 | PS LA 2007/7 | PS LA 2007/24 | PS LA 2008/6 | Part IVA | 177A | 177D | 177DA | 9-25 | Schedule 1, Division 290 | TA 2016/2 | TA 2016/8",False,https://www.ato.gov.au/law/view/document?docid=TPA/TA201611/NAT/ATO/00001,"Tax agents who would like to provide information about individuals or companies potentially promoting arrangements covered by this Alert should also use the above contact details. | Date of Effect: [1] All legislative references are to this Act unless otherwise stated. | [2] This may depend on the type of supply being made; for example, section 9-25 of A New Tax System (Goods and Services Tax) Act 1999 prescribes different rules for determining whether tangible and intangible supplies are connected with the indirect tax zone. | Public Groups and International"
TA 2016/12,Trust income reduction arrangements,17 November 2016,Current,,"We are currently reviewing a class of arrangements detected by our Trusts Taskforce that appear designed to exploit the proportionate approach to trust taxation. The arrangements are deliberately structured to exclude from the trust income much of the economic benefit that is reflected in the taxable net income of the trust. In doing this, the taxpayers seek to gain substantial tax benefits. | Under the proportionate approach, the share of trust income to which a beneficiary is presently entitled determines the proportionate share of taxable net income that is included in the beneficiary's assessable income. One implication of this approach is that, if taxable net income exceeds trust income, the share of that net income included in a beneficiary's assessable income will be more than the amount of the beneficiary's income entitlement under the trust. | The underlying premise of the arrangements described in this Taxpayer Alert is that the taxable net income of the trust is assessed to the presently entitled beneficiary, while the economic benefits reflected in that net income are retained by the trustee, or passed to a different beneficiary in a purportedly tax free form. | Under these arrangements, the rate of tax paid by the presently entitled beneficiary is lower (often significantly lower) than the rate of tax that would otherwise have been paid by the trustee and/or the beneficiary who receives the benefit. | The arrangements described above typically display all or most of the following features: 1. Steps are taken to create an artificial difference between the trust income and taxable net income of a closely held trust with the primary motivation appearing to be the avoidance of tax. The steps may include: a. Amending or varying the trust deed definition of income or the trustee's powers to determine trust income b. The trustee taking steps for the principal purpose of reducing trust income c. The trustee relying on a power in the trust deed to determine that trust income is less than it would otherwise have been 2. The beneficiary who is made presently entitled to the trust income: a. paying little or no tax on the share of taxable net income included in its assessable income, or b. is a private company, with the arrangement designed to impose tax on the net income of the trust at the rate of 30%, while limiting any increase in the accumulated profits of the company so as to minimise future assessable income that arises from paying dividends out of company profits. 3. The trust retaining the economic benefit reflecting the artificial difference between the trust income and taxable net income of the trust. That benefit may subsequently be extracted in a form that is claimed to be tax-free (or subject to a reduced rate of tax) in the hands of the recipient (usually an individual related to the controlling mind). | 1. Steps are taken to create an artificial difference between the trust income and taxable net income of a closely held trust with the primary motivation appearing to be the avoidance of tax. The steps may include: a. Amending or varying the trust deed definition of income or the trustee's powers to determine trust income b. The trustee taking steps for the principal purpose of reducing trust income c. The trustee relying on a power in the trust deed to determine that trust income is less than it would otherwise have been 2. The beneficiary who is made presently entitled to the trust income: a. paying little or no tax on the share of taxable net income included in its assessable income, or b. is a private company, with the arrangement designed to impose tax on the net income of the trust at the rate of 30%, while limiting any increase in the accumulated profits of the company so as to minimise future assessable income that arises from paying dividends out of company profits. 3. The trust retaining the economic benefit reflecting the artificial difference between the trust income and taxable net income of the trust. That benefit may subsequently be extracted in a form that is claimed to be tax-free (or subject to a reduced rate of tax) in the hands of the recipient (usually an individual related to the controlling mind). | a. Amending or varying the trust deed definition of income or the trustee's powers to determine trust income b. The trustee taking steps for the principal purpose of reducing trust income c. The trustee relying on a power in the trust deed to determine that trust income is less than it would otherwise have been | a. paying little or no tax on the share of taxable net income included in its assessable income, or b. is a private company, with the arrangement designed to impose tax on the net income of the trust at the rate of 30%, while limiting any increase in the accumulated profits of the company so as to minimise future assessable income that arises from paying dividends out of company profits. | This Taxpayer Alert is not concerned with arrangements where differences arise between the trust income and the taxable net income of the trust, merely because: • taxable net income can include amounts that are not traditionally regarded as trust income (for example, capital gains), or amounts that do not represent an accretion of value to the trust (for example, franking credits), or • proper accounting (not principally directed towards the obtaining of tax benefits) leads to differences between when and how amounts are recognised for tax and accounting purposes. | • taxable net income can include amounts that are not traditionally regarded as trust income (for example, capital gains), or amounts that do not represent an accretion of value to the trust (for example, franking credits), or • proper accounting (not principally directed towards the obtaining of tax benefits) leads to differences between when and how amounts are recognised for tax and accounting purposes.","The taxable net income of a discretionary trust for 2015-16 is $1,000,000 which relates wholly to business income. The accounting records of the trust show a profit of a similar amount. | The trustee determines the trust income for the 2015-16 year to be 30% of the taxable net income of the trust. The trustee cites a power in the deed in support of this determination. The trustee treats the remaining $700,000 as trust capital. But for this determination, the trust income would have been $1,000,000. | The trustee resolves to make a company presently entitled to all of the trust income ($300,000). The company returns all of the taxable net income of the trust ($1,000,000) as assessable income, and uses the whole of its trust income entitlement of $300,000 to meet its tax liability on this amount. | The trustee later distributes the capitalised amount of $700,000 to an individual beneficiary. The individual treats the distribution as tax-free in its hands. | The asserted result is tax of $300,000 is payable on the net income of the trust rather than tax on the net income at the individual's marginal tax rate. | In the 2015-16 year, a discretionary trust makes a $210,000 capital gain and invests $200,000 in acquiring units in a related hybrid trust entitling the trustee of the discretionary trust to receive, among other things, discretionary distributions from the hybrid trust. | The hybrid trust uses the proceeds from the unit subscription to make a $200,000 capital distribution to a discretionary object of that trust. | As a result of the capital distribution, the discretionary trust writes down the value of its investment in the hybrid trust, and recognises a $200,000 accounting loss for the year. | The accounting loss does not affect the calculation of the taxable net income of the discretionary trust for 2015-16, which is $210,000. | The trustee of the discretionary trust resolves that the $200,000 accounting loss is to be made good out of the $210,000 capital gain. The trustee cites a power in the deed in support of this resolution and determines that the trust income of the discretionary trust in 2015-16 is $10,000. But for the events described above, the trust income would have been $210,000 (i.e., would have included the full amount of the capital gain). | The trustee resolves to make a company presently entitled to all of the trust income ($10,000). The company therefore includes all of the trust's taxable net income ($210,000) in its assessable income for the year. | The company made a genuine business loss in 2015-16 and deducts that loss against its share of the trust's taxable net income, resulting in it having nil taxable income. | The discretionary object of the hybrid trust to whom the $200,000 capital distribution was made, treats the receipt as tax-free in its hands. | The asserted result is that no tax is payable on the net income of the discretionary trust even though $200,000 of the capital gain made by the trust has been received by the individual. | A discretionary trust receives a $700,000 franked dividend in 2015-16, of which $650,000 is used to purchase a residential property. | In the same income year, the trustee transfers the residential property to an individual beneficiary as an in-specie capital distribution. | The trustee determines that the in-specie distribution causes a $650,000 loss to the trust to be made good out of income, and that the trust income for 2015-16 is therefore $50,000. The trustee cites a power in the deed in support of this determination. But for the determination, the trust income would have been $700,000 (i.e. would have included the full amount of the franked dividend). | The trustee resolves to make a company presently entitled to all of the trust income ($50,000). The company returns assessable income of $1,000,000 (being the total of the $700,000 dividend and $300,000 franking credit gross up amount) in its income tax return and applies $300,000 in franking credit offsets against its tax payable. | The individual beneficiary treats the transfer of the residential property as a tax-free receipt in its hands. | The asserted result is that no tax is payable on the net income of the discretionary trust beyond the imputed 30%, even though $650,000 of the franked distribution received by the trust has been applied to benefit the individual. | The trust property of a discretionary trust includes shares in Company A which were acquired for $2. | In 2014-15, the trustee revalues the shares from $2 to $1,400,002 in the trust accounts in recognition of the company having accumulated profits of $1,400,000. The trustee then, purportedly in accordance with the terms of the trust deed, creates a $1,400,000 capital entitlement (sourced from the asset revaluation reserve) in favour of an individual beneficiary (who controls both the discretionary trust and Company A). The entitlement is not paid during the year. | In 2015-16, the trust receives a fully franked $1,400,000 dividend from Company A, and $1,000 in interest income. | The taxable net income of the trust in 2015-16 is $2,001,000. This is the sum of the interest, dividends and a $600,000 franking credit gross up amount. | In the trust accounts for the 2015-16 year, the trustee records the dividend and interest as income and further records a reduction in the book value of the shares in Company A, which is accounted for as a $1,400,000 loss made good out of income. The trustee determines that the trust income is $1,000. The trustee cites a power in the deed in support of this determination. If the trustee had not revalued the shares, the trust income would have been $1,401,000 (ie the interest income and full amount of the dividend). | The trustee of the discretionary trust resolves to make Company B presently entitled to all of the trust income ($1,000), causing its assessable income to include all of the discretionary trust's taxable net income for 2015-16 ($2,001,000). However, because Company B is entitled to the franking credit offset, it only pays $300 in tax (30% x $1000). | The trustee of the discretionary trust uses the $1,400,000 dividend income to satisfy the individual beneficiary's entitlement to the $1,400,000 capital distribution created in the 2014-15 income year. The individual beneficiary treats the amount as a tax free distribution in its hands. | The asserted result is that no tax is payable on the net income of the discretionary trust beyond the imputed 30% even though the entire $1.4m franked distribution received by the trust has been paid to the individual.","We are concerned that trustees undertaking these arrangements are taking contrived steps to engineer a reduction in the trust income of the trust with the principal purpose of generating significant tax benefits. | From our initial review of these arrangements, we consider that they may lead to various tax and other consequences, including whether: (a) the trustee's determination of income or appointment of income is ineffective under the terms of the trust deed and / or more generally for trust law purposes (e.g., where the trust deed does not give the trustee power to make a determination in the manner stated or the appointment is made to an entity which is not a beneficiary of the trust) (b) the arrangement, or steps within it, is a sham, or is otherwise ineffective to create a present entitlement at general law (c) the arrangement results in a deemed dividend under Div 7A of Part III of the ITAA 1936 due to the operation of section 109D, where trust income is appointed to a private company and the private company's entitlement is not fully satisfied (d) the arrangement results in a deemed dividend under Division 7A due to the operation of section 109T of the ITAA 1936, where the arrangement involves payment of a dividend from a private company to the trustee of a trust and the trustee uses the proceeds from the dividend to make a payment or loan other than: a. to a private company, or b. in discharge of an entitlement to trust income where that trust income includes the dividend (e) the loss integrity rules in Schedule 2F to the ITAA 1936 and Part 3-5 of the ITAA 1997 apply, in particular the income injection tests, limiting the availability of deductions and/or losses to corporate and trustee beneficiaries (f) the qualified person requirement in Subdivision 207-F of the ITAA 1997 restricts the availability of a tax offset in respect of franking credits attached to a franked distribution flowing to a beneficiary (g) the arrangement, or part of it, is a 'reimbursement agreement', and, as a result, the income beneficiary would be deemed not to be presently entitled under section 100A of the ITAA 1936 (h) the arrangement is a scheme to which the general anti-avoidance rules in Part IVA of the ITAA 1936 apply, and (i) steps taken by trustees to misstate the trust income in the trust's income tax return amount to evasion. | (a) the trustee's determination of income or appointment of income is ineffective under the terms of the trust deed and / or more generally for trust law purposes (e.g., where the trust deed does not give the trustee power to make a determination in the manner stated or the appointment is made to an entity which is not a beneficiary of the trust) (b) the arrangement, or steps within it, is a sham, or is otherwise ineffective to create a present entitlement at general law (c) the arrangement results in a deemed dividend under Div 7A of Part III of the ITAA 1936 due to the operation of section 109D, where trust income is appointed to a private company and the private company's entitlement is not fully satisfied (d) the arrangement results in a deemed dividend under Division 7A due to the operation of section 109T of the ITAA 1936, where the arrangement involves payment of a dividend from a private company to the trustee of a trust and the trustee uses the proceeds from the dividend to make a payment or loan other than: a. to a private company, or b. in discharge of an entitlement to trust income where that trust income includes the dividend (e) the loss integrity rules in Schedule 2F to the ITAA 1936 and Part 3-5 of the ITAA 1997 apply, in particular the income injection tests, limiting the availability of deductions and/or losses to corporate and trustee beneficiaries (f) the qualified person requirement in Subdivision 207-F of the ITAA 1997 restricts the availability of a tax offset in respect of franking credits attached to a franked distribution flowing to a beneficiary (g) the arrangement, or part of it, is a 'reimbursement agreement', and, as a result, the income beneficiary would be deemed not to be presently entitled under section 100A of the ITAA 1936 (h) the arrangement is a scheme to which the general anti-avoidance rules in Part IVA of the ITAA 1936 apply, and (i) steps taken by trustees to misstate the trust income in the trust's income tax return amount to evasion. | a. to a private company, or b. in discharge of an entitlement to trust income where that trust income includes the dividend",We are currently reviewing these arrangements and have commenced compliance activities affecting a number of entities. | We are identifying tax advisors that are promoting these schemes and will follow up appropriately. | We will continue to review differences between trust income and taxable net income and undertake further compliance activity when we identify a taxpayer that may have entered into a contrived arrangement of the types described above. | We are developing our technical position on the arrangements and will canvass these in more detail in due course.,"If you have entered, or are planning to enter, into an arrangement of this type we encourage you to: a) phone or email us at the contact details set out below b) ask us for our view through a private ruling c) seek independent professional advice, and / or d) make a voluntary disclosure to reduce potential penalties. | a) phone or email us at the contact details set out below b) ask us for our view through a private ruling c) seek independent professional advice, and / or d) make a voluntary disclosure to reduce potential penalties. | Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters. In more serious cases, sanctions under criminal law may apply. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15 | TR 2012/D1 | TR 2010/3 | TD 2007/11 | TD 2011/16 | TD 2012/12 | TD 2012/22 | PS LA 2005/24 | PS LA 2010/4 | 44 | Pt III Div 6 | 100A | Pt III Div 7A | Pt IVA | Schedule 2F | Pt 3-5 | Subdiv 207-F | Division 290 of Schedule 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA201612/NAT/ATO/00001,"The ATO view on the application of section 109T of the Income Tax Assessment Act 1936 to arrangements of the kind described in this Alert is set out in Draft Taxation Determination TD 2017/D3. | Do you have information?: • phone us on 1800 060 062 , or • email us at TrustRisk@ato.gov.au | Updated ATO tip-off hotline number | Private Groups and High Wealth Individuals"
TA 2015/1,Dividend stripping arrangements involving the transfer of private company shares to a self-managed superannuation fund,30 April 2015,Current,"This Taxpayer Alert describes arrangements where a private company with accumulated profits channels franked dividends to a self-managed superannuation fund (SMSF) instead of to the company's original shareholders. As a result, the original shareholders escape tax on the dividends and the original shareholders or individuals associated with the original shareholders benefit as members of the SMSF from franking credit refunds to the SMSF. | What is the issue? | The ATO is concerned that contrived arrangements are being entered into by individuals (typically SMSF members approaching retirement) so that dividends subsequently flow to, and are purportedly treated as exempt from income tax in, the SMSF because the relevant shares are supporting pensions. The intention is for the original shareholders of the private company and/or their associates to avoid 'top-up' income tax on the dividend income; and for the SMSF to receive a refund of the unused franking credit tax offset, which is available for tax free distribution to its members. | This arrangement has features of dividend stripping which could lead to the ATO cancelling any tax benefit for the transferring shareholder and/or denying the SMSF the franking credit tax offset.","This Taxpayer Alert applies to arrangements that display all or most of the following: 1. A private company (the company) has significant previously taxed accumulated profits, which are available to be paid to shareholders as franked dividends (subject to 'top-up' tax at marginal individual rates). 2. A shareholder in the company transfers their shares (the shares) in that company to a SMSF of which the shareholder or their associate is a member. There may be more than one shareholder who transfers shares to the SMSF. 3. The trustee of the SMSF treats the shares as supporting the payment of pensions to the member(s) of the SMSF (and therefore all or part of the income from the shares is regarded as exempt income of the SMSF). 4. After the SMSF satisfies the 45 day holding period rule, the company distributes its accumulated profits to the SMSF as fully or partially franked dividends. 5. The trustee of the SMSF treats the franked dividends and the attached franking credits as exempt income, which entitles the SMSF to a refund of the unused franking credit tax offsets. 6. The company may be liquidated or deregistered after the value of the shares is substantially reduced (or reduced to nil) by the payment of the franked dividends. | 1. A private company (the company) has significant previously taxed accumulated profits, which are available to be paid to shareholders as franked dividends (subject to 'top-up' tax at marginal individual rates). 2. A shareholder in the company transfers their shares (the shares) in that company to a SMSF of which the shareholder or their associate is a member. There may be more than one shareholder who transfers shares to the SMSF. 3. The trustee of the SMSF treats the shares as supporting the payment of pensions to the member(s) of the SMSF (and therefore all or part of the income from the shares is regarded as exempt income of the SMSF). 4. After the SMSF satisfies the 45 day holding period rule, the company distributes its accumulated profits to the SMSF as fully or partially franked dividends. 5. The trustee of the SMSF treats the franked dividends and the attached franking credits as exempt income, which entitles the SMSF to a refund of the unused franking credit tax offsets. 6. The company may be liquidated or deregistered after the value of the shares is substantially reduced (or reduced to nil) by the payment of the franked dividends. | The arrangement may also include one or more of the following characteristics or variations: 7. The shareholder may transfer the shares to the SMSF as an in specie contribution and/or the SMSF may purchase the shares from the shareholder using: (a) existing SMSF assets (b) funding obtained from a limited recourse borrowing arrangement (LRBA) or some other form of financial accommodation, including paying for the shares using dividends received under the arrangement, or (c) a combination of the above. 8. The company may make one or more distributions of franked dividends to the SMSF. 9. Distributions of franked dividends may also be made to other shareholders, if the SMSF does not hold 100% of the shares in the company. 10. The SMSF may receive franked dividends indirectly from the company, such as through a unit trust. 11. The SMSF (or another superannuation fund) may pay a superannuation benefit to enable the members to repay any outstanding shareholder or associate loans from the company prior to the acquisition of the shares by the SMSF. 12. A member of the SMSF may be in the accumulation phase and not receiving a pension, meaning that relevant franked dividends and attached franking credits will be assessable at 15%, resulting in a partial refund of the unused franking credit tax offsets to the SMSF. | 7. The shareholder may transfer the shares to the SMSF as an in specie contribution and/or the SMSF may purchase the shares from the shareholder using: (a) existing SMSF assets (b) funding obtained from a limited recourse borrowing arrangement (LRBA) or some other form of financial accommodation, including paying for the shares using dividends received under the arrangement, or (c) a combination of the above. 8. The company may make one or more distributions of franked dividends to the SMSF. 9. Distributions of franked dividends may also be made to other shareholders, if the SMSF does not hold 100% of the shares in the company. 10. The SMSF may receive franked dividends indirectly from the company, such as through a unit trust. 11. The SMSF (or another superannuation fund) may pay a superannuation benefit to enable the members to repay any outstanding shareholder or associate loans from the company prior to the acquisition of the shares by the SMSF. 12. A member of the SMSF may be in the accumulation phase and not receiving a pension, meaning that relevant franked dividends and attached franking credits will be assessable at 15%, resulting in a partial refund of the unused franking credit tax offsets to the SMSF. | (a) existing SMSF assets (b) funding obtained from a limited recourse borrowing arrangement (LRBA) or some other form of financial accommodation, including paying for the shares using dividends received under the arrangement, or (c) a combination of the above. | Diagram of arrangement | What are the ATO's concerns? | a) The ATO considers that the main anti-avoidance provisions for arrangements of this type are whether: (i) the franked dividends received by the SMSF may be part of a dividend stripping operation under paragraph 207-145(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) (ii) the arrangement may be a scheme by way of or in the nature of, or have substantially the effect of, dividend stripping to which section 177E of the Income Tax Assessment Act 1936 (ITAA 1936) applies (iii) the arrangement may be a scheme to obtain imputation benefits to which section 177EA of the ITAA 1936 applies. | (i) the franked dividends received by the SMSF may be part of a dividend stripping operation under paragraph 207-145(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) (ii) the arrangement may be a scheme by way of or in the nature of, or have substantially the effect of, dividend stripping to which section 177E of the Income Tax Assessment Act 1936 (ITAA 1936) applies (iii) the arrangement may be a scheme to obtain imputation benefits to which section 177EA of the ITAA 1936 applies. | b) The ATO considers that arrangements of this type may also give rise to non-arm's length income for the SMSF under section 295-550 of the ITAA 1997. | c) Other compliance issues for arrangements of this type may include: (i) capital gains tax consequences, for example, where transfers of shares are made below market value or the requirements of Division 152 of the ITAA 1997 (small business relief) are not met, even though that Division is relied upon as applying (ii) ordinary dividend or deemed dividend consequences (iii) superannuation regulatory issues, for example, if the SMSF share acquisition from a related party is not covered by an exception contained in section 66 of the Superannuation Industry (Supervision) Act 1993 (SISA); the market value ratio of the fund's in-house assets exceeds 5%; or the SMSF is maintained for purposes other than those set out in section 62 of the SISA. Breaches of the SISA may lead to the SMSF being made non-complying or the disqualification of an individual as a trustee, and/or (iv) excess contributions tax consequences. Please note: Even if your arrangement differs in some respects from the arrangement described in paragraphs 1 to 12 above, the anti-avoidance rules or other provisions of the ITAA 1936, ITAA 1997 or SISA may still apply. If the essence of an arrangement is to direct dividend income and attached franking credits from a private company to an SMSF instead of being paid to another entity, the arrangement, and whether it should be undertaken, requires careful consideration. The ATO has significant concerns that taxpayers are seeking to distinguish arrangements from this Taxpayer Alert on the basis of some feature or other variation, rather than focussing on the essence of the arrangement and what it will (or is designed to) achieve. For example, seeking to distinguish the arrangement from this Taxpayer Alert on the basis of one or more of the following does not take the arrangement outside of the scope of this Taxpayer Alert: • the private company also holds residential or commercial property when shares in the company are acquired by the SMSF • the private company earns income on an ongoing basis • distributions of franked dividends to the SMSF from the private company may happen over a number of income years instead of in the one income year • the SMSF may receive franked dividends indirectly from the private company through various interposed entities, or • there are no plans to deregister the private company. | (i) capital gains tax consequences, for example, where transfers of shares are made below market value or the requirements of Division 152 of the ITAA 1997 (small business relief) are not met, even though that Division is relied upon as applying (ii) ordinary dividend or deemed dividend consequences (iii) superannuation regulatory issues, for example, if the SMSF share acquisition from a related party is not covered by an exception contained in section 66 of the Superannuation Industry (Supervision) Act 1993 (SISA); the market value ratio of the fund's in-house assets exceeds 5%; or the SMSF is maintained for purposes other than those set out in section 62 of the SISA. Breaches of the SISA may lead to the SMSF being made non-complying or the disqualification of an individual as a trustee, and/or (iv) excess contributions tax consequences. | Even if your arrangement differs in some respects from the arrangement described in paragraphs 1 to 12 above, the anti-avoidance rules or other provisions of the ITAA 1936, ITAA 1997 or SISA may still apply. | If the essence of an arrangement is to direct dividend income and attached franking credits from a private company to an SMSF instead of being paid to another entity, the arrangement, and whether it should be undertaken, requires careful consideration. | The ATO has significant concerns that taxpayers are seeking to distinguish arrangements from this Taxpayer Alert on the basis of some feature or other variation, rather than focussing on the essence of the arrangement and what it will (or is designed to) achieve. For example, seeking to distinguish the arrangement from this Taxpayer Alert on the basis of one or more of the following does not take the arrangement outside of the scope of this Taxpayer Alert: • the private company also holds residential or commercial property when shares in the company are acquired by the SMSF • the private company earns income on an ongoing basis • distributions of franked dividends to the SMSF from the private company may happen over a number of income years instead of in the one income year • the SMSF may receive franked dividends indirectly from the private company through various interposed entities, or • there are no plans to deregister the private company. | • the private company also holds residential or commercial property when shares in the company are acquired by the SMSF • the private company earns income on an ongoing basis • distributions of franked dividends to the SMSF from the private company may happen over a number of income years instead of in the one income year • the SMSF may receive franked dividends indirectly from the private company through various interposed entities, or • there are no plans to deregister the private company. | What is the ATO doing about these compliance issues? | Private rulings | Prior to March 2014, the ATO had issued five private rulings on arrangements with features similar to those described in this Taxpayer Alert and did not apply the main anti-avoidance provisions (see paragraph (a) above). However, the ATO does not consider that this small number of private rulings constitutes a general administrative practice on such arrangements. | From March 2014, the ATO has consistently issued private rulings on arrangements with features similar to those described in this Taxpayer Alert and has applied the main anti-avoidance provisions (see paragraph (a) above). In addition, the ATO has applied the non-arm's length income provision (see paragraph (b) above) in some cases, applying the views expressed in Taxation Ruling TR 2006/7. | The ATO is continuing to closely examine private ruling applications for arrangements with features similar to those described in this Taxpayer Alert. | Compliance action | If you entered into an arrangement with features similar to those described in this Taxpayer Alert, the ATO may allocate compliance resources to consider applying all relevant provisions to your arrangement on a case-by-case basis, including: • the main anti-avoidance provisions (see paragraph (a) above) • the non-arm's length income provision (see paragraph (b) above) • the provisions relevant to other compliance issues (see paragraph (c) above). | • the main anti-avoidance provisions (see paragraph (a) above) • the non-arm's length income provision (see paragraph (b) above) • the provisions relevant to other compliance issues (see paragraph (c) above). | Further public guidance | The ATO will issue a public guidance product to explain the ATO view on how taxation and superannuation laws apply to arrangements with features similar to those in this Taxpayer Alert. | As part of consultation on this public guidance product, the ATO will consult on the application of the main anti-avoidance provisions to such arrangements, including those entered into before the issue of this Taxpayer Alert.",,,,"If you have entered into a similar arrangement to that described in this Taxpayer Alert you may wish to seek independent professional advice. If you would like to correct something in your tax return more information is available on our website ato.gov.au and search for Correct a mistake or amend a return . | You may also ask us for our view through a private ruling or contact the officer named in the Taxpayer Alert. More information on private rulings is available on our website ato.gov.au and search for Applying for a private ruling . | Frequently asked questions | Who should I contact if I have information about the arrangement? | If you have any information about the current arrangement, or would like to provide information about an individual or company potentially promoting the arrangement: • phone us on 1800 060 062 • complete the ATO Tip-Off Form | • phone us on 1800 060 062 • complete the ATO Tip-Off Form | What penalties could apply if I participate in the arrangement? | If you participate in an arrangement similar to that described in this Taxpayer Alert, and do not have a private ruling or class ruling in respect of your arrangement, you may be liable to penalties (in addition to being required to pay any tax that is avoided). | More information on penalties is available on our website ato.gov.au and search for Interest and penalties . Penalties of up to 75% of the tax avoided can apply. | How do I make a voluntary disclosure? | Any penalty relating to your participation will be significantly reduced if you make a voluntary disclosure. Generally, the reduction is greater if you make the disclosure before we notify you of an examination of your tax affairs (eg an audit). | More information on voluntary disclosures is available on our website ato.gov.au and search for Voluntary disclosures or phone 13 28 69. | For further information, see Miscellaneous Taxation Ruling MT 2012/3. | What if I have implemented a similar arrangement consistent with a private ruling issued to me stating that section 295-550 or paragraph 207-145(1)(d) of the ITAA 1997 or Part IVA of the ITAA 1936 does not apply? | Your ruling only applies in the circumstances set out in the 'Relevant facts and circumstances' section of the ruling. If you have relied on your ruling, that is, you have conducted your tax affairs in a way that is consistent with your ruling, we must apply the law to you in the way set out in the ruling. However, if you have implemented your arrangement in a materially different way from that set out in your ruling, the ruling will not apply to your circumstances. | More information is available on our website ato.gov.au and search for Can I rely on a private ruling ? | Where can I find out more about Taxpayer Alerts? | Further information on Taxpayer Alerts, including circumstances in which one may be withdrawn, can be found in Law Administration Practice Statement PS LA 2008/15. | A full list of Taxpayer Alerts issued by the ATO is available on our website, ato.gov.au. | Date of amendment Comment 19 January 2024 Updated ATO tip-off hotline number | Date of Issue: 30 April 2015 | Date of Effect: | Related Rulings/Determinations: IT 2627 TR 2006/7 MT 2012/3 | Related Practice Statements: PS LA 2008/15 | Subject References: dividend stripping franking accounts franking credits holding period rule in specie contributions Part IVA self-managed superannuation funds | Legislative References: Income Tax Assessment Act 1936 Part IVA Section 177D Section 177E Section 177EA Income Tax Assessment Act 1997 Section 207-145 Section 295-550 Superannuation Industry (Supervision) Act 1993 Section 66 Section 71 | Contact Officer: Scott Parkinson Business Line: Private Groups and High Wealth Individuals Phone: (02) 9374 2069",IT 2627 | TD 95/37 | TR 2009/3 | TR 2006/7 | MT 2012/3 | PS LA 2008/15 | Part IVA | Section 177D | Section 177E | Section 177EA | Section 207-145 | Section 295-550 | Section 66 | Section 71 | View changes,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20151/NAT/ATO/00001,The Commissioner's view on the operation of the imputation system and section 177EA of the ITAA 1936 is discussed in Taxation Ruling TR 2009/3 . | View our video about this Taxpayer Alert. | View changes made to this Taxpayer Alert.
TA 2015/1A,Dividend stripping arrangements involving the transfer of private company shares to a self-managed superannuation fund,29 October 2015,Current,,"View the updated version of TA 2015/1. | This Addendum amends Taxpayer Alert TA 2015/1 to: • make it clear that a Taxpayer Alert cannot cover every potential variation of an arrangement and that a person who has entered into, or is contemplating entering, a similar arrangement should apply for a private ruling (which provides certainty as to the ATO view) rather than rely on distinguishing their arrangement from the Taxpayer Alert, and • provide further clarity to the ""other compliance issues"" that may arise for arrangements of the type referred to in the Taxpayer Alert. This Addendum to a Taxpayer Alert is issued under the authority of the Commissioner. | • make it clear that a Taxpayer Alert cannot cover every potential variation of an arrangement and that a person who has entered into, or is contemplating entering, a similar arrangement should apply for a private ruling (which provides certainty as to the ATO view) rather than rely on distinguishing their arrangement from the Taxpayer Alert, and • provide further clarity to the ""other compliance issues"" that may arise for arrangements of the type referred to in the Taxpayer Alert. | This Addendum to a Taxpayer Alert is issued under the authority of the Commissioner. | 1. Immediately before the paragraph ""This Taxpayer Alert is issued under the authority of the Commissioner. "" Insert: While this Taxpayer Alert describes a type of arrangement, it is not possible to cover every potential variation of the arrangement to which the anti-avoidance rules or other provisions of the Income Tax Assessment Act 1936, Income Tax Assessment Act 1997 or Superannuation Industry (Supervision) Act 1993 may apply. Taxpayers who have entered into, or are contemplating entering, an arrangement similar to that described in this Taxpayer Alert should apply for a private ruling to obtain certainty as to the ATO view, rather than seek to distinguish certain aspects of their arrangement from the Taxpayer Alert. Taxpayers may also consider seeking independent professional advice. | Insert: While this Taxpayer Alert describes a type of arrangement, it is not possible to cover every potential variation of the arrangement to which the anti-avoidance rules or other provisions of the Income Tax Assessment Act 1936, Income Tax Assessment Act 1997 or Superannuation Industry (Supervision) Act 1993 may apply. Taxpayers who have entered into, or are contemplating entering, an arrangement similar to that described in this Taxpayer Alert should apply for a private ruling to obtain certainty as to the ATO view, rather than seek to distinguish certain aspects of their arrangement from the Taxpayer Alert. Taxpayers may also consider seeking independent professional advice. | 2. Subparagraph c)(i), under the heading ""What are the ATO's concerns?"" Omit the subparagraph; substitute: (i) capital gains tax consequences, for example, where transfers of shares are made below market value or the requirements of Division 152 of the ITAA 1997 (small business relief) are not met, even though that Division is relied upon as applying | Omit the subparagraph; substitute: (i) capital gains tax consequences, for example, where transfers of shares are made below market value or the requirements of Division 152 of the ITAA 1997 (small business relief) are not met, even though that Division is relied upon as applying | (i) capital gains tax consequences, for example, where transfers of shares are made below market value or the requirements of Division 152 of the ITAA 1997 (small business relief) are not met, even though that Division is relied upon as applying | 3. Subparagraph c)(iii), under the heading ""What are the ATO's concerns?"" Omit the subparagraph; substitute: (iii) superannuation regulatory issues, for example, if the SMSF share acquisition from a related party is not covered by an exception contained in section 66 of the Superannuation Industry (Supervision) Act 1993 (SISA); the market value ratio of the fund's in-house assets exceeds 5%; or the SMSF is maintained for purposes other than those set out in section 62 of the SISA. Breaches of the SISA may lead to the SMSF being made non-complying or the disqualification of an individual as a trustee, and/or | Omit the subparagraph; substitute: (iii) superannuation regulatory issues, for example, if the SMSF share acquisition from a related party is not covered by an exception contained in section 66 of the Superannuation Industry (Supervision) Act 1993 (SISA); the market value ratio of the fund's in-house assets exceeds 5%; or the SMSF is maintained for purposes other than those set out in section 62 of the SISA. Breaches of the SISA may lead to the SMSF being made non-complying or the disqualification of an individual as a trustee, and/or | (iii) superannuation regulatory issues, for example, if the SMSF share acquisition from a related party is not covered by an exception contained in section 66 of the Superannuation Industry (Supervision) Act 1993 (SISA); the market value ratio of the fund's in-house assets exceeds 5%; or the SMSF is maintained for purposes other than those set out in section 62 of the SISA. Breaches of the SISA may lead to the SMSF being made non-complying or the disqualification of an individual as a trustee, and/or | 4. After subparagraph c)iv), under the heading ""What are the ATO's concerns?"" Insert: Please note: Even if your arrangement differs in some respects from the arrangement described in paragraphs 1 to 12 above, the anti-avoidance rules or other provisions of the ITAA 1936, ITAA 1997 or SISA may still apply. If the essence of an arrangement is to direct dividend income and attached franking credits from a private company to an SMSF instead of being paid to another entity, the arrangement, and whether it should be undertaken, requires careful consideration. The ATO has significant concerns that taxpayers are seeking to distinguish arrangements from this Taxpayer Alert on the basis of some feature or other variation, rather than focussing on the essence of the arrangement and what it will (or is designed to) achieve. For example, seeking to distinguish the arrangement from this Taxpayer Alert on the basis of one or more of the following does not take the arrangement outside of the scope of this Taxpayer Alert: • the private company also holds residential or commercial property when shares in the company are acquired by the SMSF • the private company earns income on an ongoing basis • distributions of franked dividends to the SMSF from the private company may happen over a number of income years instead of in the one income year • the SMSF may receive franked dividends indirectly from the private company through various interposed entities, or • there are no plans to deregister the private company. | Insert: Please note: Even if your arrangement differs in some respects from the arrangement described in paragraphs 1 to 12 above, the anti-avoidance rules or other provisions of the ITAA 1936, ITAA 1997 or SISA may still apply. If the essence of an arrangement is to direct dividend income and attached franking credits from a private company to an SMSF instead of being paid to another entity, the arrangement, and whether it should be undertaken, requires careful consideration. The ATO has significant concerns that taxpayers are seeking to distinguish arrangements from this Taxpayer Alert on the basis of some feature or other variation, rather than focussing on the essence of the arrangement and what it will (or is designed to) achieve. For example, seeking to distinguish the arrangement from this Taxpayer Alert on the basis of one or more of the following does not take the arrangement outside of the scope of this Taxpayer Alert: • the private company also holds residential or commercial property when shares in the company are acquired by the SMSF • the private company earns income on an ongoing basis • distributions of franked dividends to the SMSF from the private company may happen over a number of income years instead of in the one income year • the SMSF may receive franked dividends indirectly from the private company through various interposed entities, or • there are no plans to deregister the private company. | • the private company also holds residential or commercial property when shares in the company are acquired by the SMSF • the private company earns income on an ongoing basis • distributions of franked dividends to the SMSF from the private company may happen over a number of income years instead of in the one income year • the SMSF may receive franked dividends indirectly from the private company through various interposed entities, or • there are no plans to deregister the private company. | This Addendum applies on and from 30 April 2015. | You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).",,,,,updated version | TA 2015/1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20151A/NAT/ATO/00001,
TA 2015/2,Franked distributions funded by raising capital to release franking credits to shareholders,7 May 2015,Current,,"We are currently reviewing arrangements which display all or most of the following features: • A company with a significant franking credit balance raises new capital from existing or new shareholders. This may occur through issuing renounceable rights to shareholders. Shareholders may include large institutional superannuation funds. • At a similar time to the capital raising, the company makes franked distributions to its shareholders, in a similar amount to the amount of capital raised. This may occur as a special dividend or through an off-market buy-back of shares, where the dividend forms part of the purchase price of the shares. • Overall: a. there is minimal net cash inflow to or outflow from the company b. the net asset position of the company remains essentially unchanged (in a buy-back variant, the number of shares on issue following the transaction may be marginally reduced due to the difference between the buy-back price and the issue price of the new shares) but their franking account is significantly reduced, and c. there is minimal impact on the shareholders, except in some cases they may receive refunds of franking credits, and in the case of buy-backs they may also get improved capital gains tax outcomes. • The franked distributions (or franked component of buy-back consideration) may be unusually large compared to ordinary dividends previously declared and paid by the company (as distinct from a typical dividend reinvestment plan applicable to an ordinary regular dividend). • The franked distribution may be receivable by all existing shareholders of the company, or shareholders may have a choice as to whether to participate (for example, in a buy-back scenario). | • A company with a significant franking credit balance raises new capital from existing or new shareholders. This may occur through issuing renounceable rights to shareholders. Shareholders may include large institutional superannuation funds. • At a similar time to the capital raising, the company makes franked distributions to its shareholders, in a similar amount to the amount of capital raised. This may occur as a special dividend or through an off-market buy-back of shares, where the dividend forms part of the purchase price of the shares. • Overall: a. there is minimal net cash inflow to or outflow from the company b. the net asset position of the company remains essentially unchanged (in a buy-back variant, the number of shares on issue following the transaction may be marginally reduced due to the difference between the buy-back price and the issue price of the new shares) but their franking account is significantly reduced, and c. there is minimal impact on the shareholders, except in some cases they may receive refunds of franking credits, and in the case of buy-backs they may also get improved capital gains tax outcomes. • The franked distributions (or franked component of buy-back consideration) may be unusually large compared to ordinary dividends previously declared and paid by the company (as distinct from a typical dividend reinvestment plan applicable to an ordinary regular dividend). • The franked distribution may be receivable by all existing shareholders of the company, or shareholders may have a choice as to whether to participate (for example, in a buy-back scenario). | a. there is minimal net cash inflow to or outflow from the company b. the net asset position of the company remains essentially unchanged (in a buy-back variant, the number of shares on issue following the transaction may be marginally reduced due to the difference between the buy-back price and the issue price of the new shares) but their franking account is significantly reduced, and c. there is minimal impact on the shareholders, except in some cases they may receive refunds of franking credits, and in the case of buy-backs they may also get improved capital gains tax outcomes.",,"We are concerned that the arrangement is being used by companies for the purpose of, or for purposes which include, releasing franking credits or streaming dividends to shareholders. This may attract the operation of the anti-avoidance rule in section 177EA of the Income Tax Assessment Act 1936 or other anti-avoidance rules. One immediate purported effect of these arrangements is the release of franking credits that may otherwise have been retained by the company. | If section 177EA (or other anti-avoidance rules) applies to an arrangement, there may be adverse implications at the shareholder level and the corporate level.",We are currently reviewing these arrangements and are engaging in discussions with taxpayers. We are developing our technical position on the arrangements.,"If you have entered into, or are contemplating entering into, an arrangement of this type we encourage you to discuss your situation with us by emailing PGIAdvice@ato.gov.au | Penalties may apply to participants and promoters of this type of arrangement. | Date of Issue: 7 May 2015 | Date of Effect: N/A",PS LA 2008/15 | section 177EA,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20152/NAT/ATO/00001,"From 28 November 2023, section 207-159 of the Income Tax Assessment Act 1997 applies to prevent certain distributions funded by capital raising from being frankable. This provision is intended to address the concerns raised in this Alert. This document incorporates revisions made since original publication. View its history and amending notices, if applicable."
TA 2015/3,Accessing the R&D Tax Incentive for ineligible broadacre farming activities,15 October 2015,Current,,"The ATO and AusIndustry are reviewing arrangements where primary producers involved in broadacre farming are claiming the R&D Tax Incentive for the cost of fertilisers and other treatments (soil improvers) where a significant part (or all) of the expenditure that is incurred relates to 'business as usual' farming activities and not to R&D activities. | In a typical arrangement: • A primary producer registers an activity for the R&D Tax Incentive and claims that the activity is for the treatment of all or a large part of a farming property with soil improvers. • Typically: - The entity purchases soil improvers, including fertilisers, microbes, and organic and other treatments. The soil improvers are either established products or products under development by another, usually unrelated, entity. - The soil improvers are applied across the entire property or a large part of it, in some cases up to thousands of hectares, whereas the treatment is only evaluated in respect of smaller specific parts of the property. • The entity claims a tax offset under the R&D Tax Incentive for expenses including the cost of the soil improvers. • In some cases, one or more companies may be established for the sole purpose of facilitating the claiming of the tax offset, and the company may lease the farming property for a nominal value. | • A primary producer registers an activity for the R&D Tax Incentive and claims that the activity is for the treatment of all or a large part of a farming property with soil improvers. • Typically: - The entity purchases soil improvers, including fertilisers, microbes, and organic and other treatments. The soil improvers are either established products or products under development by another, usually unrelated, entity. - The soil improvers are applied across the entire property or a large part of it, in some cases up to thousands of hectares, whereas the treatment is only evaluated in respect of smaller specific parts of the property. • The entity claims a tax offset under the R&D Tax Incentive for expenses including the cost of the soil improvers. • In some cases, one or more companies may be established for the sole purpose of facilitating the claiming of the tax offset, and the company may lease the farming property for a nominal value. | - The entity purchases soil improvers, including fertilisers, microbes, and organic and other treatments. The soil improvers are either established products or products under development by another, usually unrelated, entity. - The soil improvers are applied across the entire property or a large part of it, in some cases up to thousands of hectares, whereas the treatment is only evaluated in respect of smaller specific parts of the property. | What are the ATO and AusIndustry's concerns? | We are concerned that entities involved in this arrangement are attempting to access the R&D Tax Incentive for expenditure related to normal business rather than eligible R&D activities. | A number of registered activities have been reviewed by Innovation Australia, and found to be ineligible activities for the purposes of claiming the R&D Tax Incentive. Innovation Australia's reasons include: • The activities lacked the 'systematic progression of work' (which requires a hypothesis, experiment, observation and evaluation leading to logical conclusions). • The activities involved the use of established products and existing organic treatment methodologies. A competent professional could have known or worked out the outcome of using the soil improvers without conducting an experiment. • The activities claimed did not have a significant purpose of generating new knowledge. • The size of the farming area to which the soil improvers were applied was excessive relative to the number of samples taken. The scale of the activities is more consistent with commercial production than the generation of new knowledge. • Entities may have relied on R&D undertaken by or for another party, rather than carrying on their own R&D activity. The onus is on taxpayers to show that they are carrying on their own R&D activity. | • The activities lacked the 'systematic progression of work' (which requires a hypothesis, experiment, observation and evaluation leading to logical conclusions). • The activities involved the use of established products and existing organic treatment methodologies. A competent professional could have known or worked out the outcome of using the soil improvers without conducting an experiment. • The activities claimed did not have a significant purpose of generating new knowledge. • The size of the farming area to which the soil improvers were applied was excessive relative to the number of samples taken. The scale of the activities is more consistent with commercial production than the generation of new knowledge. • Entities may have relied on R&D undertaken by or for another party, rather than carrying on their own R&D activity. The onus is on taxpayers to show that they are carrying on their own R&D activity. | We are concerned that other entities in the farming industry may be inappropriately claiming the R&D Tax Incentive under similar circumstances. | Although the arrangement described above concerns the use of purchased soil improvers across all, or substantially all, of a farming property, we also have concerns that some entities in the farming industry may be encouraged to claim the R&D Tax Incentive for other types of expenditure that relates to their normal business activities and which does not qualify for the R&D Tax Incentive. While legitimate R&D activities in the farming industry are to be encouraged, taxpayers in the industry need to be alert to the fact that normal business expenditure is not eligible for the R&D Tax Incentive. Potential R&D activities should be evaluated against the relevant criteria to ensure claims are eligible. | For more information, refer to AusIndustry or this ATO fact sheet about the R & D Tax Incentive .",,,"Innovation Australia has reviewed the registered activities of certain entities and issued findings that the activities are ineligible for the R&D Tax Incentive. | The ATO and AusIndustry are working closely on this arrangement and have contacted entities who we believe may have entered into this type of arrangement to share our concerns. | The ATO and AusIndustry will monitor registrations for activities that are similar to those described in this Alert and will conduct compliance activities where appropriate. AusIndustry is developing a Specific Issue Guidance product to assist taxpayers engaged in the farming industry, and their accountants and advisors, to correctly identify and document eligible R&D activities in that industry.","If you are contemplating entering into this type of arrangement, you may want to apply to AusIndustry for a finding about your eligibility for the R&D Tax Incentive or seek independent professional advice. | If you have entered into this type of arrangement, or have otherwise claimed the R&D Tax Incentive in relation to your normal business activities, you may want to seek independent professional advice, make a voluntary disclosure to the ATO or amend your tax return. | Penalties may apply to participants and promoters of this type of arrangement. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.",PS LA 2008/15,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20153/NAT/ATO/00001,This Alert was jointly developed with AusIndustry . | The Research and Development (R & D) tax incentive is jointly administered by Innovation Australia (supported by AusIndustry) and the ATO. AusIndustry has responsibility for assuring the eligibility of R&D activities while the ATO has responsibility for R&D tax offset claims under the incentive. | Updated ATO tip-off hotline number | Private Groups and High Wealth Individuals
TA 2015/4,Accessing business profits through an interposed partnership with a private company partner,12 November 2015,Current,,"We are currently reviewing arrangements where profits are claimed to be directed through a purported partnership that has a private company as a partner. Most of the profits are taxed to the private company at the corporate tax rate, but are accessed by one or more individuals without paying additional tax reflecting their higher marginal tax rate. | These arrangements typically include all or most features of at least one of the following variations: | The following describes these arrangements in further detail: 1. An individual and a private company, which is controlled by the individual or their associate, enter into a partnership. 2. The partnership has many of the following characteristics: a. The private company contributes most of the capital, typically as much as 99%, with the individual contributing the remaining capital. The total amount of capital that is contributed frequently has only a nominal value, often as low as $100, and the partners present themselves as sharing the income of the partnership in the same proportion as their capital contributions. b. The individual (the managing partner ) has control of the management, conduct and operation of the partnership. This control includes discretion over the application and distribution of the partnership's profits. The private company is a passive partner (the passive partner ). c. The source of the partnership's income is typically a related business, however the partnership may also receive income from other sources. The income is usually channelled to the partnership via a discretionary trust (the trust ). d. Income may also be channelled to the partnership via dividends from a private company eg through a 'dividend access share' or similar arrangement (see paragraph 4(c) of TD 2014/1). e. The partnership may also purport to derive income directly from carrying on a business in its own right. However, its income from other sources greatly exceeds any income generated from its own business activities. 3. During an income year: a. The trustee resolves to distribute a share of the net income of the trust to the partnership and either: i. retains the money on sub-trust for the partnership ii. purports to retain the money on sub-trust, but does not set aside the private company's share of the money for the sole benefit of the private company, or iii. pays the money to the partnership. b. The managing partner makes a resolution in favour of the partners according to their respective interests in the partnership. c. The partners include their share of the partnership profits in their assessable income. As much as 99% of the profits are typically assessed to the private company at the corporate tax rate. 4. In the same or a subsequent income year, the profits, including amounts taxed to the private company partner, are ultimately loaned or paid to a shareholder or associate of the managing partner. a. Profits retained by the trustee are loaned or paid by the trustee to an associate of the managing partner, or applied within the business carried on by the trust. b. Profits that were paid by the trustee to the partnership are: i. loaned or paid to an associate of the managing partner or otherwise allocated ii. loaned or paid back to the trust which loans or pays the amounts to an associate of the managing partner iii. in some cases - paid to the private company partner which loans or pays the amounts to an associate of the managing partner, or iv. applied by the trustee within the business carried on by the trust. 5. The managing partner's associates, to which the money is loaned or paid, do not include the amounts received in their assessable income. Minimal or no interest is paid on these amounts. 6. In many cases the arrangement is used to eliminate pre-2009 unpaid present entitlements (UPE) that could subsequently become subject to Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) due to the operation of sections 109XA and 109XI of the ITAA 1936.",,"We are concerned that the arrangement is being used for the purpose of allowing individuals to access business and other profits at the corporate tax rate without paying additional 'top-up' tax reflecting their higher marginal tax rate. | From our initial consideration of cases involving these arrangements, we are concerned that: a) The partnership is not a 'partnership' at general law. b) The arrangement may be ineffective at law, or may have a different effect from that which has been presented, especially where there are inconsistencies in the implementation of transactions. c) It may be the partners, not the partnership, which are the beneficiaries of the trust. d) The passive partner may not have an interest in the income of the partnership, for the purposes of Division 5 of Part III of the ITAA 1936, due to the restrictions in the partnership deed. e) The passive partner may not be presently entitled to any part of the net income of the trust, due to the restrictions in the partnership deed, so that the trust distribution should not be included in the private company's assessable income under Division 6 of Part III of the ITAA 1936. f) In the event that the private company is presently entitled to any part of the net income of the trust: i. The arrangement, or part of it, may constitute a 'reimbursement agreement', and as a result, the private company is deemed to not be presently entitled under section 100A of the ITAA 1936, and ii. The private company may have a sufficient interest in the funds for it to be taken to have made a loan or to have provided financial accommodation to the trustee under section 109D of the ITAA 1936. g) By making a loan, or providing financial accommodation, the private company may be taken to have paid an unfrankable dividend to the trustee, a shareholder or an associate under Division 7A of Part III of the ITAA 1936. h) Arrangements using a 'dividend access share' (see paragraph 2(d) above) may be debt interests, not equity interests, and unable to be franked. i) The arrangement may be a scheme by way of or in the nature of, or have substantially the same effect of, dividend stripping to which section 177E of the ITAA 1936 or section 207-145 of the Income Tax Assessment Act 1997 (ITAA 1997) applies. j) The arrangement may be a scheme to which section 177D of the ITAA 1936 applies. | Accordingly, any entity involved in the promotion of this arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | Other arrangements involving the use of corporate limited partnerships (CLP) were used to avoid the operation of Division 7A of Part III of the ITAA 1936 in the past (see Taxpayer Alert TA 2007/5). These were addressed through legislative changes. | Those CLP arrangements were also recently considered by the Administrative Appeals Tribunal (AAT) in two cases, both favourable to the Commissioner: D Marks Partnership & Ors v FC of T [2015] AATA 651 and NR Allsop Holdings Pty Ltd as General Partner of Q Uniform Partnership v FC of T [2015] AATA 654. The AAT found that a number of specific provisions of the income tax law did not operate in the manner submitted by the taxpayers. | In particular the AAT decided that: a) the lack of business activities meant that there could be no general law partnership and thus could not constitute a CLP despite registration as such b) as the CLP was found not to exist the income was assessed directly to the 'partners' c) the 'dividend access share' arrangements were debt interests that were not able to be franked, and d) the applicants adopted a strained and unsustainable interpretation of relevant legislation. | The AAT did not consider the application of the general anti-avoidance rules in reaching its decision. | Although the AAT's decisions are currently being appealed, the Commissioner believes that the issues raised above have serious implications for the current managed partnership arrangements.",We are currently undertaking a pilot compliance program reviewing a number of cases involving arrangements of this type and we will be engaging with additional taxpayers over the coming months. A significant proportion of those taxpayers are actively pursuing settlement options with the Commissioner.,"If you have entered into, or are contemplating entering into, an arrangement of this type we encourage you to: a) phone or email us at the contact details provided below b) ask us for our view through a private ruling c) seek independent professional advice, or d) make a voluntary disclosure to reduce penalties that may apply.","PS LA 2008/15 | TR 2010/3 | MT 2012/3 | TD 2014/1 | Part III, Division 5 | Part III, Division 6 | Part III, Division 7A | Part IVA | Section 97 | Section 99A | Section 100A | Section 109C | Section 109D | Section 109N | Section 109XA | Section 109XB | Section 109XI | Section 177D | Section 177E | Section 318 | Section 202-45 | Section 207-145 | Section 995-1 | Division 290 | TA 2007/5 | 2015 ATC 10-403 | [2015] AATA 654",False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20154/NAT/ATO/00001,Updated ATO tip-off hotline number | Related Taxpayer Alerts: D Marks Partnership & Ors v FC of T [2015] AATA 651 2015 ATC 10-403 | Private Groups and High Wealth Individuals
TA 2015/5,Arrangements involving offshore procurement hubs,10 December 2015,Current,,"We are currently reviewing arrangements involving the use of offshore entities which source goods (procurement hub) on behalf of Australian resident multi-national enterprises (MNEs). In these arrangements, the procurement hub receives services from a related offshore entity (services hub). Our concerns about these arrangements primarily relate to the application of the controlled foreign company (CFC) rules, the transfer pricing rules and Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936). | These arrangements typically display all or most of the following features: • A procurement hub and a services hub are established offshore. The hubs are CFCs of the MNE. A lower rate of tax or concessionary tax treatment may apply to the hubs in the relevant foreign jurisdiction(s). • In procuring goods, the procurement hub enters into contracts with third party suppliers for or on behalf of the MNE. The procurement hub may or may not take title to or physical possession of the goods on the transfer of the goods. It does not substantially transform the goods it buys on behalf of the MNE. • The procurement hub may have few or no employees and assets. • The services hub provides services to the procurement hub in exchange for a fee which may be calculated as a percentage of sales or profits. The pricing methodologies adopted may not result in outcomes which could be expected to be observed between parties dealing at arm's length. • There is little or no commercial justification for the separation of the procurement function into two separate CFCs/entities. | • A procurement hub and a services hub are established offshore. The hubs are CFCs of the MNE. A lower rate of tax or concessionary tax treatment may apply to the hubs in the relevant foreign jurisdiction(s). • In procuring goods, the procurement hub enters into contracts with third party suppliers for or on behalf of the MNE. The procurement hub may or may not take title to or physical possession of the goods on the transfer of the goods. It does not substantially transform the goods it buys on behalf of the MNE. • The procurement hub may have few or no employees and assets. • The services hub provides services to the procurement hub in exchange for a fee which may be calculated as a percentage of sales or profits. The pricing methodologies adopted may not result in outcomes which could be expected to be observed between parties dealing at arm's length. • There is little or no commercial justification for the separation of the procurement function into two separate CFCs/entities.",,"We are concerned that Australian resident MNEs are entering into offshore procurement structures where there is a bifurcation of the procurement function between two separate offshore entities. We are concerned that such structures are being used by MNEs for the purpose of, or for purposes which include, minimising tainted income under section 447 and section 448 of the ITAA 1936. | Alternatively, these arrangements may attract the application of the general anti-avoidance rules in Part IVA of the ITAA 1936. | We are also concerned with the substance and pricing of some of these arrangements from a transfer pricing perspective. | Arrangements involving the outbound supply of goods by offshore hubs may also attract these concerns.",We are currently reviewing these arrangements and have commenced compliance activities in relation to a number of cases. Compliance activity will continue and we are developing our technical position on the arrangements. | We will canvass our concerns in further detail at upcoming professional forums.,"If you have entered into, or are contemplating entering into, an arrangement of this type we recommend that you seek independent advice, review your arrangement or discuss your situation with us by emailing offshorehubs@ato.gov.au | Date of Issue: 10 December 2015 | Date of Effect: | Subject References: Arm's length conditions Controlled foreign companies Part IVA Procurement hubs Profit shifting Transfer pricing | Contact officer: Paul Korganow Business Line: Public Groups and International Phone: (03) 8601 9505",PS LA 2008/15 | section 447 | section 448 | Part IVA,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20155/NAT/ATO/00001,
TA 2014/1,Trusts mischaracterising property development receipts as capital gains,28 July 2014,Current,"This Taxpayer Alert describes arrangements where property developers use trusts to return the proceeds from property development as capital gains instead of income on revenue account. | What is the issue? | This Taxpayer Alert describes an arrangement whereby a trust (commonly a special purpose or new trust) undertakes property development activities as part of its normal business. The developed property, which could be either commercial or residential in nature, is subsequently sold and the proceeds are returned on capital account, resulting in access to the general 50% capital gains discount. | The proceeds are not returned as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), either on a gross basis (as part of a business of property development, where the underlying property constitutes trading stock for the purposes of section 70-10 of the ITAA 1997) or on a net basis (as part of a profit making undertaking).","This Taxpayer Alert applies to arrangements which display all or most of the following: 1. An entity with experience in either developing or selling property, or in the property and construction industry, establishes a new trust for the purpose of acquiring property for development and sale. 2. In some cases the trust deed may expressly state that the purpose of the trust is to hold the developed property as a capital asset to generate rental income. In other cases the trust deed may be silent as to its purpose. 3. Activity is then undertaken in a manner which is at odds with the stated purpose of treating the developed property as a capital asset. For example: • Documents prepared in connection with obtaining finance for the development may indicate that the dwellings constructed on the land are to be sold within a certain timeframe and that the proceeds are to be used to repay the loan. • Communication with local government authorities overseeing building approvals may describe the activity as being the development of property for sale. • Real estate agents may be engaged early in the development process, and advertising to the general public may indicate that the dwellings/subdivided blocks of land are available to be purchased well in advance of the project's completion, including sales off the plan. 4. The property is sold soon after completion of the development, where the underlying property may have been held for as little as 13 months. 5. The trustee treats the sale proceeds as being on capital account, and because the trustee acquired the underlying property more than 12 months before the sale, it claims the general 50% capital gains tax discount (in other words, it treats the gain/profit in respect of each sale as a discounted capital gain). | 1. An entity with experience in either developing or selling property, or in the property and construction industry, establishes a new trust for the purpose of acquiring property for development and sale. 2. In some cases the trust deed may expressly state that the purpose of the trust is to hold the developed property as a capital asset to generate rental income. In other cases the trust deed may be silent as to its purpose. 3. Activity is then undertaken in a manner which is at odds with the stated purpose of treating the developed property as a capital asset. For example: • Documents prepared in connection with obtaining finance for the development may indicate that the dwellings constructed on the land are to be sold within a certain timeframe and that the proceeds are to be used to repay the loan. • Communication with local government authorities overseeing building approvals may describe the activity as being the development of property for sale. • Real estate agents may be engaged early in the development process, and advertising to the general public may indicate that the dwellings/subdivided blocks of land are available to be purchased well in advance of the project's completion, including sales off the plan. 4. The property is sold soon after completion of the development, where the underlying property may have been held for as little as 13 months. 5. The trustee treats the sale proceeds as being on capital account, and because the trustee acquired the underlying property more than 12 months before the sale, it claims the general 50% capital gains tax discount (in other words, it treats the gain/profit in respect of each sale as a discounted capital gain). | • Documents prepared in connection with obtaining finance for the development may indicate that the dwellings constructed on the land are to be sold within a certain timeframe and that the proceeds are to be used to repay the loan. • Communication with local government authorities overseeing building approvals may describe the activity as being the development of property for sale. • Real estate agents may be engaged early in the development process, and advertising to the general public may indicate that the dwellings/subdivided blocks of land are available to be purchased well in advance of the project's completion, including sales off the plan. | What are the ATO's concerns? | The ATO considers that arrangements of this type give rise to various issues relevant to taxation laws, including whether: (a) the underlying property constitutes trading stock for the purposes of section 70-10 of the ITAA 1997 on the basis that the trustee is carrying on a business of property development, (b) the gross proceeds from sale constitute ordinary income under section 6-5 of the ITAA 1997 on the basis that the trustee is carrying on a business of property development, (c) the net profit from sale is ordinary income under section 6-5 of the ITAA 1997 on the basis that, although the trustee is not carrying on a business of property development, it is nevertheless involved in a profit making undertaking. | (a) the underlying property constitutes trading stock for the purposes of section 70-10 of the ITAA 1997 on the basis that the trustee is carrying on a business of property development, (b) the gross proceeds from sale constitute ordinary income under section 6-5 of the ITAA 1997 on the basis that the trustee is carrying on a business of property development, (c) the net profit from sale is ordinary income under section 6-5 of the ITAA 1997 on the basis that, although the trustee is not carrying on a business of property development, it is nevertheless involved in a profit making undertaking. | What is the ATO doing? | The ATO has commenced a number of audits and has made adjustments to increase the net income of a number of trusts. Audit activity will continue.",,,,"If you have entered into a similar arrangement to that described in this alert you may wish to seek independent professional advice. If you would like to correct something in your tax return, more information is available on our website ato.gov.au and search for Correcting your tax return or activity statement . | You may also ask us for our view through a private ruling or contact the officer named in the Taxpayer Alert. More information on private rulings is available on our website ato.gov.au and search for How to apply for a private ruling . | Frequently asked questions | Who should I contact if I have information about the arrangement? | If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). | Can I self-amend? | If you detect an error you may self-amend to correct your tax return, if within the time period allowed by the law. Self-amending to correct your tax return will avoid penalties. | More information on correcting your return and amendment periods is available on our website ato.gov.au and search for Correcting your tax return or activity statement . | How do I make a voluntary disclosure? | Any penalty relating to your involvement will be significantly reduced if you make a voluntary disclosure. Generally, the reduction is greater if you make the disclosure before we notify you of an examination of your tax affairs (eg an audit). | More information on voluntary disclosures is available on our website ato.gov.au and search for Make a voluntary disclosure or phone 13 28 61. | What penalties could apply? | If you participate in an arrangement similar to that described in this Taxpayer Alert, and do not have a private binding ruling or class ruling in respect of your arrangement, it is possible that you may become liable to penalties (in addition to being required to pay any tax that is avoided) should the ATO review your tax affairs. | More information on penalties is available on our website ato.gov.au and search for Penalties and interest . In deliberate cases, penalties of up to 75% of the tax avoided can apply. | For further information see Miscellaneous Tax Ruling MT 2012/3 . | Where can I find out more about Taxpayer Alerts? | Further information on Taxpayer Alerts, including circumstances in which one may be withdrawn, can be found in Law Administration Practice Statement PS LA 2008/15 . | A full list of Taxpayer Alerts issued by the ATO is available on our website, ato.gov.au. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 28 July 2014 | Date of Effect: | Related Rulings/Determinations: MT 2012/3 TR 92/3 | Related Practice Statements: PS LA 2008/15 | Subject References: capital gains property development receipts special purpose trusts | Legislative References: Income Tax Assessment Act 1997 Section 6-5 Section 70-10 | Contact Officer: Bruce Collins Business Line: Private Groups & High Wealth Individuals Phone: (02) 6216 2710",MT 2012/3 | PS LA 2008/15 | TR 92/3 | Section 6-5 | Section 70-10,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20141/NAT/ATO/00001,
TA 2013/1,Arrangements to exploit mismatches between trust and taxable income,12 August 2013,Current,"This Taxpayer Alert describes an artificial arrangement where a deliberate mismatch is created between the amounts beneficiaries are entitled to receive from a trust and the amounts they are taxed on. | Context for the arrangement | The arrangement concerns a situation where a trust has generated a small amount of income and a large capital gain during the year. The trust distributions are made in such a way that one beneficiary receives the funds generated from the capital gain, tax free, whilst another beneficiary (a new incorporated company) receives the tax liability attached to that capital gain. The newly incorporated company receives no funds from the capital gain to pay this tax liability, and winding-up proceedings are commenced. This process is designed to avoid the payment of tax on the large taxable capital gain.","The Taxpayer Alert applies to artificial arrangements with features substantially equivalent, but not limited to the following: 1. The trust is a discretionary trust. The beneficiaries are members of a family group. One family member controls the trust. 2. Trust income is defined in the trust deed to be equal to the trust's taxable income, unless the trustee determines otherwise. 3. During the year, the trustee sells a capital asset, which results in a capital gain. The trust also derives a small amount of ordinary income. 4. A newly incorporated company, controlled by a family member, is made a beneficiary of the trust. 5. The trustee exercises its power under the trust deed to: (i) determine that the capital gain is excluded from trust income; and (ii) distribute all of the trust income remaining to the new company beneficiary. 6. The result is that whilst the company is only entitled to receive the small amount determined to be trust income, it is assessed on the trust's entire taxable income (comprising both the net capital gain and the ordinary income). 7. In the following income year, the trustee makes a capital distribution of an amount equal to the capital gain to an individual family member. 8. There is no prospect of the company paying its tax liability, as its only material asset is an entitlement to the small amount of trust income. 9. liquidator is appointed to wind up the company. 10. There is no evidence of any commercial, familial, or charitable reason for carrying out this arrangement. 11. The net effect of the arrangement is that all parties avoid the payment of tax on the capital gain. | 1. The trust is a discretionary trust. The beneficiaries are members of a family group. One family member controls the trust. 2. Trust income is defined in the trust deed to be equal to the trust's taxable income, unless the trustee determines otherwise. 3. During the year, the trustee sells a capital asset, which results in a capital gain. The trust also derives a small amount of ordinary income. 4. A newly incorporated company, controlled by a family member, is made a beneficiary of the trust. 5. The trustee exercises its power under the trust deed to: (i) determine that the capital gain is excluded from trust income; and (ii) distribute all of the trust income remaining to the new company beneficiary. 6. The result is that whilst the company is only entitled to receive the small amount determined to be trust income, it is assessed on the trust's entire taxable income (comprising both the net capital gain and the ordinary income). 7. In the following income year, the trustee makes a capital distribution of an amount equal to the capital gain to an individual family member. 8. There is no prospect of the company paying its tax liability, as its only material asset is an entitlement to the small amount of trust income. 9. liquidator is appointed to wind up the company. 10. There is no evidence of any commercial, familial, or charitable reason for carrying out this arrangement. 11. The net effect of the arrangement is that all parties avoid the payment of tax on the capital gain. | (i) determine that the capital gain is excluded from trust income; and (ii) distribute all of the trust income remaining to the new company beneficiary. | Diagram of arrangement | The diagram below demonstrates the arrangement. The company is taxed on the ordinary income and capital gain, however the company is unable to pay the tax as it has insufficient funds. Most of the funds are received by the individual in the form of a capital distribution which is treated as tax free. | Features which concern us | The ATO considers that arrangements substantially of this type give rise to taxation issues that include whether: (a) the arrangement, or steps within it, may be a sham; (b) income may be assessable to any entity involved in the arrangement and their associates under section 100A of Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936); (c) the arrangement may constitute a scheme to which the general anti-avoidance rules in Part IVA of the ITAA 1936 may apply; (d) any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA); (e) any entity involved in the arrangement that is a tax practitioner may be referred to the Tax Practitioners Board under the Tax Agent Services Act 2009 regarding matters relevant to the Code of Professional Conduct; and (f) any civil or criminal offences have been committed by any entity involved in the arrangement (where the ATO becomes aware of such offences, the matter may be referred to the appropriate authority). | (a) the arrangement, or steps within it, may be a sham; (b) income may be assessable to any entity involved in the arrangement and their associates under section 100A of Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936); (c) the arrangement may constitute a scheme to which the general anti-avoidance rules in Part IVA of the ITAA 1936 may apply; (d) any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA); (e) any entity involved in the arrangement that is a tax practitioner may be referred to the Tax Practitioners Board under the Tax Agent Services Act 2009 regarding matters relevant to the Code of Professional Conduct; and (f) any civil or criminal offences have been committed by any entity involved in the arrangement (where the ATO becomes aware of such offences, the matter may be referred to the appropriate authority). | The ATO is currently reviewing these arrangements. | If you have any information about arrangements substantially equivalent to that described in this Taxpayer Alert, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call the Tax Agent Infoline - 13 72 86 Fast Key Code 3 4. Note 1: You may have already sought advice from the ATO in respect of your arrangement by way of a private ruling. If you have received a private ruling in respect of your arrangement, you can rely on that private ruling. A private ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the private ruling is later found to be incorrect. However, a private ruling only applies to the particular entity identified and the particular scheme described in the ruling for the years identified in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the private ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the ITAA 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 5: In appropriate cases, possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where : • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. Note 6: A registered tax agent may have their registration cancelled or suspended by the Tax Practitioners' Board under the Tax Agent Services Act 2009 for breach of a condition of registration, including being penalised for being a promoter of a tax exploitation scheme. Note 7: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PS LA 2008/6. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. | Date of amendment Comment 19 January 2024 Updated ATO tip-off hotline number | Date of Issue: 12 August 2013 | Date of Effect: 12 August 2013 | Related Practice Statements: PS LA 2005/24 PS LA 2008/6 PS LA 2008/15 | Subject References: general anti-avoidance rule trust trust distributions | Legislative References: Income Tax Assessment Act 1936 Division 6 Section 100A Part IVA Taxation Administration Act 1953 Division 290 of Schedule 1 | Contact Officer: Neil McNamara Business Line: Medium Business Line Section: Trust Technical Team Phone: (02) 6058 7495",,,,,PS LA 2005/24 | PS LA 2008/6 | PS LA 2008/15 | Division 6 | Section 100A | Part IVA | Division 290 of Schedule 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20131/NAT/ATO/00001,
TA 2013/2,Wine equalisation tax (WET) producer rebate schemes,8 October 2013,Current,"This Taxpayer Alert describes two contrived arrangements that are designed to create additional Wine Equalisation Tax (WET) rebates through non-commercial dealings between entities. | Context | Wine Equalisation Tax (WET) generally applies on the last wholesale sale of wine. A producer rebate is available in certain circumstances to producers of wine to a maximum of $500,000 in a financial year. This limit also applies to a group of 'associated' producers. | The arrangements are structured so that producers or groups of associated producers claim multiple rebates that combine to exceed the $500,000 limit. | The first arrangement involves a wine producer arranging for another entity to be the producer of some of its wine. The other entity has no real role in the manufacturing process and sells the wine produced to the wine producer for resale to third parties. Both entities then claim rebates, even though the wine is actually manufactured by the wine producer. | In the second arrangement, the wine producer sells wine to other entities for blending or further manufacture. However it is the wine producer who organises and controls all the blending or further manufacture. Sales of the blended or further manufactured wine occur between the entities within the arrangement. All entities claim rebates on the sales of the wine even though it is actually manufactured by the wine producer. | The ATO is conducting compliance action on these arrangements and considers that these arrangements may not be effective in creating additional rebate entitlements for the entities involved.","This Taxpayer Alert applies to arrangements with features substantially equivalent to the following: | Arrangement 1: Wine Producer arranges for another entity to manufacture some of its wine | 1 A wine producer buys grapes to make wine and claims the rebate when the wine is sold. The wine producer's sales result in it claiming the maximum rebate for that financial year. | 2 An entity, not at arm's length to the wine producer, starts buying grapes from the wine producer or someone that the wine producer would buy grapes from. | 3 The wine producer manufactures the entity's grapes into wine. | 4 The wine producer buys the wine from the entity which triggers a producer rebate claim by the entity. No WET is payable as an ABN is quoted by the time of the sale. | 5 The end buyers of the wine are those that the wine producer would sell to. | 6 The combined producer rebates claimed in the financial year by the wine producer and the entity will exceed the wine producer's maximum entitlement. | 7 The extra producer rebate(s) are usually shared by participants in the arrangement through manipulating prices charged between the parties for the grapes, wine or other services. | Diagram of arrangement 1 | This arrangement can be represented diagrammatically as follows: | Arrangement 2: Wine producer sells wine to other entities who further blend or manufacture the wine | 1 A wine producer makes and sells wine then claims the producer rebate. | 2 An entity not at arm's length to the wine producer buys bulk wine from the wine producer or another supplier it arranges. | 3 The wine is further processed for the entity by the wine producer. | 4 The entity sells the wine to the wine producer or to another non-arm's length entity and claims a rebate on the sale. | 5 Extra rebates are created by a number of staged wine sales between further interposed entities purporting to blend or further manufacture the wine. | 6 No WET is payable on wine sales between the participants as each buyer quotes its ABN by the time of sale. | 7 For sales of wine on or after 10 December 2012, involving wine manufacture using other wine (e.g. blending) producers are required to reduce their rebate entitlement by earlier rebates claimed on the acquired wine. | 8 The end buyers of the wine are those that the wine producer would ordinarily sell to. | 9 The extra producer rebate(s) are usually shared by participants in the arrangement through manipulating prices charged between the parties for the grapes, wine or other services. | Diagram of arrangement 2 | This arrangement can be represented diagrammatically as follows: | Features which concern us | The ATO considers that arrangements of the type described above give rise to a number of issues relevant to the taxation laws, including whether: (a) the entity satisfies the definition of 'producer' as defined in section 33-1 of the WET Act. (b) the treatment of the wine, for which the producer rebate is claimed, meets the definition of 'manufacture' as defined in section 33-1 of the WET Act. (c) the entities in the arrangement are entitled to a producer rebate under Division 19 of the WET Act. (d) the entity and the wine producer are associated producers within the meaning of section 19-20 of the WET Act. (e) section 27-10 of the WET Act applies to adjust WET liability or wine tax credit entitlement in respect of non-arm's length transactions. (f) the anti-avoidance provisions in Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply. (g) the arrangement, or certain steps within it, constitutes a sham at general law. (h) any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA). Note 1: You may have already sought advice from the ATO in respect of your arrangement by way of a private ruling or class ruling. If you have received a private ruling or class ruling in respect of your arrangement, you can rely on that ruling. A private or class ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the ruling is later found to be incorrect. However, a private ruling only applies to a particular entity identified and the particular scheme described in the ruling. Similarly, a class ruling only applies to a specified class of entities and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Division 165 of the GST Act is considered in that ruling. The applicant may not have sought for us to rule on the application of Division 165 to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Division 165 applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Division 165 of the GST Act is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 5: Significant reductions in penalty apply to voluntary disclosures - see Miscellaneous Taxation Ruling MT 2012/3. You can view this ruling on our website, ato.gov.au, by searching the legal database on 'MT 2012/3'. Note 6: In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where : • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. Note 7: A registered tax agent may have their registration cancelled or suspended by the Tax Practitioners Board under the Tax Agent Services Act 2009 for breach of a condition of registration including being penalised for being a promoter of a tax exploitation scheme. Note 8: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6. | (a) the entity satisfies the definition of 'producer' as defined in section 33-1 of the WET Act. (b) the treatment of the wine, for which the producer rebate is claimed, meets the definition of 'manufacture' as defined in section 33-1 of the WET Act. (c) the entities in the arrangement are entitled to a producer rebate under Division 19 of the WET Act. (d) the entity and the wine producer are associated producers within the meaning of section 19-20 of the WET Act. (e) section 27-10 of the WET Act applies to adjust WET liability or wine tax credit entitlement in respect of non-arm's length transactions. (f) the anti-avoidance provisions in Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply. (g) the arrangement, or certain steps within it, constitutes a sham at general law. (h) any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA). | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 8 October 2013 | Date of Effect: | Related Rulings/Determinations: WETR 2009/1 WETR 2009/2 WETD 2011/1 MT 2012/3 | Related Practice Statements: PS LA 2005/24 PS LA 2008/6 PS LA 2008/15 | Subject References: goods and services tax producer rebate wine equalisation tax | Legislative References: A New Tax System (Goods and Services Tax) Act 1999 Division 165 A New Tax System (Wine Equalisation Tax) Act 1999 Division 19 Section 27-10 Section 33-1 Taxation Administration Act 1953 Division 290 of Schedule 1 | Case References: SJ Buller Pty Ltd and Commissioner of Taxation [2013] AATA 617 2013 ATC 10-334 | SJ Buller Pty Ltd and Commissioner of Taxation [2013] AATA 617 2013 ATC 10-334 | Contact Officer: Stephen Howlin Business Line: Indirect Tax Section: Compliance Strategy and Systems Phone: (02) 9354 3380",,,,,WETR 2009/1 | WETR 2009/2 | WETD 2011/1 | MT 2012/3 | PS LA 2005/24 | PS LA 2008/6 | PS LA 2008/15 | Division 165 | Division 19 | Section 27-10 | Section 33-1 | Division 290 of Schedule 1 | 2013 ATC 10-334,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20132/NAT/ATO/00001,"Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers."
TA 2013/3,Purported alienation of income through discretionary trust partners,22 November 2013,Current,"This Taxpayer Alert describes arrangements where an individual purports to make the trustee of a discretionary trust a partner in a firm of accountants, lawyers or other professionals (firm); but fails to give legal effect to that structure or fails to account for its tax consequences. | What is the issue? | In the arrangements described in this alert, an individual purports to alienate income attributable to their professional services to a trustee partner. | In this context, 'alienation' refers to a situation where income that would otherwise be assessable to an individual is the income of a different entity. This may occur as the result of the assignment of an existing partnership interest, or by the creation of a new interest. | The ATO is concerned that in some cases the arrangement: a. may be ineffective in alienating the individual's income, b. may have CGT consequences for the individual which have not been correctly recognised, or c. may involve a scheme to which the income tax general anti-avoidance rules apply. | a. may be ineffective in alienating the individual's income, b. may have CGT consequences for the individual which have not been correctly recognised, or c. may involve a scheme to which the income tax general anti-avoidance rules apply.","This alert applies to arrangements with features substantially equivalent, but not limited to, those described below. All factors should be weighed up in assessing whether any tax risks are posed by a particular arrangement. 1. An individual causes transactions to occur which purport to make the trustee of a discretionary trust (trustee) a partner in a professional firm. The trustee may be the individual acting in their capacity as trustee or another entity. The beneficiaries of the trust include the individual or their associates. 2. The individual purports to assign their existing interest in the partnership to the trustee. In such a case the individual may not report any capital gain associated with the assignment in their tax return, or report an understated capital gain. 3. Alternatively, the individual may not have had an existing interest in the partnership, but transactions occur which purport to provide the trustee with a new partnership interest. 4. The arrangement has some or all of the following features: a. the trustee does not actively engage in the conduct of the firm's practice and may not hold professional qualifications, b. the practice is carried on in much the same way as it had been before the trustee purported to become a partner, or would have been if the trustee had not purported to become a partner; specifically: (i) the individual renders substantial personal services to clients of the firm, the value of which cannot be attributed solely to the efforts of employees or income producing assets, (ii) the individual has the same or similar roles, responsibilities and obligations as they had before the trustee purported to become a partner, or would have had if the trustee had not purported to become a partner, (iii) no advice of the trustee arrangement is given to clients of the firm or other third parties, (iv) the trustee arrangement does not result in any limitation of liability for the individual, or the individual is exposed to substantially the same level of business risk they were exposed to as a partner, or would have been exposed to, if they had been a partner, (v) the trustee arrangement does not assist in the provision of professional services by the individual. c. the amount of salary or other remuneration payable to the individual is considerably lower than the income which they formerly derived from the practice, or would have derived if they had been a partner, d. the individual has the ability to remove the trustee, revoke or alter the trust arrangement, or otherwise control the trustee's interest in the partnership. 5. In addition, or in the alternative, the arrangement may have some or all of the following features: a. inconsistencies in the documentation that make it unclear whether the individual or the trustee is a partner in the firm, b. the individual contracts with clients or other third parties on the basis that the individual is a partner, c. the firm or the individual represents to the public that the individual is a partner, d. there is no employment or other contractual relationship between the trustee and the individual, e. the documentation purports to provide corporate trustees with entitlements (eg leave) which can only be enjoyed by a natural person, f. the trustee does not have any employees (whether in its capacity as partner or otherwise), g. the trustee does not hold any significant assets (whether in its capacity as partner or otherwise), h. the trustee does not contribute any capital to the partnership, i. the individual purports to make drawings from partnership equity for their personal use. 6. In each financial year: a. the firm directs distributions of net profits of the firm to the trustee as partner of the firm. This distribution may correspond to the amount the individual could reasonably be expected to have received if they had not entered into the arrangement. b. the trustee resolves to distribute most or all of the income to lower taxed beneficiaries of the trust. 7. The individual does not report any income from the professional firm in their tax return, except to the extent (if any) that such income is part of their entitlement as a beneficiary of the trust. 8. The arrangements described above may alternatively be implemented using a unit trust, units in which are held by lower taxed beneficiaries. | 1. An individual causes transactions to occur which purport to make the trustee of a discretionary trust (trustee) a partner in a professional firm. The trustee may be the individual acting in their capacity as trustee or another entity. The beneficiaries of the trust include the individual or their associates. 2. The individual purports to assign their existing interest in the partnership to the trustee. In such a case the individual may not report any capital gain associated with the assignment in their tax return, or report an understated capital gain. 3. Alternatively, the individual may not have had an existing interest in the partnership, but transactions occur which purport to provide the trustee with a new partnership interest. 4. The arrangement has some or all of the following features: a. the trustee does not actively engage in the conduct of the firm's practice and may not hold professional qualifications, b. the practice is carried on in much the same way as it had been before the trustee purported to become a partner, or would have been if the trustee had not purported to become a partner; specifically: (i) the individual renders substantial personal services to clients of the firm, the value of which cannot be attributed solely to the efforts of employees or income producing assets, (ii) the individual has the same or similar roles, responsibilities and obligations as they had before the trustee purported to become a partner, or would have had if the trustee had not purported to become a partner, (iii) no advice of the trustee arrangement is given to clients of the firm or other third parties, (iv) the trustee arrangement does not result in any limitation of liability for the individual, or the individual is exposed to substantially the same level of business risk they were exposed to as a partner, or would have been exposed to, if they had been a partner, (v) the trustee arrangement does not assist in the provision of professional services by the individual. c. the amount of salary or other remuneration payable to the individual is considerably lower than the income which they formerly derived from the practice, or would have derived if they had been a partner, d. the individual has the ability to remove the trustee, revoke or alter the trust arrangement, or otherwise control the trustee's interest in the partnership. 5. In addition, or in the alternative, the arrangement may have some or all of the following features: a. inconsistencies in the documentation that make it unclear whether the individual or the trustee is a partner in the firm, b. the individual contracts with clients or other third parties on the basis that the individual is a partner, c. the firm or the individual represents to the public that the individual is a partner, d. there is no employment or other contractual relationship between the trustee and the individual, e. the documentation purports to provide corporate trustees with entitlements (eg leave) which can only be enjoyed by a natural person, f. the trustee does not have any employees (whether in its capacity as partner or otherwise), g. the trustee does not hold any significant assets (whether in its capacity as partner or otherwise), h. the trustee does not contribute any capital to the partnership, i. the individual purports to make drawings from partnership equity for their personal use. 6. In each financial year: a. the firm directs distributions of net profits of the firm to the trustee as partner of the firm. This distribution may correspond to the amount the individual could reasonably be expected to have received if they had not entered into the arrangement. b. the trustee resolves to distribute most or all of the income to lower taxed beneficiaries of the trust. 7. The individual does not report any income from the professional firm in their tax return, except to the extent (if any) that such income is part of their entitlement as a beneficiary of the trust. 8. The arrangements described above may alternatively be implemented using a unit trust, units in which are held by lower taxed beneficiaries. | a. the trustee does not actively engage in the conduct of the firm's practice and may not hold professional qualifications, b. the practice is carried on in much the same way as it had been before the trustee purported to become a partner, or would have been if the trustee had not purported to become a partner; specifically: (i) the individual renders substantial personal services to clients of the firm, the value of which cannot be attributed solely to the efforts of employees or income producing assets, (ii) the individual has the same or similar roles, responsibilities and obligations as they had before the trustee purported to become a partner, or would have had if the trustee had not purported to become a partner, (iii) no advice of the trustee arrangement is given to clients of the firm or other third parties, (iv) the trustee arrangement does not result in any limitation of liability for the individual, or the individual is exposed to substantially the same level of business risk they were exposed to as a partner, or would have been exposed to, if they had been a partner, (v) the trustee arrangement does not assist in the provision of professional services by the individual. c. the amount of salary or other remuneration payable to the individual is considerably lower than the income which they formerly derived from the practice, or would have derived if they had been a partner, d. the individual has the ability to remove the trustee, revoke or alter the trust arrangement, or otherwise control the trustee's interest in the partnership. | (i) the individual renders substantial personal services to clients of the firm, the value of which cannot be attributed solely to the efforts of employees or income producing assets, (ii) the individual has the same or similar roles, responsibilities and obligations as they had before the trustee purported to become a partner, or would have had if the trustee had not purported to become a partner, (iii) no advice of the trustee arrangement is given to clients of the firm or other third parties, (iv) the trustee arrangement does not result in any limitation of liability for the individual, or the individual is exposed to substantially the same level of business risk they were exposed to as a partner, or would have been exposed to, if they had been a partner, (v) the trustee arrangement does not assist in the provision of professional services by the individual. | a. inconsistencies in the documentation that make it unclear whether the individual or the trustee is a partner in the firm, b. the individual contracts with clients or other third parties on the basis that the individual is a partner, c. the firm or the individual represents to the public that the individual is a partner, d. there is no employment or other contractual relationship between the trustee and the individual, e. the documentation purports to provide corporate trustees with entitlements (eg leave) which can only be enjoyed by a natural person, f. the trustee does not have any employees (whether in its capacity as partner or otherwise), g. the trustee does not hold any significant assets (whether in its capacity as partner or otherwise), h. the trustee does not contribute any capital to the partnership, i. the individual purports to make drawings from partnership equity for their personal use. | a. the firm directs distributions of net profits of the firm to the trustee as partner of the firm. This distribution may correspond to the amount the individual could reasonably be expected to have received if they had not entered into the arrangement. b. the trustee resolves to distribute most or all of the income to lower taxed beneficiaries of the trust. | Diagram of arrangement (existing partnership interests) | The following diagram illustrates an arrangement where individuals purport to transfer their existing interests in a partnership to a trustee. | What are the ATO's concerns? | The ATO will weigh up all the factors discussed above in determining the application of the law to the facts in each case. | Broadly, the ATO's concerns with these types of arrangements include whether: a) the transactions referred to above are legally effective, such as: (i) whether an interest in the net income of the partnership is an interest of the trustee or the individual for the purposes of section 92 of the Income Tax Assessment Act 1936 (ITAA 1936), (ii) whether assessable income relating to work performed by the individual is derived by the individual or the partnership for the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), b) any transactions intended to make the trustee a partner in the firm give rise to or increase a net capital gain for the individual in the year of income, such as: (i) whether a CGT event has happened to an interest held by the individual in a partnership, (ii) what capital proceeds are associated with the event, (iii) whether the individual's net capital gain is reduced by the CGT discount or small business concessions in Division 152 of the ITAA 1997, c) the general anti-avoidance rules in Part IVA of the ITAA 1936 apply to cancel tax benefits obtained by the individual. | a) the transactions referred to above are legally effective, such as: (i) whether an interest in the net income of the partnership is an interest of the trustee or the individual for the purposes of section 92 of the Income Tax Assessment Act 1936 (ITAA 1936), (ii) whether assessable income relating to work performed by the individual is derived by the individual or the partnership for the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), b) any transactions intended to make the trustee a partner in the firm give rise to or increase a net capital gain for the individual in the year of income, such as: (i) whether a CGT event has happened to an interest held by the individual in a partnership, (ii) what capital proceeds are associated with the event, (iii) whether the individual's net capital gain is reduced by the CGT discount or small business concessions in Division 152 of the ITAA 1997, c) the general anti-avoidance rules in Part IVA of the ITAA 1936 apply to cancel tax benefits obtained by the individual. | (i) whether an interest in the net income of the partnership is an interest of the trustee or the individual for the purposes of section 92 of the Income Tax Assessment Act 1936 (ITAA 1936), (ii) whether assessable income relating to work performed by the individual is derived by the individual or the partnership for the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), | (i) whether a CGT event has happened to an interest held by the individual in a partnership, (ii) what capital proceeds are associated with the event, (iii) whether the individual's net capital gain is reduced by the CGT discount or small business concessions in Division 152 of the ITAA 1997, | What action is the ATO taking? | The ATO is currently reviewing these arrangements and conducting examinations in appropriate cases. | The ATO is also reviewing relevant Tax Rulings and Determinations. | A number of the features described in this alert were identified in Taxation Ruling IT 2330 (IT 2330) as being factors which point towards the application of the general anti-avoidance provisions to income splitting arrangements; see paragraph 4 of this alert in particular. In this regard, the ATO is considering whether some of the arrangements identified in this alert involve a scheme to which Part IVA of the ITAA 1936 applies. | IT 2330 also states that the anti-avoidance provisions will not apply to assignments of partnership interests of the same nature as that considered in FC of T v. Everett 80 ATC 4076; 10 ATR 608 ( Everett ). A similar statement was made in Taxation Ruling IT 2501 in relation to the decisions in Everett and FC of T v. Galland 86 ATC 4885; 18 ATR 33. The ATO is currently reviewing this position, although arrangements described in this alert may be distinguishable from the arrangements considered in those cases. | The ATO is also reviewing Taxation Ruling IT 2540, which addresses the CGT consequences of disposing of an interest in a partnership. | The ATO is preparing further guidance on these arrangements in the form of an online publication to help professionals understand the risks and how to address them in practice. | The ATO is also consulting with relevant professional bodies on the action it is taking, including the potential application of Part IVA of the ITAA 1936. | The ATO will examine arrangements which the ATO considers are a sham or ineffective in alienating the individual's income, or where CGT has not been correctly recognised. | The ATO will apply compliance resources to consider the possible application of Part IVA of the ITAA 1936 to arrangements of the type covered by this alert in relation to tax benefits arising in the 2013/14 income year and later income years.",,,,"If you have entered into a similar arrangement to that described in this alert you may wish to seek independent professional advice. If you would like to correct something in your tax return, more information is available on our website ato.gov.au and search for Self-amendments. | You may also ask us for our view through a private ruling or contact the contact officer named in the Taxpayer Alert. | Frequently asked questions | Who should I contact if I have information about the arrangement? | If you have any information about this arrangement, phone us on 1800 060 062. | How do I make a voluntary disclosure? | Any penalty relating to your involvement will be reduced if you make a voluntary disclosure. Generally, the reduction is greater if you make the disclosure before we notify you of an examination of your tax affairs (eg an audit). | More information on voluntary disclosures is available on our website ato.gov.au and search for Voluntary disclosures or phone 13 28 66. | For further information see Miscellaneous Taxation Ruling MT 2012/3. | Where can I find out more about Taxpayer Alerts? | Further information on Taxpayer Alerts, including circumstances in which one may be withdrawn, can be found in PS LA 2008/15. | A full list of Taxpayer Alerts issued by the ATO is available on our website, ato.gov.au | Date of amendment Comment 19 January 2024 Updated ATO tip-off hotline number | Date of Issue: 22 November 2013 | Date of Effect: | Related Rulings/Determinations: IT 2330 IT 2501 IT 2540 MT 2012/3 | Related Practice Statements: PS LA 2007/7 PS LA 2007/24 PS LA 2008/6 PS LA 2008/15 | Other References: Self-amendments Voluntary Disclosures List of Taxpayer Alerts | Subject References: anti-avoidance capital gains tax discretionary trusts partnerships personal services income professional firms scheme | Legislative References: Income Tax Assessment Act 1936 Section 92 Part IVA Income Tax Assessment Act 1997 Section 6-5 Part 2-42 Division 152 | Case References: FC of T v. Everett (1980) 143 CLR 440 80 ATC 4076 10 ATR 608 FC of T v. Galland (1986) 162 CLR 408 86 ATC 4885 18 ATR 33 | FC of T v. Everett (1980) 143 CLR 440 80 ATC 4076 10 ATR 608 | FC of T v. Galland (1986) 162 CLR 408 86 ATC 4885 18 ATR 33 | Contact Officer: Bruce Collins Business Line: Private Groups & High Wealth Individuals Section: Phone: (02) 6216 2710",IT 2330 | IT 2501 | IT 2540 | MT 2012/3 | PS LA 2007/7 | PS LA 2007/24 | PS LA 2008/6 | PS LA 2008/15 | Section 92 | Part IVA | Section 6-5 | Part 2-42 | Division 152 | 80 ATC 4076 | 86 ATC 4885,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20133/NAT/ATO/00001,
TA 2012/1,Non disclosure of foreign source income by Australian tax residents,21 March 2012,Current,"This Taxpayer Alert describes arrangements under which Australian resident taxpayers who have derived income or other taxable amounts from foreign sources do not correctly include these amounts in their assessable income for Australian tax purposes. | The ATO's recent compliance activities indicate that many taxpayers are not aware of their Australian taxation obligations in relation to their worldwide income. However there are also some taxpayers who attempt to deliberately conceal their offshore income. The purpose of this alert is to remind both of these groups of their ongoing taxation obligations to avoid potential penalties. | Under Australian taxation laws, a resident of Australia is generally liable to Australian income tax on their worldwide income (subject to a number of exceptions and exemptions). | The ATO guide, Income you must declare provides information on the main types of worldwide income Australian residents earn and how tax applies to that income. | The tests for whether an individual is an Australian resident for tax purposes are outlined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). | The primary test is whether an individual resides in Australia according to ordinary concepts. There are also three other statutory tests. | Taxation Ruling TR 98/17 provides the Commissioner's view on the circumstances in which individuals entering Australia, including people migrating to Australia or who are teaching or studying in Australia, will 'reside' here for tax purposes according to ordinary concepts. | The alert applies to arrangements with features substantially equivalent to the following: 1. An individual (""the taxpayer"") is a resident of Australia for tax purposes. 2. The taxpayer derives income or other taxable amounts from a foreign source (""foreign source income""). The foreign source income may include (but is not limited to): a. interest accrued in an offshore bank account b. income derived from a foreign investment (e.g. dividend or rental income) c. income from an asset that has been inherited from an overseas source d. a foreign pension or annuity e. certain foreign employment income f. foreign business income g. foreign trust income h. capital gains arising from disposal of overseas assets i. attributable income from interests in offshore entities even if the income has not been distributed 3. The foreign source income is received in Australia or accumulated offshore. 4. The taxpayer does not correctly disclose their interest and/or involvement in deriving foreign source income and does not pay Australian tax on this income. 5. The non-disclosure by the taxpayer may arise through: a. accumulating the income in an offshore bank account; b. accumulating or reinvesting income in other assets or entities offshore; c. transferring funds to the taxpayer through the use of purported loan arrangements; and/or d. accessing funds in an offshore bank account through the use of debit or credit cards by the taxpayer in Australia or elsewhere. 6. In some instances, another entity (for example, a promoter) may act on behalf of the taxpayer who is a beneficiary of an offshore structure or investment, to conceal the true control of the entity or the beneficial interest in the income or assets. 7. In some arrangements, documentation supporting the above transactions is absent, incomplete or falsified. | 1. An individual (""the taxpayer"") is a resident of Australia for tax purposes. 2. The taxpayer derives income or other taxable amounts from a foreign source (""foreign source income""). The foreign source income may include (but is not limited to): a. interest accrued in an offshore bank account b. income derived from a foreign investment (e.g. dividend or rental income) c. income from an asset that has been inherited from an overseas source d. a foreign pension or annuity e. certain foreign employment income f. foreign business income g. foreign trust income h. capital gains arising from disposal of overseas assets i. attributable income from interests in offshore entities even if the income has not been distributed 3. The foreign source income is received in Australia or accumulated offshore. 4. The taxpayer does not correctly disclose their interest and/or involvement in deriving foreign source income and does not pay Australian tax on this income. 5. The non-disclosure by the taxpayer may arise through: a. accumulating the income in an offshore bank account; b. accumulating or reinvesting income in other assets or entities offshore; c. transferring funds to the taxpayer through the use of purported loan arrangements; and/or d. accessing funds in an offshore bank account through the use of debit or credit cards by the taxpayer in Australia or elsewhere. 6. In some instances, another entity (for example, a promoter) may act on behalf of the taxpayer who is a beneficiary of an offshore structure or investment, to conceal the true control of the entity or the beneficial interest in the income or assets. 7. In some arrangements, documentation supporting the above transactions is absent, incomplete or falsified. | a. interest accrued in an offshore bank account b. income derived from a foreign investment (e.g. dividend or rental income) c. income from an asset that has been inherited from an overseas source d. a foreign pension or annuity e. certain foreign employment income f. foreign business income g. foreign trust income h. capital gains arising from disposal of overseas assets i. attributable income from interests in offshore entities even if the income has not been distributed | a. accumulating the income in an offshore bank account; b. accumulating or reinvesting income in other assets or entities offshore; c. transferring funds to the taxpayer through the use of purported loan arrangements; and/or d. accessing funds in an offshore bank account through the use of debit or credit cards by the taxpayer in Australia or elsewhere. | The ATO considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether : (a) the foreign source income may be assessable to the taxpayer under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); (b) the foreign source income may be assessable to the taxpayer and/or their associates (such as an entity acting as trustee for the taxpayer) under the trust income provisions in Division 6 of Part III of the ITAA 1936; (c) any income accrued offshore may be attributable to the taxpayer under Australia's anti-deferral regimes within Part X, former Part XI or Division 6AAA of Part III of the ITAA 1936; (d) taxable capital gains may arise to the taxpayer on the disposal of offshore assets under Part 3-1 or 3-3 of the ITAA 1997; (e) the foreign source income is assessable to the taxpayer under another provision of the tax law; (f) all or any part of the arrangement (such as any purported loans) may constitute a sham at general law; (g) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to an arrangement which is entered into with the sole or dominant purpose to obtain a tax benefit; and (h) any taxation statements made in relation to the arrangement may be false or misleading. | (a) the foreign source income may be assessable to the taxpayer under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); (b) the foreign source income may be assessable to the taxpayer and/or their associates (such as an entity acting as trustee for the taxpayer) under the trust income provisions in Division 6 of Part III of the ITAA 1936; (c) any income accrued offshore may be attributable to the taxpayer under Australia's anti-deferral regimes within Part X, former Part XI or Division 6AAA of Part III of the ITAA 1936; (d) taxable capital gains may arise to the taxpayer on the disposal of offshore assets under Part 3-1 or 3-3 of the ITAA 1997; (e) the foreign source income is assessable to the taxpayer under another provision of the tax law; (f) all or any part of the arrangement (such as any purported loans) may constitute a sham at general law; (g) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to an arrangement which is entered into with the sole or dominant purpose to obtain a tax benefit; and (h) any taxation statements made in relation to the arrangement may be false or misleading. | The ATO is continuing to review these arrangements. Note 1: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false or misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about specific people or entities involved in tax evasion arrangements please phone us on 1800 060 062 or fax 1800 804 544. Note 2: In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. Note 3: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PS LA 2007/7 and PS LA 2007/24. Note 4: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. | Date of Issue: 21 March 2012 | Date of Effect: 21 March 2012 | Related Rulings/Determinations: TR 98/17 | Related Practice Statements: PS LA 2007/7 PS LA 2007/24 PS LA 2008/6 PS LA 2008/15 | Other References: Income you must declare | Subject References: Foreign source income | Legislative References: Income Tax Assessment Act 1936 Subsection 6(1) Section 167 Division 6 of Part III Division 6AAA of Part III Part IVA Part X Part XI Income Tax Assessment Act 1997 Section 6-5 Part 3-1 Part 3-3 | Related Taxpayer Alerts: | Contact Officer: Paul Cheetham Business Line: Serious Non Compliance Section: Wickenby Phone: (02) 9374 8740",,,,,,TR 98/17 | PS LA 2007/7 | PS LA 2007/24 | PS LA 2008/6 | PS LA 2008/15 | Subsection 6(1) | Section 167 | Division 6 of Part III | Division 6AAA of Part III | Part IVA | Part X | Section 6-5 | Part 3-1 | Part 3-3 | TA 2005/5 | TA 2005/6 | TA 2005/7 | TA 2005/8 | TA 2008/2 | TA 2008/8,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20121/NAT/ATO/00001,"Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers."
TA 2012/2,New Zealand Foreign Trust arrangements,16 May 2012,Current,,"Taxpayer Alerts provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO. In these latter cases, the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert. | Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers. | Where a Taxpayer Alert provides guidance that a particular arrangement is or will be ineffective and that guidance is subsequently found to be incorrect and the taxpayer had relied on that guidance, the taxpayer is protected from paying a shortfall penalty and any interest charge that would otherwise be payable under the law. | This Taxpayer Alert describes arrangements where a New Zealand based foreign discretionary trust (New Zealand Foreign Trust) is used to avoid taxation on Australian sourced income. These arrangements may involve the provision of services, at a mark up, to an Australian resident business, or the diversion of Australian sourced income. The ATO is investigating these arrangements, including through Project Wickenby. The ATO view on the arrangement is set out in Taxation Ruling TR 2005/14. | This Alert addresses an arrangement similar to that described in Taxpayer Alert TA 2004/4 but also highlights additional features of concern. TA 2004/4 and TR 2005/14 continue to apply while new versions have been detected which warrant the issue of this Taxpayer Alert. | Under New Zealand income tax law, a New Zealand resident trustee is not taxed on foreign source income if there is no New Zealand resident settlor of the New Zealand Foreign Trust. | Promoters of New Zealand Foreign Trust arrangements have marketed these structures on the basis that the trusts can accumulate Australian sourced income and capital on a tax-free basis. The promoters argue that: • the New Zealand Foreign Trust is not assessable on Australian sourced income under New Zealand domestic tax laws, and • Australian sourced income of the New Zealand Foreign Trust is not assessable in Australia due to the provisions contained within the Australia/New Zealand Double Tax Agreement (NZ Agreement). | • the New Zealand Foreign Trust is not assessable on Australian sourced income under New Zealand domestic tax laws, and • Australian sourced income of the New Zealand Foreign Trust is not assessable in Australia due to the provisions contained within the Australia/New Zealand Double Tax Agreement (NZ Agreement). | However, the ATO view as set out in TR 2005/14 states that Australia's right to tax Australian sourced income derived by the trustee of a New Zealand Foreign Trust is unaffected by the NZ Agreement. Therefore, where the whole or part of the net income of the trust estate consists of Australian source income, Australia is able to tax that income to the trustee where the conditions in sections 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936) are met, without regard to the NZ Agreement. | General provisions within Australia's domestic tax legislation which relate to the assessable income, allowable deductions, trust income, transfer pricing, personal services income, Goods & Services Tax (GST), PAYG withholding and superannuation may also be relevant to the arrangements covered in this Taxpayer Alert. | Core arrangement | The alert applies to arrangements with features substantially equivalent to the following (or a combination of parts): 1. A New Zealand Foreign Trust (the trust) is established by a New Zealand based promoter with a settlor which is an entity that is not a resident of New Zealand. To date we have identified trusts being settled in countries such as the Republic of Panama, Samoa, Vanuatu and Hong Kong. However, this may be replicated in other jurisdictions. 2. The trust may be: • administered by a trustee which is either the promoter, an associate of the promoter or a New Zealand company in which the promoter or an associate holds a controlling interest. ""Controlling interest"" includes, but is not limited to, a direct or indirect shareholding in the company; • represented in Australia by an Australian resident who is associated with the promoter. The trustee may grant a General Power of Attorney to the Australian resident; and/or • registered for GST in Australia and lodge Business Activity Statements (BAS). 3. A business located and operating in Australia (the Australian business), which is ultimately controlled by an Australian individual, enters into an agreement with the trust under which the trust provides resources or services to the Australian business. This may include staff, business equipment or motor vehicles, and/or services such as administration. Refer (a) in Diagram 1 . 4. The fees paid by the Australian business for the provision of resources or services may include a ""mark up"" (typically of 20-30% above cost) and are deposited into a bank account of the trust. The income is not reported or assessed in Australia or New Zealand for tax purposes. Refer (b) in Diagram 1 . 5. The funds deposited into the bank account may be used to pay for expenses relating to the resources provided under the agreement (e.g. wages) or to pay expenses of the Australian business on its behalf. Refer (d) in Diagram 1 . 6. As an alternative to depositing the mark up into the bank account, the mark up may instead be transferred offshore to the promoter, after which the Australian business, or its owner or associates, appear to have the benefit of the funds. For example, the funds may be ""loaned"" back to the owner on non-commercial terms with no interest or principal repayments made, or the owner may, by some other means, have direct or indirect access to the funds. The mark up is not reported or assessed in Australia or New Zealand for tax purposes. Refer (c) and (e) in Diagram 1 . 7. The Australian business claims a deduction for the fees and mark up (if any). | 1. A New Zealand Foreign Trust (the trust) is established by a New Zealand based promoter with a settlor which is an entity that is not a resident of New Zealand. To date we have identified trusts being settled in countries such as the Republic of Panama, Samoa, Vanuatu and Hong Kong. However, this may be replicated in other jurisdictions. 2. The trust may be: • administered by a trustee which is either the promoter, an associate of the promoter or a New Zealand company in which the promoter or an associate holds a controlling interest. ""Controlling interest"" includes, but is not limited to, a direct or indirect shareholding in the company; • represented in Australia by an Australian resident who is associated with the promoter. The trustee may grant a General Power of Attorney to the Australian resident; and/or • registered for GST in Australia and lodge Business Activity Statements (BAS). 3. A business located and operating in Australia (the Australian business), which is ultimately controlled by an Australian individual, enters into an agreement with the trust under which the trust provides resources or services to the Australian business. This may include staff, business equipment or motor vehicles, and/or services such as administration. Refer (a) in Diagram 1 . 4. The fees paid by the Australian business for the provision of resources or services may include a ""mark up"" (typically of 20-30% above cost) and are deposited into a bank account of the trust. The income is not reported or assessed in Australia or New Zealand for tax purposes. Refer (b) in Diagram 1 . 5. The funds deposited into the bank account may be used to pay for expenses relating to the resources provided under the agreement (e.g. wages) or to pay expenses of the Australian business on its behalf. Refer (d) in Diagram 1 . 6. As an alternative to depositing the mark up into the bank account, the mark up may instead be transferred offshore to the promoter, after which the Australian business, or its owner or associates, appear to have the benefit of the funds. For example, the funds may be ""loaned"" back to the owner on non-commercial terms with no interest or principal repayments made, or the owner may, by some other means, have direct or indirect access to the funds. The mark up is not reported or assessed in Australia or New Zealand for tax purposes. Refer (c) and (e) in Diagram 1 . 7. The Australian business claims a deduction for the fees and mark up (if any). | • administered by a trustee which is either the promoter, an associate of the promoter or a New Zealand company in which the promoter or an associate holds a controlling interest. ""Controlling interest"" includes, but is not limited to, a direct or indirect shareholding in the company; • represented in Australia by an Australian resident who is associated with the promoter. The trustee may grant a General Power of Attorney to the Australian resident; and/or • registered for GST in Australia and lodge Business Activity Statements (BAS). | Diagram of core arrangement | The basic structure of the core arrangement can be summarised diagrammatically as follows. Not all of the features shown in the following Diagram will necessarily exist in practice. | Diagram 1 | Variation | The following is a variation of the core arrangement (i.e. replacing features 3 to 7 with 8 to 11): 8. Under a service agreement, the trust engages an Australian individual to provide services (service provider), such as consultancy services, to the Australian business. These services may be provided in Australia or offshore. Refer (a) and (b) in Diagram 2 . 9. The fees paid for the services are deposited into a bank account of the trust. Refer (c) in Diagram 2 . 10. The service provider appears to have the benefit of the funds, e.g. they may have access to the funds in the bank account or the funds may be used to pay the service provider's expenses on their behalf. Refer (d) in Diagram 2 . 11. The income is not reported or assessed in Australia or New Zealand for tax purposes. | 8. Under a service agreement, the trust engages an Australian individual to provide services (service provider), such as consultancy services, to the Australian business. These services may be provided in Australia or offshore. Refer (a) and (b) in Diagram 2 . 9. The fees paid for the services are deposited into a bank account of the trust. Refer (c) in Diagram 2 . 10. The service provider appears to have the benefit of the funds, e.g. they may have access to the funds in the bank account or the funds may be used to pay the service provider's expenses on their behalf. Refer (d) in Diagram 2 . 11. The income is not reported or assessed in Australia or New Zealand for tax purposes. | Diagram of variation | The basic structure of the variation of the core arrangement can be summarised diagrammatically as follows. Not all of the features shown in the following Diagram will necessarily exist in practice. | Diagram 2 | The ATO considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether : (a) the arrangement, or certain steps within it, may constitute a sham at general law, (b) any income derived may be assessable under section 6-5 or section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997), (c) any expenses incurred may not be deductible under section 8-1 of the ITAA 1997, (d) the trust may have a permanent establishment in Australia, (e) the trustee, in its capacity as trustee, may not be a resident of New Zealand for the purposes of the Australia/New Zealand Double Tax Agreement (despite being a New Zealand resident under New Zealand domestic tax law), as it will only be liable to tax under New Zealand domestic tax law in respect of New Zealand sourced income. It would therefore not be entitled to treaty benefits under the Australia/New Zealand Double Tax Agreement, (f) the Australian sourced income of the trust may be assessable to the trustee under Division 6 of Part III of the ITAA 1936, where no beneficiary is presently entitled, (g) any income that has been alienated may be income of the service provider under section 6-5 of the ITAA 1997, (h) amounts should be withheld under the PAYG(W) rules in Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953), (i) a minimum level of superannuation support may be required under the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992), (j) the arrangement may constitute an arrangement which avoids payment of the superannuation guarantee charge to which section 30 of the SGAA 1992 may apply, (k) the mark up, i.e. the inflated portion of the service fee, may not be considered a creditable acquisition for GST purposes. Therefore, the Australian business may not be entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act 1999). Similarly, the trust may be required to be registered for GST in Australia and remit GST on taxable supplies made with respect to services provided to the Australian business under section 9-5 of the GST Act 1999, (l) the transfer pricing provisions in Division 13 of Part III of the ITAA 1936 may apply, (m) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to the arrangement, and (n) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the TAA 1953. Note 1: You may have already sought advice from the ATO in respect of your arrangement by way of a private ruling or class ruling. If you have received a private ruling or class ruling in respect of your arrangement, you can rely on that ruling. A private or class ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the ruling is later found to be incorrect. However, a private ruling only applies to a particular entity identified and the particular scheme described in the ruling. Similarly, a class ruling only applies to a specified class of entities and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the ITAA 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false or misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 5: In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. Note 6: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PS LA 2007/7 and PS LA 2007/24. Note 7: A registered tax agent may have their registration cancelled or suspended by the Tax Practitioners Board under the Tax Agent Services Act 2009 for breach of a condition of registration including being penalised for being a promoter of a tax exploitation scheme. Note 8: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PS LA 2008/6. | (a) the arrangement, or certain steps within it, may constitute a sham at general law, (b) any income derived may be assessable under section 6-5 or section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997), (c) any expenses incurred may not be deductible under section 8-1 of the ITAA 1997, (d) the trust may have a permanent establishment in Australia, (e) the trustee, in its capacity as trustee, may not be a resident of New Zealand for the purposes of the Australia/New Zealand Double Tax Agreement (despite being a New Zealand resident under New Zealand domestic tax law), as it will only be liable to tax under New Zealand domestic tax law in respect of New Zealand sourced income. It would therefore not be entitled to treaty benefits under the Australia/New Zealand Double Tax Agreement, (f) the Australian sourced income of the trust may be assessable to the trustee under Division 6 of Part III of the ITAA 1936, where no beneficiary is presently entitled, (g) any income that has been alienated may be income of the service provider under section 6-5 of the ITAA 1997, (h) amounts should be withheld under the PAYG(W) rules in Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953), (i) a minimum level of superannuation support may be required under the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992), (j) the arrangement may constitute an arrangement which avoids payment of the superannuation guarantee charge to which section 30 of the SGAA 1992 may apply, (k) the mark up, i.e. the inflated portion of the service fee, may not be considered a creditable acquisition for GST purposes. Therefore, the Australian business may not be entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act 1999). Similarly, the trust may be required to be registered for GST in Australia and remit GST on taxable supplies made with respect to services provided to the Australian business under section 9-5 of the GST Act 1999, (l) the transfer pricing provisions in Division 13 of Part III of the ITAA 1936 may apply, (m) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to the arrangement, and (n) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the TAA 1953. | Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings.",,,,,TR | 2005/14. | TR 2005/14 | PS LA 2008/15 | Australia/New Zealand Double Tax Agreement | Section 99 | Section 99A | Part III Division 6 | Part III Division 13 | Part IVA | Section 6-5 | Section 6-10 | Section 8-1 | Division 290 | Section 30 | Section 9-5 | Section 11-20 | TA 2004/4,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20122/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers
TA 2012/3,Structured financial products that exploit franking credits and other tax benefits,14 June 2012,Current,,"The alert applies to arrangements with features substantially equivalent to the following: 1. A financial institution or other entity markets an arrangement to taxpayers who are retail or wholesale investors. 2. A taxpayer enters into the arrangement. 3. Once the taxpayer pays the issue price, a parcel of ASX listed securities (the Parcel) is acquired and the legal title to that parcel is held by a custodian or security trustee, or under a similar trust arrangement, on behalf of the taxpayer. 4. The taxpayer also enters into a derivative instrument with the following features: i. The amount of the distributions or other income generated by the Parcel is either diverted by the taxpayer, or the trustee of the trust, to the entity with which the taxpayer, or some other entity acting on their behalf, has entered into the derivative instrument; ii. Under the derivative, the taxpayer may be entitled to a periodic coupon which is calculated by reference to the increase in value of a notional investment in certain reference assets. If the value of those reference assets does not increase during the calculation period, then no coupon will be payable for that period. These reference assets are unrelated to the Parcel. iii. Instead of or in addition to the payment of a periodic coupon, the taxpayer may be entitled to an amount that is payable at the maturity of the investment. This amount may be calculated by reference to the difference between the market value of the Parcel at maturity and the value of a notional investment in a separate portfolio of reference assets. This feature changes the taxpayer's exposure from an exposure to movements in the market price of the securities comprising the Parcel to an exposure to the reference assets. 5. The arrangement may also involve entry into put and call options over the securities comprising the Parcel or other securities that provide the same return as the notional investment. Such options may provide the mechanism to allow the taxpayer or the issuer to exit the arrangement prior to, or at maturity or to protect the invested capital of the taxpayer if they hold their investment to maturity. 6. The taxpayer may be able to exit the investment prior to maturity. However, if this occurs the taxpayer may not receive the benefit of the capital protection mechanism described above in paragraph 5. 7. The taxpayer may also be provided with a loan to fund the investment and, as a result, may incur interest and/or borrowing expenses. 8. In some cases, the entity who marketed the arrangement or an associate who implements the arrangement indicates in marketing documents that certain favourable tax outcomes are available or potentially available to investors, such as: i. franking credits; ii. deductions for payments made by the taxpayer under the derivative; and/or iii. deductions for interest expenses or borrowing costs. 9. The issuer, a custodian or some other entity acting on their behalf issues distribution statements or other documents that reflect favourable tax outcomes for the taxpayer, such as: i. tax offsets in respect of distributions constructively received, but paid to the counterparty under the derivative; ii. revenue deductions for payments made by the taxpayer under the derivative; and iii. deductions for interest or borrowing costs. 10. The taxpayer subsequently claims some or all of the favourable tax outcomes discussed at paragraph 9 in their income tax return. 11. In some cases, there may be differences in implementation of key steps in the arrangement that may affect the potential availability of these favourable tax outcomes, such as failures to transfer the interest in the Parcel or to execute key transactions within the derivative. | 1. A financial institution or other entity markets an arrangement to taxpayers who are retail or wholesale investors. 2. A taxpayer enters into the arrangement. 3. Once the taxpayer pays the issue price, a parcel of ASX listed securities (the Parcel) is acquired and the legal title to that parcel is held by a custodian or security trustee, or under a similar trust arrangement, on behalf of the taxpayer. 4. The taxpayer also enters into a derivative instrument with the following features: i. The amount of the distributions or other income generated by the Parcel is either diverted by the taxpayer, or the trustee of the trust, to the entity with which the taxpayer, or some other entity acting on their behalf, has entered into the derivative instrument; ii. Under the derivative, the taxpayer may be entitled to a periodic coupon which is calculated by reference to the increase in value of a notional investment in certain reference assets. If the value of those reference assets does not increase during the calculation period, then no coupon will be payable for that period. These reference assets are unrelated to the Parcel. iii. Instead of or in addition to the payment of a periodic coupon, the taxpayer may be entitled to an amount that is payable at the maturity of the investment. This amount may be calculated by reference to the difference between the market value of the Parcel at maturity and the value of a notional investment in a separate portfolio of reference assets. This feature changes the taxpayer's exposure from an exposure to movements in the market price of the securities comprising the Parcel to an exposure to the reference assets. 5. The arrangement may also involve entry into put and call options over the securities comprising the Parcel or other securities that provide the same return as the notional investment. Such options may provide the mechanism to allow the taxpayer or the issuer to exit the arrangement prior to, or at maturity or to protect the invested capital of the taxpayer if they hold their investment to maturity. 6. The taxpayer may be able to exit the investment prior to maturity. However, if this occurs the taxpayer may not receive the benefit of the capital protection mechanism described above in paragraph 5. 7. The taxpayer may also be provided with a loan to fund the investment and, as a result, may incur interest and/or borrowing expenses. 8. In some cases, the entity who marketed the arrangement or an associate who implements the arrangement indicates in marketing documents that certain favourable tax outcomes are available or potentially available to investors, such as: i. franking credits; ii. deductions for payments made by the taxpayer under the derivative; and/or iii. deductions for interest expenses or borrowing costs. 9. The issuer, a custodian or some other entity acting on their behalf issues distribution statements or other documents that reflect favourable tax outcomes for the taxpayer, such as: i. tax offsets in respect of distributions constructively received, but paid to the counterparty under the derivative; ii. revenue deductions for payments made by the taxpayer under the derivative; and iii. deductions for interest or borrowing costs. 10. The taxpayer subsequently claims some or all of the favourable tax outcomes discussed at paragraph 9 in their income tax return. 11. In some cases, there may be differences in implementation of key steps in the arrangement that may affect the potential availability of these favourable tax outcomes, such as failures to transfer the interest in the Parcel or to execute key transactions within the derivative. | i. The amount of the distributions or other income generated by the Parcel is either diverted by the taxpayer, or the trustee of the trust, to the entity with which the taxpayer, or some other entity acting on their behalf, has entered into the derivative instrument; ii. Under the derivative, the taxpayer may be entitled to a periodic coupon which is calculated by reference to the increase in value of a notional investment in certain reference assets. If the value of those reference assets does not increase during the calculation period, then no coupon will be payable for that period. These reference assets are unrelated to the Parcel. iii. Instead of or in addition to the payment of a periodic coupon, the taxpayer may be entitled to an amount that is payable at the maturity of the investment. This amount may be calculated by reference to the difference between the market value of the Parcel at maturity and the value of a notional investment in a separate portfolio of reference assets. This feature changes the taxpayer's exposure from an exposure to movements in the market price of the securities comprising the Parcel to an exposure to the reference assets. | i. franking credits; ii. deductions for payments made by the taxpayer under the derivative; and/or iii. deductions for interest expenses or borrowing costs. | i. tax offsets in respect of distributions constructively received, but paid to the counterparty under the derivative; ii. revenue deductions for payments made by the taxpayer under the derivative; and iii. deductions for interest or borrowing costs.","Features which concern us | The ATO considers that arrangements of this type give rise to a number of issues relevant to taxation laws, including whether: a. the substance of the arrangement provides the investor with exposure to reference assets, even though the form of the arrangement is an investment in the Parcel through a trust; b. the deductibility under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) of the amount of any payment made under the derivative reflecting the distributions and other income on the Parcel; c. the deductibility under sections 8-1 or 25-25 of the ITAA 1997 of interest or other borrowing expenses incurred by taxpayers under any loan to finance their investment; d. for the purposes of former Division 1A Part IIIAA of the ITAA 1936 and Subdivision 207-F of the ITAA 1997, the taxpayer is a qualified person in relation to any distribution paid on the Parcel such that the taxpayer is entitled to tax offsets attaching to those distributions; e. paragraph 177EA(5)(b) of ITAA 1936 applies to deny the whole, or any part, of the imputation benefits claimed by the taxpayers in respect of distributions on the Parcel of shares; f. other parts of Part IVA of the ITAA 1936 apply; g. the assessability of any fee, commission or other amount received by the promoter; h. any entity who marketed or otherwise encouraged the growth of the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953; and i. any taxation statement made by taxpayers in relation to the arrangement may be false or misleading. | a. the substance of the arrangement provides the investor with exposure to reference assets, even though the form of the arrangement is an investment in the Parcel through a trust; b. the deductibility under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) of the amount of any payment made under the derivative reflecting the distributions and other income on the Parcel; c. the deductibility under sections 8-1 or 25-25 of the ITAA 1997 of interest or other borrowing expenses incurred by taxpayers under any loan to finance their investment; d. for the purposes of former Division 1A Part IIIAA of the ITAA 1936 and Subdivision 207-F of the ITAA 1997, the taxpayer is a qualified person in relation to any distribution paid on the Parcel such that the taxpayer is entitled to tax offsets attaching to those distributions; e. paragraph 177EA(5)(b) of ITAA 1936 applies to deny the whole, or any part, of the imputation benefits claimed by the taxpayers in respect of distributions on the Parcel of shares; f. other parts of Part IVA of the ITAA 1936 apply; g. the assessability of any fee, commission or other amount received by the promoter; h. any entity who marketed or otherwise encouraged the growth of the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953; and i. any taxation statement made by taxpayers in relation to the arrangement may be false or misleading. | The ATO is currently reviewing these arrangements. | The ATO view on the operation of the imputation system and section 177EA is discussed in Taxation Ruling TR 2009/3. Note 1: You may have already sought advice from the ATO in respect of your arrangement by way of a private ruling or class ruling. If you have received a private ruling or class ruling in respect of your arrangement, you can rely on that ruling. A private or class ruling is legally binding against the Commissioner who will be bound to act in the way set out in the ruling, even if the ruling is later found to be incorrect. However, a private ruling only applies to a particular entity identified and the particular scheme described in the ruling, for the period the ruling specifies or if no period is specified for the period from when it is made to the end of the accounting period in which it is made. Similarly, a class ruling only applies to a specified class of entities and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity or on a class ruling in respect of a class of entities in which they are not included. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the Income Tax Assessment Act 1936 is considered in that ruling. The applicant may not have asked for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false or misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062 . Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The current value of a penalty unit is $110. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 5: In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. Note 6: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PS LA 2007/7 and PS LA 2007/24. Note 7: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6. | A private or class ruling is legally binding against the Commissioner who will be bound to act in the way set out in the ruling, even if the ruling is later found to be incorrect. However, a private ruling only applies to a particular entity identified and the particular scheme described in the ruling, for the period the ruling specifies or if no period is specified for the period from when it is made to the end of the accounting period in which it is made. Similarly, a class ruling only applies to a specified class of entities and the particular scheme described in the ruling. | If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity or on a class ruling in respect of a class of entities in which they are not included. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 14 June 2012 | Date of Effect: 14 June 2012 | Related Rulings/Determinations: IT 2050 IT 2682 TR 95/33 TR 2009/3 | Related Practice Statements: PS LA 2005/24 PS LA 2008/15 | Subject References: capital protected borrowing financial products interest expense interest income prepaid expenses product rulings public rulings taxation administration | Legislative References: Income Tax Assessment Act 1936 Section 51AAA Section 51(1) Division 6 Part III Former Division 1A Part IIIA Part IVA Section 177EA Income Tax Assessment Act 1997 Section 8-1 Section 25-25 Division 110 Division 207 Subdivision 207-B Subdivision 207-F Division 247 Taxation Administration Act 1953 Division 290 of Schedule 1 | Case References: Mills v Commissioner of Taxation [2011] FCAFC 158 2011 ATC 20-295 | Mills v Commissioner of Taxation [2011] FCAFC 158 2011 ATC 20-295 | Contact Officer: Bruce Collins Assistant Deputy Commissioner Financial Products Taskforce Leader Business Line: Aggressive Tax Planning (ATP) Section: Financial Products Taskforce Phone: (02) 6216 2710",,,,TR | 2009/3. | IT 2050 | IT 2682 | TR 95/33 | TR 2009/3 | PS LA 2005/24 | PS LA 2008/15 | Section 51AAA | Division 6 Part III | Part IVA | Section 177EA | Section 8-1 | Section 25-25 | Division 110 | Division 207 | Subdivision 207-B | Subdivision 207-F | Division 247 | Division 290 of Schedule 1 | 2011 ATC 20-295,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20123/NAT/ATO/00001,"Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers. | Overview: This Taxpayer Alert describes certain complex highly structured investment products that seek, amongst other things, to transfer franking credits. These products claim to offer investors (the taxpayers) exposure to a portfolio of listed securities and the benefit of franking credits whilst using a derivative instrument to effectively transfer the risk of investing in those securities from investors to the derivative counterparty. | Context for the arrangement: Imputation benefits (including franking credits) may attach to distributions paid by a company. An important principle underlying the imputation system is that imputation benefits should only be available to the true economic owners of the company. | The income tax legislation contains specific measures, as well as a general anti-avoidance provision in section 177EA of the Income Tax Assessment Act 1936 (ITAA 1936), to prevent abuse of the imputation system through schemes which circumvent the basic rules for the franking of distributions. Under section 177EA of the ITAA 1936, the Commissioner may make a determination to deny imputation benefits where it may be concluded that a party to a scheme participated in the scheme or some part of the scheme for a purpose, other than an incidental purpose, of enabling a taxpayer to obtain an imputation benefit."
TA 2012/4,Accessing private company profits through a dividend access share arrangement attempting to circumvent taxation laws,12 July 2012,Current,,"Taxpayer Alerts provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO. In these latter cases, the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert. | Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers. | This Taxpayer Alert describes arrangements where the accumulated profits of a private company are distributed in a substantially tax-free form to an entity associated with the ordinary shareholders of the private company. The dividends are distributed on a new class of shares which the private company has created and issued to the associated entity for nominal consideration. The dividends are fully franked such that the associated entity will bear little or no additional income tax. | The ATO is concerned that such arrangements are carefully planned so that the ordinary shareholders and/or their associates will derive the economic benefit of the accumulated profits in a substantially (if not entirely) tax-free form. | Generally speaking, the existence of undistributed profits in a private company creates a potential tax liability for its shareholders. That tax liability would ordinarily crystallise when the profits are eventually accessed by the shareholders, albeit with the benefit of franking credits if those profits are distributed as a franked dividend. | Some arrangements that shift value between the shares or their shareholders and their associates may have income tax consequences under the general value shifting rules or the deemed dividend provisions. Where arrangements involve income tax avoidance, there are also anti-avoidance rules for schemes that deal with dividend stripping, the cancellation of tax benefits for avoided income and the cancellation of franking credit benefits. | This Taxpayer Alert applies to arrangements generally marketed with some or all of the features substantially equivalent to the following: 1. A private company (""the target company"") has accumulated significant profits which have been subject to income tax at the company tax rate. 2. The target company's ordinary shares are held by one or more individuals (""the original shareholders"") who may also be the target company directors. 3. A tax intermediary recommends the following steps to the controller(s) of the target company. 4. The target company creates a new class of shares that has some or all of the following characteristics: a. a right to receive a dividend distribution at the discretion of the target company's directors; b. a lack of any voting rights or rights to participate in surplus assets of the target company upon its winding up; c. a right by the target company to redeem the new shares within four years of the share's issue date; and/or d. a right by the target company to abolish dividend entitlements on the new shares within four years of the share's issue date. 5. The new shares are issued to an entity or entities (""the new shareholders"") that are closely associated with the ordinary shareholders of the target company. 6. The new shareholders pay nominal consideration for the new shares. 7. Significant profits accumulated in the target company are then distributed as a dividend to the new shareholders, potentially with franking credits. 8. A series of transactions is entered into as a means to transfer the economic benefits of all or some of the distributions to the control of the original shareholders/associates with a purpose of securing a better tax outcome. In some cases, these transactions may be delayed for some time, for example, the distributions may be planned to spread over a four year period. 9. The original shareholders and their advisers may cite a commercial rationale, such as asset protection, for this type of arrangement. The nature of the transactions may involve the use of promissory notes and/or a 'round robin' bank facility that involves funds instantaneously flowing through accounts to create transaction records. 10. In certain arrangements the funds represented by the dividend distribution may be: a. lent to the original shareholders and/or their associates; b. distributed to a trust, or an individual, that has carry forward tax losses, which may result in no further tax being paid and may generate a refund of franking credits; c. distributed through a series of trusts and companies and ultimately end up in the hands of, or the control of, the original shareholders and/or their family in a manner which attracts no or minimal additional tax; or d. distributed to a non-resident and not subject to any further Australian tax. The non-resident then loans a comparable amount back to the target company. 11. The accumulated profits of the target company are effectively placed in the hands of, or in the control of, the original shareholders and/or their family in a substantially (or entirely) tax-free form. | 1. A private company (""the target company"") has accumulated significant profits which have been subject to income tax at the company tax rate. 2. The target company's ordinary shares are held by one or more individuals (""the original shareholders"") who may also be the target company directors. 3. A tax intermediary recommends the following steps to the controller(s) of the target company. 4. The target company creates a new class of shares that has some or all of the following characteristics: a. a right to receive a dividend distribution at the discretion of the target company's directors; b. a lack of any voting rights or rights to participate in surplus assets of the target company upon its winding up; c. a right by the target company to redeem the new shares within four years of the share's issue date; and/or d. a right by the target company to abolish dividend entitlements on the new shares within four years of the share's issue date. 5. The new shares are issued to an entity or entities (""the new shareholders"") that are closely associated with the ordinary shareholders of the target company. 6. The new shareholders pay nominal consideration for the new shares. 7. Significant profits accumulated in the target company are then distributed as a dividend to the new shareholders, potentially with franking credits. 8. A series of transactions is entered into as a means to transfer the economic benefits of all or some of the distributions to the control of the original shareholders/associates with a purpose of securing a better tax outcome. In some cases, these transactions may be delayed for some time, for example, the distributions may be planned to spread over a four year period. 9. The original shareholders and their advisers may cite a commercial rationale, such as asset protection, for this type of arrangement. The nature of the transactions may involve the use of promissory notes and/or a 'round robin' bank facility that involves funds instantaneously flowing through accounts to create transaction records. 10. In certain arrangements the funds represented by the dividend distribution may be: a. lent to the original shareholders and/or their associates; b. distributed to a trust, or an individual, that has carry forward tax losses, which may result in no further tax being paid and may generate a refund of franking credits; c. distributed through a series of trusts and companies and ultimately end up in the hands of, or the control of, the original shareholders and/or their family in a manner which attracts no or minimal additional tax; or d. distributed to a non-resident and not subject to any further Australian tax. The non-resident then loans a comparable amount back to the target company. 11. The accumulated profits of the target company are effectively placed in the hands of, or in the control of, the original shareholders and/or their family in a substantially (or entirely) tax-free form. | a. a right to receive a dividend distribution at the discretion of the target company's directors; b. a lack of any voting rights or rights to participate in surplus assets of the target company upon its winding up; c. a right by the target company to redeem the new shares within four years of the share's issue date; and/or d. a right by the target company to abolish dividend entitlements on the new shares within four years of the share's issue date. | a. lent to the original shareholders and/or their associates; b. distributed to a trust, or an individual, that has carry forward tax losses, which may result in no further tax being paid and may generate a refund of franking credits; c. distributed through a series of trusts and companies and ultimately end up in the hands of, or the control of, the original shareholders and/or their family in a manner which attracts no or minimal additional tax; or d. distributed to a non-resident and not subject to any further Australian tax. The non-resident then loans a comparable amount back to the target company. | The ATO considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether: (a) an amount should be included in the assessment of any entity as an ordinary dividend or as a deemed dividend under Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936); (b) an amount should be deductible for the target company or its shareholders in respect of any fees paid to an entity recommending the arrangement under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or another provision; (c) the new shares may be debt interests under Division 974 of the ITAA 1997; (d) a taxing event may generate a capital gain under CGT event K8 for the original shareholders of the target company by virtue of the direct value shifting rules in Division 725 of the ITAA 1997; (e) an amount should be allowable as a franking credit/offset under Part 3-6 of the ITAA 1997; (f) the arrangement may be a scheme by way of or in the nature of, or have substantially the effect of, dividend stripping under section 177E of the ITAA 1936; (g) the arrangement may be a scheme to which sections 177A to 177D of Part IVA of the ITAA 1936 (the general anti-avoidance rules) may apply; (h) the general anti-avoidance rule for franking credit benefits in section 177EA of the ITAA 1936 may apply to the arrangement; (i) any amounts received by an entity recommending the arrangement are assessable income of that entity; (j) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953); and (k) any entity involved with the arrangement that is a tax practitioner may be referred to the Tax Practitioner Board under the Tax Agent Services Act 2009 regarding matters relevant to the Code of Professional Conduct. | (a) an amount should be included in the assessment of any entity as an ordinary dividend or as a deemed dividend under Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936); (b) an amount should be deductible for the target company or its shareholders in respect of any fees paid to an entity recommending the arrangement under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or another provision; (c) the new shares may be debt interests under Division 974 of the ITAA 1997; (d) a taxing event may generate a capital gain under CGT event K8 for the original shareholders of the target company by virtue of the direct value shifting rules in Division 725 of the ITAA 1997; (e) an amount should be allowable as a franking credit/offset under Part 3-6 of the ITAA 1997; (f) the arrangement may be a scheme by way of or in the nature of, or have substantially the effect of, dividend stripping under section 177E of the ITAA 1936; (g) the arrangement may be a scheme to which sections 177A to 177D of Part IVA of the ITAA 1936 (the general anti-avoidance rules) may apply; (h) the general anti-avoidance rule for franking credit benefits in section 177EA of the ITAA 1936 may apply to the arrangement; (i) any amounts received by an entity recommending the arrangement are assessable income of that entity; (j) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953); and (k) any entity involved with the arrangement that is a tax practitioner may be referred to the Tax Practitioner Board under the Tax Agent Services Act 2009 regarding matters relevant to the Code of Professional Conduct. | The ATO is currently reviewing these arrangements. | The Commissioner's views on the application of section 177E of the ITAA 1936 are contained in Taxation Ruling IT 2627 and Taxation Determination TD 95/37. The Commissioner's view on the operation of the imputation system and section 177EA of the ITAA 1936 is discussed in Taxation Ruling TR 2009/3. ATO Practice Statement Law Administration PS LA 2005/4 Application of General Anti-Avoidance Rules provides guidelines in dealing with the application of the general anti-avoidance rules in Part IVA of the ITAA 1936. Note 1: You may have already sought advice from the ATO in respect of your arrangement by way of a private ruling or class ruling. If you have received a private ruling or class ruling in respect of your arrangement, you can rely on that ruling. A private or class ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the ruling is later found to be incorrect. However, a private ruling only applies to a particular entity identified and the particular scheme described in the ruling. Similarly, a class ruling only applies to a specified class of entities and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the ITAA 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false or misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about your involvement in the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 4: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6. Note 5: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 6: A registered tax agent may have their registration cancelled or suspended by the Tax Practitioners Board under the Tax Agent Services Act 2009 for breach of a condition of registration including being penalised for being a promoter of a tax exploitation scheme. | Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ).",,,,,IT | 2627 | TD | 95/37 | TR | 2009/3 | PS | LA | 2005/24 | Taxation Ruling IT 2627 | Taxation Ruling TR 2009/3 | Taxation Determination TD 95/37 | PS LA 2005/24 | PS LA 2008/6 | PS LA 2008/7 | PS LA 2008/15 | Division 7A | Part IVA | Section 177E | Section 177EA | Section 177F | Section 8-1 | Section 104-250 | Part 3-6 | Division 725 | Division 974 | Division 290 of Schedule 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20124/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers
TA 2012/5,Acquisition of intangible right for inflated consideration which is financed by supplier,8 August 2012,Current,,"Taxpayer Alerts provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO. In these latter cases, the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert. | Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers. | This Taxpayer Alert describes an arrangement where an entity claims an input tax credit on a purported acquisition (on non-commercial terms) of an intangible right from a GST-registered supplier, with the provision of vendor finance under which payments are contingent on a future event. | The alert applies to arrangements with features substantially equivalent to the following: 1. A GST registered vendor purports to make a supply of an intangible right to a GST registered purchaser. 2. The stated price appears to be inflated and commercially unrealistic. The price is either substantially or wholly subject to vendor finance. 3. The terms of the purported vendor finance are such that any payment is contingent. In some cases, the purchaser is not obliged to pay anything unless and until the purchaser makes profits from exploiting the right. Any payments (including interest) are limited to a proportion of the profits. 4. The vendor issues a tax invoice to the purchaser for the stated purchase price stipulated under the agreement, irrespective of whether the conditions for requiring the purchaser to make payment have been met at that time. 5. The purchaser contends that it is entitled to an input tax credit on the acquisition in the tax period in which the tax invoice is received, either on the basis that an invoice has been issued to them or that consideration has been provided. 6. The vendor accounts on a cash basis and does not remit the GST. | 1. A GST registered vendor purports to make a supply of an intangible right to a GST registered purchaser. 2. The stated price appears to be inflated and commercially unrealistic. The price is either substantially or wholly subject to vendor finance. 3. The terms of the purported vendor finance are such that any payment is contingent. In some cases, the purchaser is not obliged to pay anything unless and until the purchaser makes profits from exploiting the right. Any payments (including interest) are limited to a proportion of the profits. 4. The vendor issues a tax invoice to the purchaser for the stated purchase price stipulated under the agreement, irrespective of whether the conditions for requiring the purchaser to make payment have been met at that time. 5. The purchaser contends that it is entitled to an input tax credit on the acquisition in the tax period in which the tax invoice is received, either on the basis that an invoice has been issued to them or that consideration has been provided. 6. The vendor accounts on a cash basis and does not remit the GST. | The basic structure of the core arrangement can be summarised diagrammatically as follows. Not all of the features shown in the following Diagram will necessarily exist in practice. | The ATO considers that arrangements outlined above give rise to taxation issues that include whether: (a) the purchaser has made a creditable acquisition at all - there would not be a creditable acquisition if there is no taxable supply by the supplier; if the acquisition by the purchaser is not made in carrying on an enterprise; or if the purchaser does not provide, and is not liable to provide, consideration; (b) the purchaser is entitled to attribute any input tax credits before the contingency for payment is satisfied; (c) the anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply to the arrangement, as it appears artificial and contrived in its design and execution; and (d) the arrangement, or certain steps within it, may constitute a sham at general law. | (a) the purchaser has made a creditable acquisition at all - there would not be a creditable acquisition if there is no taxable supply by the supplier; if the acquisition by the purchaser is not made in carrying on an enterprise; or if the purchaser does not provide, and is not liable to provide, consideration; (b) the purchaser is entitled to attribute any input tax credits before the contingency for payment is satisfied; (c) the anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply to the arrangement, as it appears artificial and contrived in its design and execution; and (d) the arrangement, or certain steps within it, may constitute a sham at general law. | The ATO is currently reviewing these arrangements. | The ATO will also consider the income tax and GST implications for the vendor. Note 1: An entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. Note 2: You may have already sought advice from the ATO in respect of your arrangement by way of a private ruling or class ruling. If you have received a private ruling or class ruling in respect of your arrangement, you can rely on that ruling. A private or class ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the ruling is later found to be incorrect. However, a private ruling only applies to a particular entity identified and the particular scheme described in the ruling. Similarly, a class ruling only applies to a specified class of entities and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 3: If you have received a private ruling in respect of your arrangement, please check whether the application of Division 165 of the GST Act is considered in that ruling. You may not have asked for us to rule on the application of Division 165 to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Division 165 applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 4: Base penalties of up to 50% of the tax avoided can apply where Division 165 is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if you make a voluntary disclosure to the ATO. If you have any information about the current arrangement or about people or companies who may be promoting these or similar arrangements, please call us on 1800 060 062. Note 5: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 6: In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. Note 7: A registered tax agent may have their registration cancelled or suspended by the Tax Practitioners Board under the Tax Agent Services Act 2009 for breach of a condition of registration including being penalised for being a promoter of a tax exploitation scheme. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings.",,,,,PS LA 2008/15 | Section 9-5 | Section 11-5 | Section 11-15 | Division 29 | Division 165 | Division 290 of Schedule 1 | TA 2004/1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20125/NAT/ATO/00001,"Updated ATO tip-off hotline number | Strategy, Risk & Intelligence"
TA 2012/6,Deduction generation from purported purchase of offshore 'emission units' that do not exist at the time of the arrangement,25 September 2012,Current,,"This Alert contains references to the Clean Energy Act 2011, which was repealed with effect from 1 July 2014. This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | This Taxpayer Alert describes an arrangement where participants that are carrying on a business, contract with an offshore entity to purportedly purchase offshore 'emission units' generated through offshore carbon reduction activities, and acquire a licence to use a logo owned by the offshore entity. The offshore entity may be incorporated in a tax haven. Participants may also acquire a put option from the offshore entity which if exercised requires the offshore entity to purportedly purchase the number of offshore 'emission units' contracted for by the participant for approximately the same amount as the balance payable by the participant. | Participants are only obliged to pay a part of the purchase price upon entering the arrangement. Participants may not be obliged to pay the balance. If a participant is obliged to pay the balance, the participant may exercise the put option. This makes the financing arrangements effectively non-recourse. | The arrangement purports to allow participants to deduct the entire purchase price of the offshore 'emission units' in the income year that they enter the arrangement. | Participants are not necessarily liable entities under the Clean Energy Act 2011, and may not have a legal obligation under that legislation in respect of their carbon emissions. The number of the offshore 'emission units' contracted for under the arrangement is not necessarily related to participants' carbon emissions. | It is unclear whether any carbon reduction activities that may generate the offshore 'emission units' have commenced, or will ever commence. It is also unclear whether the offshore 'emission units' contracted for can be registered in Australia, or used to offset participants' carbon emissions. | Participants may not be entitled to deduct the purchase price under the purchase agreement pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), or any other provision. | Participants may also derive assessable income or make a capital gain on delivery of the units, or on exercise of the put option. | The anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to all or part of the arrangement. | The arrangement may also incorrectly classify the purported supply of the offshore 'emission units' for the purposes of section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act). | The deductibility of the purchase price of an offshore emission unit, that is not a registered emissions unit pursuant to section 420-10 of the ITAA 1997, is determined by section 8-1 of the ITAA 1997. | Taxation Ruling TR 94/26 sets out the ATO view on the interpretation of section 8-1 of the ITAA 1997, in particular the interpretation of the word 'incurred'. Taxation Ruling TR 2006/2 sets out the ATO view on characterisation of expenses incurred in obtaining goods and services from another party under a contract. Taxation Ruling TR 95/33 outlines the ATO view of the relevance of subjective purpose, motive or intention for determining the deductibility of expenses. | Division 420 of the ITAA 1997 deals with the amounts you can deduct and the amounts included in your assessable income because you acquire, hold at the start or the end of the income year, or dispose of emission units that meet the definition of a registered emissions unit in the ITAA 1997. Further information regarding the Clean Energy Legislative Package can be found on our website www.ato.gov.au. | Division 9 of the GST Act defines taxable supplies, states who is liable for the GST, and describes how to work out the GST on supplies. Goods and Services Tax Ruling GSTR 2006/9 examines the meaning of 'supply' in the GST Act. | The alert applies to arrangements with the same or substantially similar features to the following: 1. An entity ( the promoter ) promotes, recommends or offers to taxpayers an arrangement in which the participant that carries on a business contracts to acquire offshore 'emission units' from an offshore entity and a licence to use a logo owned by the offshore entity. 2. It purports to allow the participant to deduct the entire purchase price of the offshore 'emission units' as a marketing expense in the income year in which the participant contracts to acquire the units. It also purports not to have any GST consequences. 3. The promoter arranges for the participant to enter into the following agreements with the offshore entity: (a) a purchase agreement for the offshore 'emission units' ( purchase agreement ) • The participant agrees to acquire from the seller a set quantity of the offshore 'emission units' that purportedly will be generated through offshore carbon reduction activities. • The participant must pay a percentage (for example 15%) of the purchase price of the offshore 'emission units' upon entering into the purchase agreement ( first instalment ). • The participant is required to pay the balance of the purchase price ( second instalment ) when, or if, the offshore entity notifies the participant when it can deliver the documents allowing for crediting of the participant's registry account with the agreed quantity of the offshore 'emission units'. • If the offshore entity does not notify the participant within the agreed timeframe (for example, 3 years) that it can deliver the documents, the participant is entitled to terminate the purchase agreement. • If the participant terminates the purchase agreement, the participant is not required to pay the second instalment of the purchase price and is not entitled to a refund of the first instalment. (b) an intellectual property licence agreement ( licence agreement ) • The licence agreement entitles the participant to use a logo owned by the offshore entity for a set period. • The participant is required to pay a minimal amount for the licence. • The participant may use the logo to promote its business as environmentally friendly. 4. The participant may also enter into a put option agreement with the offshore entity ( put option agreement ). • The put option agreement enables the participant to require the offshore entity to purportedly purchase the offshore 'emission units' from the participant for an agreed purchase price ( exercise price ). • The exercise price is approximately equal to the second instalment under the purchase agreement. • The participant is required to pay an option fee for the option ( option fee ). • The participant may exercise the option at any time before termination of the purchase agreement. 5. The participant pays the first instalment (and an option fee, if applicable) to the promoter upon entering into the purchase agreement. The promoter retains a portion of the first instalment (and the option fee) as a fee or commission for the services it provides, and transfers the remainder to the offshore entity. 6. The offshore entity purportedly invests the remainder of the first instalment into offshore carbon reduction activities. There is no indication that any carbon reduction activities have commenced, or will ever commence. 7. For the income year in which the purchase agreement is entered into: • the participant records the full purchase price as an advertising or marketing expense in the participant's accounts; • the second instalment is recorded as a loan payable to the offshore entity. 8. The participant claims a deduction for the full purchase price in the income year that the purchase agreement is entered into. 9. There is no indication that any carbon reduction activities have commenced or will ever commence nor that any carbon reduction activities would be carried out in accordance with the Kyoto rules or other conditions prescribed by the Australian Government that must be met for resulting units to be eligible for use under the Clean Energy Act 2011. Accordingly there is nothing in the arrangement which would indicate that the offshore 'emission units' contracted for, if generated, would meet the definition of: (a) an eligible international emissions unit in the Clean Energy Act 2011 or Australian National Registry of Emissions Units Act 2011 (and therefore the definition of an eligible emissions unit in section 195-1 of the GST Act); (b) a Kyoto unit in the Australian National Registry of Emissions Units Act 2011 ; or (c) a registered emissions unit in section 420-10 of the ITAA 1997. 10. The quantity of the offshore 'emission units' under the purchase agreement does not relate to the participant's emissions. 11. The offshore entity does not require any assurance that the units contracted for will be used to offset the participant's carbon emissions, nor that the number of units reflects the participant's carbon emissions, in order for the participant to be entitled to use the logo. 12. The participant does not necessarily have an account with an Australian registry. 13. The participant is not necessarily a liable entity under the Clean Energy Act 2011 , and may not have an obligation to offset its carbon emissions. | 1. An entity ( the promoter ) promotes, recommends or offers to taxpayers an arrangement in which the participant that carries on a business contracts to acquire offshore 'emission units' from an offshore entity and a licence to use a logo owned by the offshore entity. 2. It purports to allow the participant to deduct the entire purchase price of the offshore 'emission units' as a marketing expense in the income year in which the participant contracts to acquire the units. It also purports not to have any GST consequences. 3. The promoter arranges for the participant to enter into the following agreements with the offshore entity: (a) a purchase agreement for the offshore 'emission units' ( purchase agreement ) • The participant agrees to acquire from the seller a set quantity of the offshore 'emission units' that purportedly will be generated through offshore carbon reduction activities. • The participant must pay a percentage (for example 15%) of the purchase price of the offshore 'emission units' upon entering into the purchase agreement ( first instalment ). • The participant is required to pay the balance of the purchase price ( second instalment ) when, or if, the offshore entity notifies the participant when it can deliver the documents allowing for crediting of the participant's registry account with the agreed quantity of the offshore 'emission units'. • If the offshore entity does not notify the participant within the agreed timeframe (for example, 3 years) that it can deliver the documents, the participant is entitled to terminate the purchase agreement. • If the participant terminates the purchase agreement, the participant is not required to pay the second instalment of the purchase price and is not entitled to a refund of the first instalment. (b) an intellectual property licence agreement ( licence agreement ) • The licence agreement entitles the participant to use a logo owned by the offshore entity for a set period. • The participant is required to pay a minimal amount for the licence. • The participant may use the logo to promote its business as environmentally friendly. 4. The participant may also enter into a put option agreement with the offshore entity ( put option agreement ). • The put option agreement enables the participant to require the offshore entity to purportedly purchase the offshore 'emission units' from the participant for an agreed purchase price ( exercise price ). • The exercise price is approximately equal to the second instalment under the purchase agreement. • The participant is required to pay an option fee for the option ( option fee ). • The participant may exercise the option at any time before termination of the purchase agreement. 5. The participant pays the first instalment (and an option fee, if applicable) to the promoter upon entering into the purchase agreement. The promoter retains a portion of the first instalment (and the option fee) as a fee or commission for the services it provides, and transfers the remainder to the offshore entity. 6. The offshore entity purportedly invests the remainder of the first instalment into offshore carbon reduction activities. There is no indication that any carbon reduction activities have commenced, or will ever commence. 7. For the income year in which the purchase agreement is entered into: • the participant records the full purchase price as an advertising or marketing expense in the participant's accounts; • the second instalment is recorded as a loan payable to the offshore entity. 8. The participant claims a deduction for the full purchase price in the income year that the purchase agreement is entered into. 9. There is no indication that any carbon reduction activities have commenced or will ever commence nor that any carbon reduction activities would be carried out in accordance with the Kyoto rules or other conditions prescribed by the Australian Government that must be met for resulting units to be eligible for use under the Clean Energy Act 2011. Accordingly there is nothing in the arrangement which would indicate that the offshore 'emission units' contracted for, if generated, would meet the definition of: (a) an eligible international emissions unit in the Clean Energy Act 2011 or Australian National Registry of Emissions Units Act 2011 (and therefore the definition of an eligible emissions unit in section 195-1 of the GST Act); (b) a Kyoto unit in the Australian National Registry of Emissions Units Act 2011 ; or (c) a registered emissions unit in section 420-10 of the ITAA 1997. 10. The quantity of the offshore 'emission units' under the purchase agreement does not relate to the participant's emissions. 11. The offshore entity does not require any assurance that the units contracted for will be used to offset the participant's carbon emissions, nor that the number of units reflects the participant's carbon emissions, in order for the participant to be entitled to use the logo. 12. The participant does not necessarily have an account with an Australian registry. 13. The participant is not necessarily a liable entity under the Clean Energy Act 2011 , and may not have an obligation to offset its carbon emissions. | (a) a purchase agreement for the offshore 'emission units' ( purchase agreement ) • The participant agrees to acquire from the seller a set quantity of the offshore 'emission units' that purportedly will be generated through offshore carbon reduction activities. • The participant must pay a percentage (for example 15%) of the purchase price of the offshore 'emission units' upon entering into the purchase agreement ( first instalment ). • The participant is required to pay the balance of the purchase price ( second instalment ) when, or if, the offshore entity notifies the participant when it can deliver the documents allowing for crediting of the participant's registry account with the agreed quantity of the offshore 'emission units'. • If the offshore entity does not notify the participant within the agreed timeframe (for example, 3 years) that it can deliver the documents, the participant is entitled to terminate the purchase agreement. • If the participant terminates the purchase agreement, the participant is not required to pay the second instalment of the purchase price and is not entitled to a refund of the first instalment. (b) an intellectual property licence agreement ( licence agreement ) • The licence agreement entitles the participant to use a logo owned by the offshore entity for a set period. • The participant is required to pay a minimal amount for the licence. • The participant may use the logo to promote its business as environmentally friendly. | • The participant agrees to acquire from the seller a set quantity of the offshore 'emission units' that purportedly will be generated through offshore carbon reduction activities. • The participant must pay a percentage (for example 15%) of the purchase price of the offshore 'emission units' upon entering into the purchase agreement ( first instalment ). • The participant is required to pay the balance of the purchase price ( second instalment ) when, or if, the offshore entity notifies the participant when it can deliver the documents allowing for crediting of the participant's registry account with the agreed quantity of the offshore 'emission units'. • If the offshore entity does not notify the participant within the agreed timeframe (for example, 3 years) that it can deliver the documents, the participant is entitled to terminate the purchase agreement. • If the participant terminates the purchase agreement, the participant is not required to pay the second instalment of the purchase price and is not entitled to a refund of the first instalment. | • The licence agreement entitles the participant to use a logo owned by the offshore entity for a set period. • The participant is required to pay a minimal amount for the licence. • The participant may use the logo to promote its business as environmentally friendly. | • The put option agreement enables the participant to require the offshore entity to purportedly purchase the offshore 'emission units' from the participant for an agreed purchase price ( exercise price ). • The exercise price is approximately equal to the second instalment under the purchase agreement. • The participant is required to pay an option fee for the option ( option fee ). • The participant may exercise the option at any time before termination of the purchase agreement. | • the participant records the full purchase price as an advertising or marketing expense in the participant's accounts; • the second instalment is recorded as a loan payable to the offshore entity. | (a) an eligible international emissions unit in the Clean Energy Act 2011 or Australian National Registry of Emissions Units Act 2011 (and therefore the definition of an eligible emissions unit in section 195-1 of the GST Act); (b) a Kyoto unit in the Australian National Registry of Emissions Units Act 2011 ; or (c) a registered emissions unit in section 420-10 of the ITAA 1997. | The basic structure of the arrangement can be summarised diagrammatically as follows: | The ATO considers that an arrangement of the type described above gives rise to taxation issues that include whether : (a) the full purchase price under the purchase agreement is incurred for purposes of section 8-1 of the ITAA 1997 in the income year in which the purchase agreement is entered into; (b) any expenses incurred by the participant under the arrangement are deductible under section 8-1 of the ITAA 1997 to any extent; (c) any expenses incurred by the participant under the arrangement are deductible under any other provision (for example Division 420 of the ITAA 1997 or section 40-755 of the ITAA 1997); (d) the grant, exercise and/or end of the put option results in a CGT event happening and a capital gain or loss for the grantor and/or participant; (e) the delivery of the units, or the transfer or holding of the units in the participant's registry account, if a registry account within the meaning of the Australian National Registry of Emissions Units Act 2011, gives rise to: • assessable income (for example, under Division 420 of the ITAA 1997) or • a capital gain (for example, as a result of CGT event K1 happening pursuant to section 104-205 of the ITAA 1997); (f) the termination of the purchase agreement for failure to deliver the documents that would allow crediting of the participant's registry account with the offshore 'emission units' within the agreed timeframe, and the subsequent cancellation of the obligation to pay the second instalment, give rise to a capital gain, or are otherwise assessable to the participant; (g) the anti-avoidance provisions of Part IVA of the ITAA 1936 apply to the arrangement or to any part of it; (h) the offshore entity's supply of offshore 'emission units' is a taxable supply under section 9-5 of the GST Act; (i) the participants are entitled to input tax credits under Division 11 of the GST Act on the acquisition of the offshore 'emission units'; (j) the offshore 'emission units' satisfy the definition of an eligible emissions unit for the purposes of Subdivision 38-S of the GST Act; (k) the arrangement, or steps within it, are a sham; and (l) any entity involved in the scheme is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | (a) the full purchase price under the purchase agreement is incurred for purposes of section 8-1 of the ITAA 1997 in the income year in which the purchase agreement is entered into; (b) any expenses incurred by the participant under the arrangement are deductible under section 8-1 of the ITAA 1997 to any extent; (c) any expenses incurred by the participant under the arrangement are deductible under any other provision (for example Division 420 of the ITAA 1997 or section 40-755 of the ITAA 1997); (d) the grant, exercise and/or end of the put option results in a CGT event happening and a capital gain or loss for the grantor and/or participant; (e) the delivery of the units, or the transfer or holding of the units in the participant's registry account, if a registry account within the meaning of the Australian National Registry of Emissions Units Act 2011, gives rise to: • assessable income (for example, under Division 420 of the ITAA 1997) or • a capital gain (for example, as a result of CGT event K1 happening pursuant to section 104-205 of the ITAA 1997); (f) the termination of the purchase agreement for failure to deliver the documents that would allow crediting of the participant's registry account with the offshore 'emission units' within the agreed timeframe, and the subsequent cancellation of the obligation to pay the second instalment, give rise to a capital gain, or are otherwise assessable to the participant; (g) the anti-avoidance provisions of Part IVA of the ITAA 1936 apply to the arrangement or to any part of it; (h) the offshore entity's supply of offshore 'emission units' is a taxable supply under section 9-5 of the GST Act; (i) the participants are entitled to input tax credits under Division 11 of the GST Act on the acquisition of the offshore 'emission units'; (j) the offshore 'emission units' satisfy the definition of an eligible emissions unit for the purposes of Subdivision 38-S of the GST Act; (k) the arrangement, or steps within it, are a sham; and (l) any entity involved in the scheme is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | • assessable income (for example, under Division 420 of the ITAA 1997) or • a capital gain (for example, as a result of CGT event K1 happening pursuant to section 104-205 of the ITAA 1997); | The ATO is currently reviewing these arrangements but on their face they exhibit features characteristic of a tax avoidance scheme. Note 1: You may have already sought advice from the ATO in respect of your arrangement by way of a private ruling. If you have received a private ruling in respect of your arrangement, you can rely on that private ruling. A private ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the private ruling is later found to be incorrect. However, a private ruling only applies to the particular entity identified and the particular described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the private ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the ITAA 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false or misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 5: A registered tax agent may have their registration cancelled or suspended by the Tax Practitioners Board under the Tax Agent Services Act 2009 for breach of a condition of registration including being penalised for being a promoter of a tax exploitation scheme. Note 6: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6.",,,,,TR 94/26 | TR 95/33 | TR 2006/2 | TR 2006/9 | PS LA 2008/6 | PS LA 2008/15 | Section 8-1 | Section 40-755 | Section 104-205 | Division 420 | Part IVA | Division 290 of Schedule 1 | Section 9-5 | Section 195-1 | Division 9 | Division 11 | Subdivision 38-S,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20126/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numberd
TA 2012/7,Self managed superannuation funds arrangements to acquire property which contravene superannuation law,20 November 2012,Current,,"Taxpayer Alerts provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax and superannuation planning issues. Not all potential tax and superannuation planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO. In these latter cases, the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert. | Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers. | The ATO has become aware that certain arrangements entered into by self managed superannuation funds (SMSFs) to acquire property do not comply with superannuation law. | The purpose of this Taxpayer Alert is to warn SMSF trustees and advisors to exercise care; ensuring any arrangements entered into by an SMSF to invest in property are properly implemented, particularly those involving limited recourse borrowing arrangements (LRBA) or the use of a related unit trust. | The ATO is concerned that some of these arrangements, if structured incorrectly, can not simply be restructured or rectified; and unwinding the arrangement may involve a forced sale of the asset which could cause a substantial loss to the fund. | Property investments using LRBA | Subject to limited exceptions, trustees of SMSFs are prohibited from borrowing money. An SMSF is not prohibited from borrowing money, or maintaining a borrowing of money, providing the arrangement entered into satisfies the conditions contained in the superannuation laws. Different conditions apply for arrangements entered between 25 September 2007 and 6 July 2010 inclusive and arrangements entered into on or after 7 July 2010. Some of the requirements of this exception are that the investment is made through a holding trust and not held directly by the SMSF trustee; and the investment is in a single acquirable asset. These arrangements are commonly referred to as LRBA. | Property investments using related unit trust | Subject to limited exceptions, the trustee or investment manager of an SMSF is prohibited from intentionally acquiring assets from a related party. One exception is where the asset is an investment in or loan to a related party, commonly referred to as an 'in-house asset'. However the total market value of the SMSF's in-house assets must not at any time exceed 5% of the total market value of the fund's assets. Where in-house assets for an SMSF exceed the 5% limit, the trustee needs to rectify the breach, usually within 12 months. | An SMSF's investment in a related unit trust is excluded from the definition of an in-house asset where the unit trust complies with the regulatory requirements contained in Div 13.3A of the Superannuation Industry (Supervision) Regulations 1994 (SISR). Therefore, such investments are excluded from the calculation of the 5% limit. Furthermore, the general prohibition on SMSFs acquiring assets from a related party does not apply where the SMSF's investment is in a unit trust which complies with those requirements. | Contravention of these conditions may result in the SMSF becoming a non-complying superannuation fund for tax purposes. | This alert applies to arrangements with features substantially equivalent to the following: Arrangement 1 - Property investments using LRBA 1. An SMSF enters into a LRBA post 7 July 2010 to acquire an asset. 2. The arrangement has at least one of the following features: (a) The borrowing and the title of the property is held in the individuals' name and not in the name of the trustee of the holding trust. The SMSF funds part of the initial deposit and the ongoing loan repayments; (b) The title of the property is held by the SMSF trustee not the trustee of the holding trust; (c) The trustee of the holding trust is not in existence and the holding trust is not established at the time the contract to acquire the asset is signed; (d) The SMSF trustee acquires a residential property from the SMSF member; (e) The acquisition comprises two or more separate titles and there is no physical or legal impediment to the two titles being dealt with, assigned or transferred separately; or (f) The asset is a vacant block of land. The SMSF intends to use the same borrowing to construct a house on the land. The land is transferred to the holding trust prior to the house being built. Arrangement 2 - Property investments using related unit trust 1. An individual or individuals ('the fund members') establish an SMSF and rollover their existing superannuation benefits into the SMSF. Alternatively the individual or individuals are a member of an existing SMSF. 2. A unit trust ('the unit trust') is established for the purpose of acquiring a property. Alternatively an existing unit trust can also be used for the same purpose. 3. The unit trust is a related unit trust. 4. The fund members subscribe for units in the unit trust. 5. The fund members may borrow money from a commercial lender to fund the subscription to units in the unit trust. 6. The SMSF also subscribes to units in the unit trust. 7. The trustee of the unit trust purchases an asset ('the asset') such as a property which is rented out. 8. The arrangement has one or more of the following characteristics: (a) The asset acquired by the unit trust is used as a security for the money borrowed by the members to subscribe units in the unit trust; (b) The assets of the unit trust include an asset that was acquired from a related party of the superannuation fund which is not business real property; and/or (c) The assets of the unit trust include real property which is leased to a related party of the superannuation fund, and the real property subject to the lease is not a business real property. | Arrangement 1 - Property investments using LRBA 1. An SMSF enters into a LRBA post 7 July 2010 to acquire an asset. 2. The arrangement has at least one of the following features: (a) The borrowing and the title of the property is held in the individuals' name and not in the name of the trustee of the holding trust. The SMSF funds part of the initial deposit and the ongoing loan repayments; (b) The title of the property is held by the SMSF trustee not the trustee of the holding trust; (c) The trustee of the holding trust is not in existence and the holding trust is not established at the time the contract to acquire the asset is signed; (d) The SMSF trustee acquires a residential property from the SMSF member; (e) The acquisition comprises two or more separate titles and there is no physical or legal impediment to the two titles being dealt with, assigned or transferred separately; or (f) The asset is a vacant block of land. The SMSF intends to use the same borrowing to construct a house on the land. The land is transferred to the holding trust prior to the house being built. | (a) The borrowing and the title of the property is held in the individuals' name and not in the name of the trustee of the holding trust. The SMSF funds part of the initial deposit and the ongoing loan repayments; (b) The title of the property is held by the SMSF trustee not the trustee of the holding trust; (c) The trustee of the holding trust is not in existence and the holding trust is not established at the time the contract to acquire the asset is signed; (d) The SMSF trustee acquires a residential property from the SMSF member; (e) The acquisition comprises two or more separate titles and there is no physical or legal impediment to the two titles being dealt with, assigned or transferred separately; or (f) The asset is a vacant block of land. The SMSF intends to use the same borrowing to construct a house on the land. The land is transferred to the holding trust prior to the house being built. | Arrangement 2 - Property investments using related unit trust 1. An individual or individuals ('the fund members') establish an SMSF and rollover their existing superannuation benefits into the SMSF. Alternatively the individual or individuals are a member of an existing SMSF. 2. A unit trust ('the unit trust') is established for the purpose of acquiring a property. Alternatively an existing unit trust can also be used for the same purpose. 3. The unit trust is a related unit trust. 4. The fund members subscribe for units in the unit trust. 5. The fund members may borrow money from a commercial lender to fund the subscription to units in the unit trust. 6. The SMSF also subscribes to units in the unit trust. 7. The trustee of the unit trust purchases an asset ('the asset') such as a property which is rented out. 8. The arrangement has one or more of the following characteristics: (a) The asset acquired by the unit trust is used as a security for the money borrowed by the members to subscribe units in the unit trust; (b) The assets of the unit trust include an asset that was acquired from a related party of the superannuation fund which is not business real property; and/or (c) The assets of the unit trust include real property which is leased to a related party of the superannuation fund, and the real property subject to the lease is not a business real property. | (a) The asset acquired by the unit trust is used as a security for the money borrowed by the members to subscribe units in the unit trust; (b) The assets of the unit trust include an asset that was acquired from a related party of the superannuation fund which is not business real property; and/or (c) The assets of the unit trust include real property which is leased to a related party of the superannuation fund, and the real property subject to the lease is not a business real property. | Superannuation regulatory issues | The ATO considers that arrangements of this type give rise to the following issues relevant to the application of the Superannuation Industry (Supervision) Act 1993 (SISA) and the Superannuation Industry (Supervision) Regulations 1994 (SISR), being whether: Arrangement 1 - Property investments using LRBA (a) the investment arrangements may be in breach of the sole purpose test in section 62 of the SISA; (b) section 67 of the SISA which prohibits the SMSF trustee from borrowing money or maintaining an existing borrowing may have been breached; (c) the asset acquired is not a single acquirable asset as required under section 67A(2) of the SISA as it is comprised of two or more proprietary rights; (d) the acquirable asset is subject to a charge which would prohibit an SMSF trustee from borrowing money, or maintaining a borrowing of money under subparagraph 67A(1)(f); and (e) the deposit paid by the SMSF and/or loan repayment by the SMSF may be considered as a payment of superannuation benefits which contravenes Part 6 of the SISR where the title of the property is not held by the trustee of the holding trust. Arrangement 2 - Property investments using related unit trust (f) the investment arrangements may be in breach of the sole purpose test in section 62 of the SISA; (g) the SMSF's investment in the unit trust fails to meet the requirements of Regulation 13.22C of the SISR; and (h) the SMSF's investment in the unit trust is an in-house asset under section 71 SISA, therefore counting towards the 5% limit under section 83 SISA. | Arrangement 1 - Property investments using LRBA (a) the investment arrangements may be in breach of the sole purpose test in section 62 of the SISA; (b) section 67 of the SISA which prohibits the SMSF trustee from borrowing money or maintaining an existing borrowing may have been breached; (c) the asset acquired is not a single acquirable asset as required under section 67A(2) of the SISA as it is comprised of two or more proprietary rights; (d) the acquirable asset is subject to a charge which would prohibit an SMSF trustee from borrowing money, or maintaining a borrowing of money under subparagraph 67A(1)(f); and (e) the deposit paid by the SMSF and/or loan repayment by the SMSF may be considered as a payment of superannuation benefits which contravenes Part 6 of the SISR where the title of the property is not held by the trustee of the holding trust. | Arrangement 2 - Property investments using related unit trust (f) the investment arrangements may be in breach of the sole purpose test in section 62 of the SISA; (g) the SMSF's investment in the unit trust fails to meet the requirements of Regulation 13.22C of the SISR; and (h) the SMSF's investment in the unit trust is an in-house asset under section 71 SISA, therefore counting towards the 5% limit under section 83 SISA. | Taxation issues | The ATO considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether: Arrangement 1 - Property investments using LRBA (a) the member(s) may be required to include the SMSF loan repayments in their assessable income under Division 304 of the Income Tax Assessment Act 1997 (ITAA 1997); and (b) the income and its associated deductions from the investment should be declared by the individual member(s) rather than by the SMSF where the investment is not held for the beneficial interest of the SMSF. Arrangement 2 - Property investments using related unit trust (c) SMSF may become a non complying superannuation fund for tax purposes and must include amounts of income from previous years in its assessable income under section 295-325 of the ITAA 1997; (d) The unit trust may incur a capital gains tax liability in relation to the disposal of the property; (e) The members and the SMSF may be required to include a capital gain in their assessable income an amount on redemption of their units in the unit trust. | Arrangement 1 - Property investments using LRBA (a) the member(s) may be required to include the SMSF loan repayments in their assessable income under Division 304 of the Income Tax Assessment Act 1997 (ITAA 1997); and (b) the income and its associated deductions from the investment should be declared by the individual member(s) rather than by the SMSF where the investment is not held for the beneficial interest of the SMSF. | Arrangement 2 - Property investments using related unit trust (c) SMSF may become a non complying superannuation fund for tax purposes and must include amounts of income from previous years in its assessable income under section 295-325 of the ITAA 1997; (d) The unit trust may incur a capital gains tax liability in relation to the disposal of the property; (e) The members and the SMSF may be required to include a capital gain in their assessable income an amount on redemption of their units in the unit trust. | The ATO provides guidance to SMSF trustees on the issue of acquisition of an asset from a related party in Self Managed Superannuation Funds Ruling SMSFR 2010/1. | Self Managed Superannuation Fund Ruling SMSFR 2012/1 provides the Commissioner's view regarding the key concepts in relation to LRBA while SMSFR 2009/2 provides guidance on the general borrowing prohibition and a list of exceptions to the general prohibition. | Self Managed Superannuation Fund Ruling SMSFR 2009/4 explains the core concepts in the definition of 'in-house asset'. Note 1: Some financial advisers and SMSF trustees may talk to you about the benefits of limited recourse borrowing and may encourage you to set up an SMSF. However setting up an SMSF to take advantage of limited recourse borrowing arrangements may not be a wise step for everyone. SMSFs can be suitable for people with a large amount of super and extensive skills in financial and legal matters. Individuals should think carefully and research to find out if an SMSF is right for their circumstances. For more information to help decide if an SMSF is the right choice for you, refer to www.moneysmart.gov.au. Note 2: SMSF trustees are ultimately responsible ensuring an SMSF complies with superannuation laws. All SMSF trustees carry equal responsibility for the managing of the SMSF regardless of the level of involvement in day-to-day running of the fund. SMSF trustees have the responsibility to keep proper and accurate tax and super records. There is also a legal obligation to have the SMSF independently audited annually and the auditor must be provided with records you keep. SMSF Trustees who do not comply with their duties and responsibilities under the superannuation laws, may face disqualification as a trustee, prosecution, your SMSF being deemed non-complying and losing its tax concessions and may face penalties. Refer to Thinking about self-managed super' (NAT 72579) for more information. Note 3: Trustees should always consider the quality of the investment they are making and whether their fund can meet all of the future obligations under the LRBA. A trustee of an SMSF can only enter into such an arrangement where this is consistent with the investment strategy of the fund. The governing rules of an SMSF must allow the trustee of the fund to borrow before any LRBA can be entered into. For more information about trustee/member obligations, refer to Running a self-managed super fund. Note 4: Contravention of SISA provisions may result in an SMSF becoming a non-complying superannuation fund for tax purposes. Where this occurs the SMSF is subject to the 45% tax rate which is applied to its income and the market value of its assets (other than undeducted contributions) measured at the start of the income year in which the fund becomes non-complying. In certain circumstances, the fund's trustee may also be liable to civil penalties or face criminal charges. Note 5: An administrative penalty of up to $2,200 may apply to a trustee who makes a false or misleading statement to the Commissioner. If you have any information about the current arrangement, phone us on 1800 060 062 . Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 6: You can apply for self-managed super funds specific advice (SMSFSA) about: • your own SMSFs affairs • another person's SMSFs affairs if you are their agent or legal personal representative. An SMSFSA sets out the Commissioner's opinion about the way the super laws apply, or would apply, to your SMSF in relation to a specified arrangement or circumstance. For more information, refer to How to apply for SMSF specific advice. | • your own SMSFs affairs • another person's SMSFs affairs if you are their agent or legal personal representative. | An SMSFSA sets out the Commissioner's opinion about the way the super laws apply, or would apply, to your SMSF in relation to a specified arrangement or circumstance. For more information, refer to How to apply for SMSF specific advice.",,,,,SMSFR 2009/2 | SMSFR 2009/4 | SMSFR 2010/1 | SMSFR 2012/1 | PS LA 2008/15 | Section 295-550 | Division 304 | section 62 | section 67 | section 67A | section 67B | section 71 | section 83 | 13.22C,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20127/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline number
TA 2011/1,Loans to members of companies limited by guarantee and the operation of Division 7A,15 February 2011,Current,,"This Taxpayer Alert describes an arrangement where a company limited by guarantee (LBG company) is established to receive trust distributions. The LBG company members and directors usually control the trust and are also beneficiaries of the trust. The distributions from the trust are loaned by the LBG company to its members and directors or their associates for minimal or no interest. The loan amounts are not returned as income by the members and directors or their associates. The stated purpose of the LBG company is to protect its assets, however the only assets held are these loans. | The arrangement does not involve not for profit entities whose ordinary or statutory income is exempt under Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997). | The alert applies to arrangements with features substantially equivalent to the following. 1. A company limited by guarantee (the LBG company) is set up and becomes a beneficiary or an object of a trust (the Trust). 2. The Trust distributes net income to beneficiaries including the LBG company. The distribution to the LBG company may have franking credits attached. 3. The LBG company pays tax on the distributions at the company tax rate (30%). 4. The LBG company makes loans to directors, members or associates of the LBG company or related parties to the directors, members or associates (the borrower). 5. The borrower does not include the value of the loans in their assessable income in the year in which they are received. 6. The borrower pays minimal or no interest to the LBG in relation to these loans. 7. Aside from the perceived beneficial tax treatment, there is little or no commercial reason for the establishment of a limited by guarantee company. | 1. A company limited by guarantee (the LBG company) is set up and becomes a beneficiary or an object of a trust (the Trust). 2. The Trust distributes net income to beneficiaries including the LBG company. The distribution to the LBG company may have franking credits attached. 3. The LBG company pays tax on the distributions at the company tax rate (30%). 4. The LBG company makes loans to directors, members or associates of the LBG company or related parties to the directors, members or associates (the borrower). 5. The borrower does not include the value of the loans in their assessable income in the year in which they are received. 6. The borrower pays minimal or no interest to the LBG in relation to these loans. 7. Aside from the perceived beneficial tax treatment, there is little or no commercial reason for the establishment of a limited by guarantee company. | The basic structure of the arrangement can be summarised diagrammatically as follows: | The ATO considers that an arrangement of the type described above gives rise to taxation issues that include whether: (a) the LBG company may be a public company or private company under the income tax law, (b) the members of the LBG company are shareholders for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936), the Income Tax Assessment Act 1997 (ITAA 1997) and Division 7A of the ITAA 1936, (c) any amounts received by members of the LBG company under the arrangement may be ordinary income under section 6-5 of the ITAA 1997, (d) any amounts received by members of the LBG company under the arrangement may be dividends under section 6(1) and section 44(1) of the ITAA 1936, (e) any loans or other benefits provided to shareholders (or associates of such shareholders) of the LBG company under the arrangement may be deemed to be dividends, through the operation of Division 7A of the ITAA 1936, (f) section 100A of the ITAA 1936 may apply to the trust distributions made in connection with or as a result of reimbursement agreements, (g) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to the arrangement, (h) the loan may be a fringe benefit for the purpose of the Fringe Benefit Tax Assessment Act 1986, and (i) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Tax Administration Act 1953. | (a) the LBG company may be a public company or private company under the income tax law, (b) the members of the LBG company are shareholders for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936), the Income Tax Assessment Act 1997 (ITAA 1997) and Division 7A of the ITAA 1936, (c) any amounts received by members of the LBG company under the arrangement may be ordinary income under section 6-5 of the ITAA 1997, (d) any amounts received by members of the LBG company under the arrangement may be dividends under section 6(1) and section 44(1) of the ITAA 1936, (e) any loans or other benefits provided to shareholders (or associates of such shareholders) of the LBG company under the arrangement may be deemed to be dividends, through the operation of Division 7A of the ITAA 1936, (f) section 100A of the ITAA 1936 may apply to the trust distributions made in connection with or as a result of reimbursement agreements, (g) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to the arrangement, (h) the loan may be a fringe benefit for the purpose of the Fringe Benefit Tax Assessment Act 1986, and (i) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Tax Administration Act 1953. | The ATO is currently reviewing these arrangements. Note 1: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed . Note 3: In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings . Note 4: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PS LA 2007/7 and PS LA 2007/24. Note 5: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings .",,,,,PS LA 2008/15 | Division 7A | Division 6 | Part IVA | Division 50 | Schedule 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20111/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers
TA 2011/2,Certain labour hire arrangements utilising a discretionary trust to split income,2 March 2011,Current,,"Taxpayer Alerts provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO. In these latter cases, the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert. | Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers. | This Taxpayer Alert describes an arrangement where a labour hire firm makes a discretionary trust structure available for the use of individual taxpayers for the purpose of alienating income from personal services and splitting it between the individual taxpayers who perform the services and their associates. | This arrangement attempts to circumvent the personal services income (PSI) regime of Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997), as well as other income tax and superannuation obligations such as the Pay As You Go (Withholding) (PAYG(W)) system and the Superannuation Guarantee, but may be ineffective under these provisions or the general anti-avoidance rules. | The income in question is that which results from the provision of services (or would if it was the income of the individual who provided the services rather than that of a Personal Services Entity). If the PSI regime applies to the income of a Personal Services Entity, then that income is included in the assessable income of the individual whose personal efforts or skills generated it. The measures may also result in certain deductions not being allowed and a personal service entity having additional withholding obligations. If though, the PSI is earned in the course of conducting a personal services business, then the PSI regime may not apply in this way. | The term 'alienation of income' refers to a situation where income that would otherwise be assessable to an individual taxpayer becomes the income of a different entity. | The alert applies to arrangements with features substantially equivalent to the following: 1. A firm (the labour hire firm) offers remuneration structures for individuals who perform work or provide services (the service provider). 2. The service provider enters into an agreement to become a beneficiary of a discretionary trust (discretionary trust) which is associated with the labour hire firm. This agreement also identifies additional beneficiaries (e.g. the service provider's spouse) and the basis on which the trustee will allocate discretionary distributions. No assets are transferred to or held by the trust. 3. The service provider or the labour hire firm enters into a contract to provide services for a client of the labour hire firm (the end user). 4. In some cases, the end user may use a recruitment agency (the recruitment agency) as an intermediary to contract with the service provider via the labour hire firm to provide services to the end user. 5. In either situation, the labour hire firm may either enter into contracts in its own capacity or in its capacity as trustee of the discretionary trust. 6. The service provider then performs work or services for the end user. 7. Once work is performed or services provided, the labour hire firm invoices either the recruitment agency or the end user. 8. Payment for work performed or services provided are paid by the labour hire firm via the discretionary trust. Although the service provider is not guaranteed to receive any distributions from the discretionary trust, the discretionary trust makes payments on a regular basis to any one of, or a combination of, the following: a. the service provider, or b. an associate or associates of the service provider, typically a spouse or partner. 9. Although distributions are purportedly discretionary, in reality, the total amount of the payments are consistent with the service provider's set rate of remuneration less the management fees deducted by the labour hire firm. 10. There is limited economic rationale for the use of the arrangement, aside from the attempted avoidance of taxation or superannuation guarantee obligations. | 1. A firm (the labour hire firm) offers remuneration structures for individuals who perform work or provide services (the service provider). 2. The service provider enters into an agreement to become a beneficiary of a discretionary trust (discretionary trust) which is associated with the labour hire firm. This agreement also identifies additional beneficiaries (e.g. the service provider's spouse) and the basis on which the trustee will allocate discretionary distributions. No assets are transferred to or held by the trust. 3. The service provider or the labour hire firm enters into a contract to provide services for a client of the labour hire firm (the end user). 4. In some cases, the end user may use a recruitment agency (the recruitment agency) as an intermediary to contract with the service provider via the labour hire firm to provide services to the end user. 5. In either situation, the labour hire firm may either enter into contracts in its own capacity or in its capacity as trustee of the discretionary trust. 6. The service provider then performs work or services for the end user. 7. Once work is performed or services provided, the labour hire firm invoices either the recruitment agency or the end user. 8. Payment for work performed or services provided are paid by the labour hire firm via the discretionary trust. Although the service provider is not guaranteed to receive any distributions from the discretionary trust, the discretionary trust makes payments on a regular basis to any one of, or a combination of, the following: a. the service provider, or b. an associate or associates of the service provider, typically a spouse or partner. 9. Although distributions are purportedly discretionary, in reality, the total amount of the payments are consistent with the service provider's set rate of remuneration less the management fees deducted by the labour hire firm. 10. There is limited economic rationale for the use of the arrangement, aside from the attempted avoidance of taxation or superannuation guarantee obligations. | a. the service provider, or b. an associate or associates of the service provider, typically a spouse or partner. | The basic structure of the arrangement can be summarised diagrammatically as follows: | The ATO considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether: (a) the arrangement, or certain steps within it, may constitute a sham at general law; (b) there may be an agency relationship between any of the entities involved; (c) any entity may be considered an employer; (d) the service provider is an employee or independent contractor either at general or statutory law; (e) the alienation of personal services income regime in Part 2-42 of the ITAA 1997 may apply; (f) any income that has been alienated may be income of the service provider under section 6-5 of the ITAA 1997; (g) any expenses incurred may be deductible under section 8-1 of the ITAA 1997; (h) the arrangement may constitute a scheme to which the general anti-avoidance rules in Part IVA of ITAA 1936 may apply; (i) amounts should be withheld under the PAYG(W) rules in Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA); (j) a minimum level of superannuation support may be required under the Superannuation Guarantee (Administration) Act 1992 ; (k) the arrangement may constitute an arrangement which avoids payment of the superannuation guarantee charge to which section 30 of the Superannuation Guarantee (Administration) Act 1992 may apply; (l) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the TAA. | (a) the arrangement, or certain steps within it, may constitute a sham at general law; (b) there may be an agency relationship between any of the entities involved; (c) any entity may be considered an employer; (d) the service provider is an employee or independent contractor either at general or statutory law; (e) the alienation of personal services income regime in Part 2-42 of the ITAA 1997 may apply; (f) any income that has been alienated may be income of the service provider under section 6-5 of the ITAA 1997; (g) any expenses incurred may be deductible under section 8-1 of the ITAA 1997; (h) the arrangement may constitute a scheme to which the general anti-avoidance rules in Part IVA of ITAA 1936 may apply; (i) amounts should be withheld under the PAYG(W) rules in Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA); (j) a minimum level of superannuation support may be required under the Superannuation Guarantee (Administration) Act 1992 ; (k) the arrangement may constitute an arrangement which avoids payment of the superannuation guarantee charge to which section 30 of the Superannuation Guarantee (Administration) Act 1992 may apply; (l) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the TAA. | The ATO is currently reviewing these arrangements. | Our view on what is the meaning of personal services income is contained in Taxation Ruling TR 2001/7: Income tax: the meaning of personal services income and the meaning of personal services business is contained in Taxation Ruling TR 2001/8: Income tax: what is a personal services business. Taxation Ruling TR 2001/8 also considers the application of Part IVA, as do Taxation Rulings IT 2121, IT 2330 and IT 2639 in the case of situations that fall outside the PSI regime. Note 1: You may have already sought advice from the ATO in respect of your arrangement by way of a private ruling. If you have received a private ruling in respect of your arrangement, you can rely on that private ruling. A private ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the private ruling is later found to be incorrect. However, a private ruling only applies to the particular entity identified and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the private ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the ITAA 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 4: Penalties and charges can apply to employers that fail to comply with their PAYGW obligations under Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA), and their superannuation obligations under the Superannuation Guarantee (Administration) Act 1992. Note 5: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 6: In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. Note 7: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PS LA 2007/7 and PS LA 2007/24. Note 8: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings.",,,,,TR 2001/7 | TR 2001/8 | TR 2003/6 | TR 2003/10 | IT 2121 | IT 2330 | IT 2639 | PS LA 2008/15 | PS LA 2007/7 | PS LA 2007/24 | PS LA 2008/6 | Part IVA | Section 167 | Section 6-5 | Section 8-1 | Part 2-42 | Division 290 | Section 30,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20112/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers | Private Groups and High Wealth Individuals
TA 2011/3,"Arrangements involving holiday travel claimed as a work related, investment or self-education expense",3 May 2011,Current,,"The ATO view on this arrangement is set out in Taxation Ruling TR 98/9 . This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | Taxpayer Alerts provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO. In these latter cases, the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert. | Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers. | This Taxpayer Alert describes arrangements where a taxpayer claims a deduction for expenses incurred in relation to various educational courses and seminars where the expenses have insufficient connection with the taxpayer's current income-earning activities and are private or domestic in nature. These expenses include the costs for domestic or overseas travel on a holiday activity or to a holiday destination. | Self-education expenses and work related travel expenses are deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) where they have a relevant or sufficient connection to the taxpayer's income-earning activities. | Where an activity is undertaken both for income-earning purposes and for private purposes, it is necessary to apportion the expenses between the purposes. | Expenses allowable under section 8-1 of the ITAA 1997 may also fall within the definition of 'expenses of self-education' in section 82A of the Income Tax Assessment Act 1936 (ITAA 1936). Section 82A of the ITAA 1936 limits the amount of expenses otherwise allowable under section 8-1 of the ITAA 1997 to amounts over the $250 threshold. | The alert applies to arrangements with features substantially equivalent to the following: 1. An Australian resident taxpayer (the 'taxpayer') undertakes domestic or overseas travel and as part of the travel participates in an educational course, seminar or conference ('educational activities') arranged by an organiser (the 'organiser'). 2. The educational activities may include, but are not limited to, the taxpayer: a.) Purchasing a self-study training program (for example CD, DVD and/or written publications) which may be undertaken at a holiday destination of the taxpayer's choice; b.) Undertaking a self-study training program and/or attending a seminar on board a cruise ship; or c.) Undertaking an educational activity such as a wealth creation seminar whilst travelling. 3. The promotional materials of the organiser may include one or more of the following features to encourage the claiming of deductions: a.) the self-study training program can be undertaken at a location and time of the taxpayer's choice; b.) the program can be undertaken individually or in a group; c.) there is a minimum requirement of self-study per day over the course of the program; d.) a period of time is available to spend at the taxpayer's own leisure; e.) in some instances, no agenda is published for a seminar and the content of presentations is tailored to the audience's familiarity of the topics; f.) taxpayers may also be required to conduct an exam at the end of the course and/or complete a feedback form to acknowledge completion; or g.) taxpayers are required to record time spent in a diary, so that 100% of the educational fees and associated travel/accommodation can be claimed as a deduction. 4. In some instances, the educational activity may be targeted towards members of a particular profession, occupation or field of employment. 5. The organiser may allege that they have received endorsement from the ATO supporting the ability to claim deductions for the costs incurred in participating in an educational activity under these types of arrangements. 6. The taxpayer does not objectively apportion their expenses to the extent they are not connected to their income-earning activities and are private or domestic in nature. This may result in the taxpayer claiming as a deduction the full amount of their education/conference expenses and associated travel costs. | 1. An Australian resident taxpayer (the 'taxpayer') undertakes domestic or overseas travel and as part of the travel participates in an educational course, seminar or conference ('educational activities') arranged by an organiser (the 'organiser'). 2. The educational activities may include, but are not limited to, the taxpayer: a.) Purchasing a self-study training program (for example CD, DVD and/or written publications) which may be undertaken at a holiday destination of the taxpayer's choice; b.) Undertaking a self-study training program and/or attending a seminar on board a cruise ship; or c.) Undertaking an educational activity such as a wealth creation seminar whilst travelling. 3. The promotional materials of the organiser may include one or more of the following features to encourage the claiming of deductions: a.) the self-study training program can be undertaken at a location and time of the taxpayer's choice; b.) the program can be undertaken individually or in a group; c.) there is a minimum requirement of self-study per day over the course of the program; d.) a period of time is available to spend at the taxpayer's own leisure; e.) in some instances, no agenda is published for a seminar and the content of presentations is tailored to the audience's familiarity of the topics; f.) taxpayers may also be required to conduct an exam at the end of the course and/or complete a feedback form to acknowledge completion; or g.) taxpayers are required to record time spent in a diary, so that 100% of the educational fees and associated travel/accommodation can be claimed as a deduction. 4. In some instances, the educational activity may be targeted towards members of a particular profession, occupation or field of employment. 5. The organiser may allege that they have received endorsement from the ATO supporting the ability to claim deductions for the costs incurred in participating in an educational activity under these types of arrangements. 6. The taxpayer does not objectively apportion their expenses to the extent they are not connected to their income-earning activities and are private or domestic in nature. This may result in the taxpayer claiming as a deduction the full amount of their education/conference expenses and associated travel costs. | a.) Purchasing a self-study training program (for example CD, DVD and/or written publications) which may be undertaken at a holiday destination of the taxpayer's choice; b.) Undertaking a self-study training program and/or attending a seminar on board a cruise ship; or c.) Undertaking an educational activity such as a wealth creation seminar whilst travelling. | a.) the self-study training program can be undertaken at a location and time of the taxpayer's choice; b.) the program can be undertaken individually or in a group; c.) there is a minimum requirement of self-study per day over the course of the program; d.) a period of time is available to spend at the taxpayer's own leisure; e.) in some instances, no agenda is published for a seminar and the content of presentations is tailored to the audience's familiarity of the topics; f.) taxpayers may also be required to conduct an exam at the end of the course and/or complete a feedback form to acknowledge completion; or g.) taxpayers are required to record time spent in a diary, so that 100% of the educational fees and associated travel/accommodation can be claimed as a deduction. | The ATO considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether: (a) the expenses incurred by the taxpayer are deductible under section 8-1 of ITAA 1997, and the extent to which they are deductible; (b) any part of the self-education expenses are limited by section 82A of ITAA 1936; and (c) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Tax Administration Act 1953 . | (a) the expenses incurred by the taxpayer are deductible under section 8-1 of ITAA 1997, and the extent to which they are deductible; (b) any part of the self-education expenses are limited by section 82A of ITAA 1936; and (c) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Tax Administration Act 1953 . | The ATO is currently reviewing these arrangements. | The ATO view regarding deductibility of self-education expenses is contained in Taxation Ruling TR 98/9 . Note 1: You may have already sought advice from the ATO in respect of your arrangement by way of a private ruling or class ruling. If you have received a private ruling or class ruling in respect of your arrangement, you can rely on that ruling. A private or class ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the ruling is later found to be incorrect. However, a private ruling only applies to a particular entity identified and the particular scheme described in the ruling. Similarly, a class ruling only applies to a specified class of entities and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity . Note 2: Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062 . Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed . Note 4: A registered tax agent may have their registration cancelled or suspended by the Tax Practitioners Board under the Tax Agent Services Act 2009 for breach of a condition of registration including being penalised for being a promoter of a tax exploitation scheme . Note 5: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6 .",,,,,TR 98/9 | PS LA 2008/15 | Section 8-1 | Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20113/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers | Promoter Participant Compliance
TA 2011/4,Deductibility of unpaid directors fees,2 June 2011,Current,,"Taxpayer Alerts provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO. In these latter cases, the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert. | Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers. | This Taxpayer Alert describes an arrangement where a company claims a deduction for directors fees notwithstanding that there is no payment to the directors of these fees in the current income year and/or subsequent income year(s). There is no intention to ever make this payment in full or at all even though the company passed a resolution that directors fees of a specific amount be paid at some future time. | The ATO is not concerned with normal business practice where a company passes a resolution that creates an unconditional commitment to pay directors fees and the payment occurs within a reasonable time period which could extend outside the immediate year of income. | Taxation Ruling IT 2534 Income tax: taxation treatment of directors fees, bonuses, etc., provides the ATO view for the taxation treatment of directors fees. The ruling states that to qualify for a deduction a company must, before the end of the year of income, become definitively committed to the payment of a quantified amount of directors fees, bonuses or other such payments. | The ruling also states that income such as directors fees are considered to have been derived for income tax purposes at the time the income is paid or otherwise made available to the director although it is acknowledged that amounts may not be paid until some months into the following income year. | The alert applies to arrangements with features substantially equivalent to the following: 1. Prior to 30 June of an income year, a directors meeting of a private company is held to consider the remuneration of the directors for that year. 2. The meeting resolves that directors fees of a specific amount be made payable to the directors of the company and the minutes reflect that the company is immediately, definitively and irrevocably committed to the liability in respect of these directors fees. 3. The meeting qualifies this resolution by further resolving that the directors fees be paid at a time to be determined having regard to future cash flow and that amounts be held in a directors fees payable account until payment is or can be made. 4. The company claims a deduction for the directors fees in the year of resolution but makes no payment to directors. 5. The directors do not include any amount in their assessable income until such time as the company pays an amount to them. 6. In the following year, the company makes nil or minimal payments to directors despite the company declaring profits and, in some instances, making loans to the director(s). 7. This practice may continue in later income years. | 1. Prior to 30 June of an income year, a directors meeting of a private company is held to consider the remuneration of the directors for that year. 2. The meeting resolves that directors fees of a specific amount be made payable to the directors of the company and the minutes reflect that the company is immediately, definitively and irrevocably committed to the liability in respect of these directors fees. 3. The meeting qualifies this resolution by further resolving that the directors fees be paid at a time to be determined having regard to future cash flow and that amounts be held in a directors fees payable account until payment is or can be made. 4. The company claims a deduction for the directors fees in the year of resolution but makes no payment to directors. 5. The directors do not include any amount in their assessable income until such time as the company pays an amount to them. 6. In the following year, the company makes nil or minimal payments to directors despite the company declaring profits and, in some instances, making loans to the director(s). 7. This practice may continue in later income years. | The ATO considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether: (a) such an arrangement or certain steps within it may be a sham; (b) a liability to pay directors fees is 'incurred' for the purposes of section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) when the resolution for the directors fees is subject to satisfaction of a condition precedent; (c) the directors fees are never paid and included as assessable income under section 6-5 of the ITAA 1997; (d) the anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement or to any part of it; and (e) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | (a) such an arrangement or certain steps within it may be a sham; (b) a liability to pay directors fees is 'incurred' for the purposes of section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) when the resolution for the directors fees is subject to satisfaction of a condition precedent; (c) the directors fees are never paid and included as assessable income under section 6-5 of the ITAA 1997; (d) the anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement or to any part of it; and (e) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The ATO is currently reviewing these arrangements. | The ATO view regarding taxation treatment of directors fees, bonuses is contained in Taxation Ruling IT 2534. Note 1: If you have received a private ruling in respect of your arrangement, you can rely on that private ruling. A private ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the private ruling is later found to be incorrect. However, a private ruling only applies to the particular entity identified and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the private ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the ITAA 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062 . Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 1800 060 062 . Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 5: A registered tax agent may have their registration cancelled or suspended by the Tax Practitioners Board under the Tax Agent Services Act 2009 for breach of a condition of registration including being penalised for being a promoter of a tax exploitation scheme. Note 6: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6.",,,,,IT 2534 | PS LA 2008/15 | Part IVA | Section 6-5 | Section 8-1 | Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20114/NAT/ATO/00001,Updated ATO tip-off hotline number | Promoter Participant Compliance
TA 2011/5,FBT Avoidance through an arrangement where an employer repays an employee's loan from a purported employee share trust,27 June 2011,Current,,"This Taxpayer Alert describes an arrangement where an employer establishes an employee benefit arrangement for employees to acquire share units in a purported employee share trust (EST). The acquisition of share units by employees is funded by way of a loan from the trustee and that loan is repaid by the employer paying amounts which have been salary sacrificed by the employees. That is the employees have agreed to forego part of their total remuneration that they would otherwise have expected to receive as salary or wages (salary sacrificed amounts). | The arrangement may be an attempt by the employer to provide a benefit to employees without regard to the application of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) as the taxable value of benefits provided is not included as part of the employer's fringe benefits tax (FBT) liability. | An employee can enter into a salary sacrifice arrangement (SSA) with their employer, to forego part of their future remuneration that they would otherwise expect to receive as salary or wages, in return for a benefit of similar value. The ATO view on what constitutes an effective SSA is explained in Taxation Ruling TR 2001/10. | FBT is payable by an employer in respect of fringe benefits provided by an employer (or their associate) to employees (or their associates). A fringe benefit can include an expense payment fringe benefit, for instance, where an employer pays a liability owed by an employee to a third party. However FBT does not apply to money or property acquired by a valid EST, as the employee is taxed on their employee share scheme interests in the EST pursuant to Division 83A and Subdivision 130-D of the Income Tax Assessment Act 1997 (ITAA 1997). | ATO Interpretive Decision ATO ID 2010/108, sets out the Commissioner's view on what constitutes a valid EST within the meaning of subsection 130-85(4) of the ITAA 1997. | The alert applies to arrangements with features substantially equivalent to the following: 1. An advisory firm promotes, recommends or offers an arrangement to an employer intending to provide an effective after tax benefit to employees. 2. The employer makes contact with the advisory firm to implement this arrangement. 3. The employer establishes an employee benefit arrangement which operates through a trust. 4. The employer makes a loan contribution to the trust. 5. The trustee of the trust uses the funds to provide an interest free loan to one or more employees. 6. The employees use the funds borrowed from the trustee of the trust to acquire units in the trust. 7. The trustee invests in the employer by acquiring shares and notionally allocates those shares to the units. 8. The employees enter into an effective SSA with the employer. 9. The employer provides a benefit to employees, by paying salary sacrificed amounts to the trustee as repayments of the employee loans. 10. The employee loan is reduced by the amount of the repayment. 11. The trustee makes loan repayments to the employer. 12. The employer does not appear to include the taxable value of the benefit provided in its FBT liability. | 1. An advisory firm promotes, recommends or offers an arrangement to an employer intending to provide an effective after tax benefit to employees. 2. The employer makes contact with the advisory firm to implement this arrangement. 3. The employer establishes an employee benefit arrangement which operates through a trust. 4. The employer makes a loan contribution to the trust. 5. The trustee of the trust uses the funds to provide an interest free loan to one or more employees. 6. The employees use the funds borrowed from the trustee of the trust to acquire units in the trust. 7. The trustee invests in the employer by acquiring shares and notionally allocates those shares to the units. 8. The employees enter into an effective SSA with the employer. 9. The employer provides a benefit to employees, by paying salary sacrificed amounts to the trustee as repayments of the employee loans. 10. The employee loan is reduced by the amount of the repayment. 11. The trustee makes loan repayments to the employer. 12. The employer does not appear to include the taxable value of the benefit provided in its FBT liability. | The basic structure of the arrangement can be summarised diagrammatically as follows: | The ATO considers that an arrangement of the type described above gives rise to taxation issues that include whether: (a) the trust can be a valid EST for the purposes of the ITAA 1997 where it engages in activities which are not merely incidental to the activities set out in the definition of EST in subsection 130-85(4) of the ITAA 1997 (see ATO ID 2010/108), (b) an effective salary sacrifice arrangement has been entered into in accordance with TR 2001/10, (c) repayments made by the employer to the trustee, are an expense payment fringe benefit under section 20 of the FBTAA, (d) section 24 of the FBTAA applies to reduce the taxable value to nil under the otherwise deductible rule, (e) the employer is required to include the taxable value of an expense payment fringe benefit in their fringe benefits taxable amount for the purpose of determining the employer's fringe benefits tax liability under section 66 of the FBTAA, (f) the anti-avoidance provision in section 67 of the FBTAA may apply to the arrangement, and (g) any entity, including the advisory firms involved in promoting, recommending or offering the arrangement, may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Tax Administration Act 1953 . | (a) the trust can be a valid EST for the purposes of the ITAA 1997 where it engages in activities which are not merely incidental to the activities set out in the definition of EST in subsection 130-85(4) of the ITAA 1997 (see ATO ID 2010/108), (b) an effective salary sacrifice arrangement has been entered into in accordance with TR 2001/10, (c) repayments made by the employer to the trustee, are an expense payment fringe benefit under section 20 of the FBTAA, (d) section 24 of the FBTAA applies to reduce the taxable value to nil under the otherwise deductible rule, (e) the employer is required to include the taxable value of an expense payment fringe benefit in their fringe benefits taxable amount for the purpose of determining the employer's fringe benefits tax liability under section 66 of the FBTAA, (f) the anti-avoidance provision in section 67 of the FBTAA may apply to the arrangement, and (g) any entity, including the advisory firms involved in promoting, recommending or offering the arrangement, may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Tax Administration Act 1953 . | The ATO is currently reviewing these arrangements. Note the ATO has issued ATO ID 2011/54 in respect of Expense payment fringe benefit: employee loan from a trust repaid by employer . Note 1: You may have already sought advice from the Tax Office in respect of your arrangement by way of a private ruling. If you have received a private ruling in respect of your arrangement, you can rely on that private ruling. A private ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the private ruling is later found to be incorrect. However, a private ruling only applies to the particular entity identified and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the private ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: Base penalties of up to 75 % of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953 . The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 4: A registered tax agent may have their registration cancelled or suspended by the Tax Practitioners Board under the Tax Agent Services Act 2009 for breach of a condition of registration including being penalised for being a promoter of a tax exploitation scheme. Note 5: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. (Paragraphs 74(3)(a) to (c) of the FBTAA must also be satisfied for the Commissioner to amend an FBT assessment). See Law Administration Practice Statement PSLA 2008/6.",,,,,TR 2001/10 | PS LA 2008/6 | PS LA 2008/15 | ATO ID 2011/54 | ATO ID 2010/108 | 20 | 24 | 66 | 67 | 74(3)(a) | 74(3)(b) | 74(3)(c) | Division 290 of Schedule 1 | Division 83A | Subdivision 130-D | 130-85(4),False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20115/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers | Promoter Participant Compliance
TA 2010/1,GST - interposing an associated 'financial supply facilitator' to enhance claims for reduced input tax credits for expenses incurred in the course of a company takeover,18 February 2010,Current,,"This Taxpayer Alert describes an arrangement that attempts to create or increase an entitlement to a reduced input tax credit (RITC) for an entity that makes a financial supply of acquiring shares in a company as part of a takeover. | This Alert applies to arrangements with features that are substantially equivalent to the following: 1. A special purpose vehicle entity (SPV) is established for the purpose of acquiring shares in a company as part of a takeover. 2. Another entity within the broader economic group, that is an associate of the SPV but not a member of the same GST group, is designated to provide ""arranging services"" for the SPV's acquisition of shares. (Arranging services is a reduced credit acquisition which entitles the recipient to an RITC). 3. Under an ""arranging services"" agreement with the SPV, the associate undertakes to acquire and pay for, amongst other things, tax, legal, public relations and investment banking services supplied by third parties. These services are performed exclusively for the purpose of the SPV's takeover and there is insufficient commercial rationale for the associate's involvement in the supply of these services. 4. The associate claims input tax credits on its purported acquisitions of those services. 5. The associate then makes a single 'bundled' supply of 'arranging services' to the SPV, calculating its fee by reference to the costs it incurred in paying the service providers. 6. The SPV claims to have made a reduced credit acquisition on the basis that its interposed associate is a financial supply facilitator that has arranged the SPV's acquisition of the shares. 7. The SPV claims an RITC on its acquisition from its associate. The SPV would not have been entitled to an RITC on some or all of the acquisitions, such as tax, legal and public relations services, had it acquired those services directly from the service providers (i.e. without the interposition of the associate to provide the 'bundled' supply of 'arranging services'). 8. The basic features of this arrangement can be summarised diagrammatically as follows: | 1. A special purpose vehicle entity (SPV) is established for the purpose of acquiring shares in a company as part of a takeover. 2. Another entity within the broader economic group, that is an associate of the SPV but not a member of the same GST group, is designated to provide ""arranging services"" for the SPV's acquisition of shares. (Arranging services is a reduced credit acquisition which entitles the recipient to an RITC). 3. Under an ""arranging services"" agreement with the SPV, the associate undertakes to acquire and pay for, amongst other things, tax, legal, public relations and investment banking services supplied by third parties. These services are performed exclusively for the purpose of the SPV's takeover and there is insufficient commercial rationale for the associate's involvement in the supply of these services. 4. The associate claims input tax credits on its purported acquisitions of those services. 5. The associate then makes a single 'bundled' supply of 'arranging services' to the SPV, calculating its fee by reference to the costs it incurred in paying the service providers. 6. The SPV claims to have made a reduced credit acquisition on the basis that its interposed associate is a financial supply facilitator that has arranged the SPV's acquisition of the shares. 7. The SPV claims an RITC on its acquisition from its associate. The SPV would not have been entitled to an RITC on some or all of the acquisitions, such as tax, legal and public relations services, had it acquired those services directly from the service providers (i.e. without the interposition of the associate to provide the 'bundled' supply of 'arranging services'). 8. The basic features of this arrangement can be summarised diagrammatically as follows: | The Tax Office considers that an arrangement of the type described above gives rise to taxation issues that include whether: a. the associate may be entitled to input tax credits under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act'); b. the associate may be a financial supply facilitator for the purposes of item 9 of the table in sub-regulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999; and if so, to what extent the services provided by the associate to the SPV may be covered by that item; c. the anti-avoidance provisions of Division 165 of the GST Act may apply to the arrangement or any part of it; and d. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | a. the associate may be entitled to input tax credits under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act'); b. the associate may be a financial supply facilitator for the purposes of item 9 of the table in sub-regulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999; and if so, to what extent the services provided by the associate to the SPV may be covered by that item; c. the anti-avoidance provisions of Division 165 of the GST Act may apply to the arrangement or any part of it; and d. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | The Tax Office is currently reviewing these arrangements. Note 1: If you have received a private ruling in respect of your arrangement, please check whether the application of Division 165 of the GST Act is considered in that ruling. You may not have asked for us to rule on the application of Division 165 to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Division 165 applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 2: Base penalties of up to 50% of the tax avoided can apply where Division 165 is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if you make a voluntary disclosure to the Tax Office. If you have any information about the current arrangement or about people or companies who may be promoting these or similar arrangements, please call us on 1800 060 062. Note 3: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed.",,,,,GSTR 2002/2 | GSTR 2004/1 | GSTR 2006/9 | PS LA 2008/15 | Division 11 | 40-5 | Division 70 | Division 165 | Subdivision 40-A | 70-5.02 | Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20101/NAT/ATO/00001,Updated ATO tip-off hotline number
TA 2010/3,Non market value acquisition of shares or share options by a self-managed superannuation fund,30 June 2010,Current,,"ATO fact sheet Employee share scheme options and acquisition of shares by self-managed superannuation funds provides guidance to self-managed superannuation fund trustees on issues raised in this Taxpayer Alert. | This Taxpayer Alert describes an arrangement where an individual nominates their self-managed superannuation fund (SMSF) as the acquirer of shares or share options under an employee share scheme. The trustee of the SMSF pays no consideration or less than market value consideration for the shares or the share options. This arrangement may give rise to issues concerning the recognition of any superannuation contributions and the application of the excess contributions tax provisions. The SMSF may have issues under the superannuation and income tax laws. The individual may also not recognise the relevant income tax consequences resulting from such transactions. | Under the superannuation law trustees of SMSFs are prohibited from intentionally acquiring assets from a related party of the fund except in limited circumstances. Contravention of this provision may result in the SMSF becoming a non-complying superannuation fund for tax purposes, i.e. subject to 45% tax rates on its income (and assets other than undeducted contributions in the year that the fund becomes non-complying). The trustee of the fund may be guilty of an offence if an asset other than of the limited type is intentionally acquired from a related party or an asset of the limited type is acquired from a related party at a value other than market value as accepted by the law. | From 1 July 2007 the concessional taxation of superannuation benefits is restricted by placing a limit on the amount that can be contributed in respect of a superannuation fund member. There are two caps in operation. From 1 July 2009, the annual concessional contributions cap is $25,000 (indexed) for those aged under 50 and $50,000 for those aged 50 and over for the transition period ending 30 June 2012. | Non-concessional contributions are subject to a cap of $150,000 per annum. (Individuals under 65 years of age may 'bring forward' two years of future entitlements of non-concessional contributions giving them a cap of $450,000 over three years.) | A contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general. This may include a transfer of shares in public listed companies. Where contributions exceed the caps specified in the legislation, the individual will be liable to excess contributions tax. | The tax law also contains specific rules for the taxation of shares, stapled securities and rights acquired by an employee (or their associate) at a discount and in relation to employment. These rules also apply to shares, stapled securities and rights acquired by taxpayers (or their associates) in relation to services, where those services are provided under arrangements similar to employment. Recent changes to the law have modified these rules. The newly enacted Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) now applies to shares, stapled securities and rights acquired on or after 1 July 2009 and newly enacted Transitional Provisions apply to certain shares, stapled securities and rights acquired prior to 1 July 2009. | This Alert applies to arrangements with features that are substantially equivalent to the following: 1. A public or private company ('the company') establishes an employee share scheme ('ESS'). 2. The company invites any or all of the following parties to participate in the ESS: a. employees; b. directors; and/or c. independent contractors who are in relationships similar to employment. 3. The ESS allows the individual or their associates (including the trustee of an SMSF) to acquire shares or rights to acquire shares ('share options') in the company. 4. The shares or share options are provided in relation to employment or services provided similar to employment for no consideration or less than market value consideration. 5. The individual ('the taxpayer') nominates the trustee of their SMSF ('the trustee') as the acquirer of the shares or the share options. 6. The trustee pays no consideration for the shares or share options, or the consideration given is less than market value. 7. The trustee of the SMSF may not recognise and record the market value of the shares or the share options. 8. The taxpayer may not appropriately account for any income tax liability arising from the above transactions. | 1. A public or private company ('the company') establishes an employee share scheme ('ESS'). 2. The company invites any or all of the following parties to participate in the ESS: a. employees; b. directors; and/or c. independent contractors who are in relationships similar to employment. 3. The ESS allows the individual or their associates (including the trustee of an SMSF) to acquire shares or rights to acquire shares ('share options') in the company. 4. The shares or share options are provided in relation to employment or services provided similar to employment for no consideration or less than market value consideration. 5. The individual ('the taxpayer') nominates the trustee of their SMSF ('the trustee') as the acquirer of the shares or the share options. 6. The trustee pays no consideration for the shares or share options, or the consideration given is less than market value. 7. The trustee of the SMSF may not recognise and record the market value of the shares or the share options. 8. The taxpayer may not appropriately account for any income tax liability arising from the above transactions. | a. employees; b. directors; and/or c. independent contractors who are in relationships similar to employment. | Taxation issues | The ATO considers that arrangements of this type give rise to the following taxation issues, being whether: (a) the individual taxpayer has properly accounted for the tax liability arising under the employee share scheme provisions in the former Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936), Division 83A of the ITAA 1997 or any other relevant provisions of the ITAA 1936, ITAA 1997 or the Income Tax (Transitional Provisions) Act 1997; (b) the share options and company shares acquired by an SMSF are in fact superannuation contributions and reported for excess contributions tax under Division 292 of the ITAA 1997 at their market value; (c) the dividend income derived by the SMSF under the arrangement is 'non-arm's length income' for the purposes of section 295-550 of the ITAA 1997 and therefore is subject to a higher rate of tax; and (d) the correct cost base is used by the SMSF in calculating any capital gains tax liability upon the disposal of the company shares. | (a) the individual taxpayer has properly accounted for the tax liability arising under the employee share scheme provisions in the former Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936), Division 83A of the ITAA 1997 or any other relevant provisions of the ITAA 1936, ITAA 1997 or the Income Tax (Transitional Provisions) Act 1997; (b) the share options and company shares acquired by an SMSF are in fact superannuation contributions and reported for excess contributions tax under Division 292 of the ITAA 1997 at their market value; (c) the dividend income derived by the SMSF under the arrangement is 'non-arm's length income' for the purposes of section 295-550 of the ITAA 1997 and therefore is subject to a higher rate of tax; and (d) the correct cost base is used by the SMSF in calculating any capital gains tax liability upon the disposal of the company shares. | Superannuation regulatory issues | The ATO considers that arrangements of this type also give rise to the following issues relevant to the application of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and its Regulations, being whether: (e) in some circumstances the trustee may have breached s66 of the SIS Act which prohibits the trustee from intentionally acquiring assets from a related party of the fund except as permitted by subsections 66(2) and 66(2A). | (e) in some circumstances the trustee may have breached s66 of the SIS Act which prohibits the trustee from intentionally acquiring assets from a related party of the fund except as permitted by subsections 66(2) and 66(2A). | The ATO is currently examining these arrangements. | Our view about what is a contribution is contained in Taxation Ruling TR 2010/1 Income tax: superannuation contributions. We have also provided guidance to SMSF trustees on the issue of acquisition of an asset from a related party in Self Managed Superannuation Funds Ruling SMSFR 2010/1. Note 1: Base penalties of up to 75% of the tax avoided can apply where someone makes a false or misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 13 10 20. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call us on 13 72 86 (and then key 3 and 4 for speed connection). Note 2: An administrative penalty of 20 penalty units may apply to a trustee of a superannuation fund who makes a false or misleading statement to the Commissioner. Note 3: A superannuation fund trustee who contravenes subsection 66(1) or (3) of the SIS Act is guilty of an offence punishable by imprisonment for a term not exceeding one year.",,,,,TR 2010/1 | SMSFR 2010/1 | Superannuation Industry (Supervision) Act 1993 | Superannuation Industry (Supervision) Regulations 1994 | Income Tax Assessment Act 1936 | Income Tax Assessment Act 1997 | Income Tax (Transitional Provisions) Act 1997 | Taxation Administration Act 1953,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20103/NAT/ATO/00001,
TA 2010/4,Australian resident entities using promoted tax schemes in Samoa to claim purported deductions and conceal income or assets,14 October 2010,Current,,"Where a Taxpayer Alert provides guidance that a particular arrangement is or will be ineffective and that guidance is subsequently found to be incorrect and the taxpayer had relied on that guidance, the taxpayer is protected from paying a shortfall penalty and any interest charge that would otherwise be payable under the law. | This Taxpayer Alert describes an arrangement where Australian resident entities use a promoted tax avoidance or evasion scheme in Samoa and/or other low tax jurisdictions to artificially create deductions for purported expenses and/or to establish structures to conceal income or assets. | The ATO is investigating arrangements covered by this Alert as part of the whole of government Project Wickenby. | This Alert applies to an arrangement with features substantially equivalent to the following: 1. An Australian resident taxpayer (the taxpayer) enters into an arrangement with a tax scheme promoter involving the use of offshore entities and structures in Samoa or other low tax jurisdictions. The arrangement involves the transfer of funds offshore as artificial expenses for services purportedly provided by the promoter or an associated offshore entity. 2. This arrangement may be used for two purposes: a. To generate deductions: i. The taxpayer claims a deduction (the initial deduction) for the expenditure that has purportedly been incurred. ii. The promoter or an associate subsequently returns the funds to the taxpayer through the use of purported loan arrangements or the use of offshore debit or credit cards. iii. The taxpayer may seek further deductions in respect of interest on the purported loan used to effectively repatriate the funds. Frequently, the payment of purported interest is returned to the taxpayer, minus a small fee, as a further advance on the loan. This has the effect of increasing the loan balance and the amount of deductions in respect of purported interest over time. b. To conceal receipt of income or ownership of assets i. An offshore entity may also be used to enable the taxpayer to hold assets offshore, while concealing the beneficial ownership of those assets and the income that may be generated from those assets. ii. In some cases, the offshore entity may generate profits or gains offshore (for example by offshore passive investments) and/or in Australia (for example by trading in shares on the Australian Stock Exchange). These profits or gains are returned to the offshore entity or entities in Samoa or another low tax jurisdiction, and then transferred to another entity or entities in Samoa connected to the promoter. iii. These funds may be held offshore indefinitely, transferred to the taxpayer through the use of purported loan arrangements, or accessed through the use of debit or credit cards. | 1. An Australian resident taxpayer (the taxpayer) enters into an arrangement with a tax scheme promoter involving the use of offshore entities and structures in Samoa or other low tax jurisdictions. The arrangement involves the transfer of funds offshore as artificial expenses for services purportedly provided by the promoter or an associated offshore entity. 2. This arrangement may be used for two purposes: a. To generate deductions: i. The taxpayer claims a deduction (the initial deduction) for the expenditure that has purportedly been incurred. ii. The promoter or an associate subsequently returns the funds to the taxpayer through the use of purported loan arrangements or the use of offshore debit or credit cards. iii. The taxpayer may seek further deductions in respect of interest on the purported loan used to effectively repatriate the funds. Frequently, the payment of purported interest is returned to the taxpayer, minus a small fee, as a further advance on the loan. This has the effect of increasing the loan balance and the amount of deductions in respect of purported interest over time. b. To conceal receipt of income or ownership of assets i. An offshore entity may also be used to enable the taxpayer to hold assets offshore, while concealing the beneficial ownership of those assets and the income that may be generated from those assets. ii. In some cases, the offshore entity may generate profits or gains offshore (for example by offshore passive investments) and/or in Australia (for example by trading in shares on the Australian Stock Exchange). These profits or gains are returned to the offshore entity or entities in Samoa or another low tax jurisdiction, and then transferred to another entity or entities in Samoa connected to the promoter. iii. These funds may be held offshore indefinitely, transferred to the taxpayer through the use of purported loan arrangements, or accessed through the use of debit or credit cards. | a. To generate deductions: i. The taxpayer claims a deduction (the initial deduction) for the expenditure that has purportedly been incurred. ii. The promoter or an associate subsequently returns the funds to the taxpayer through the use of purported loan arrangements or the use of offshore debit or credit cards. iii. The taxpayer may seek further deductions in respect of interest on the purported loan used to effectively repatriate the funds. Frequently, the payment of purported interest is returned to the taxpayer, minus a small fee, as a further advance on the loan. This has the effect of increasing the loan balance and the amount of deductions in respect of purported interest over time. b. To conceal receipt of income or ownership of assets i. An offshore entity may also be used to enable the taxpayer to hold assets offshore, while concealing the beneficial ownership of those assets and the income that may be generated from those assets. ii. In some cases, the offshore entity may generate profits or gains offshore (for example by offshore passive investments) and/or in Australia (for example by trading in shares on the Australian Stock Exchange). These profits or gains are returned to the offshore entity or entities in Samoa or another low tax jurisdiction, and then transferred to another entity or entities in Samoa connected to the promoter. iii. These funds may be held offshore indefinitely, transferred to the taxpayer through the use of purported loan arrangements, or accessed through the use of debit or credit cards. | i. The taxpayer claims a deduction (the initial deduction) for the expenditure that has purportedly been incurred. ii. The promoter or an associate subsequently returns the funds to the taxpayer through the use of purported loan arrangements or the use of offshore debit or credit cards. iii. The taxpayer may seek further deductions in respect of interest on the purported loan used to effectively repatriate the funds. Frequently, the payment of purported interest is returned to the taxpayer, minus a small fee, as a further advance on the loan. This has the effect of increasing the loan balance and the amount of deductions in respect of purported interest over time. | i. An offshore entity may also be used to enable the taxpayer to hold assets offshore, while concealing the beneficial ownership of those assets and the income that may be generated from those assets. ii. In some cases, the offshore entity may generate profits or gains offshore (for example by offshore passive investments) and/or in Australia (for example by trading in shares on the Australian Stock Exchange). These profits or gains are returned to the offshore entity or entities in Samoa or another low tax jurisdiction, and then transferred to another entity or entities in Samoa connected to the promoter. iii. These funds may be held offshore indefinitely, transferred to the taxpayer through the use of purported loan arrangements, or accessed through the use of debit or credit cards. | The ATO considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether : (a) all or any part of the arrangement (such as the purported expenses or loans) may constitute a sham at general law; (b) any entity within the structure, the promoter or other persons involved with the operation of the structure, its management and administration may be acting as: (i) agent for the taxpayer as principal in relation to the activities of the structure; or (ii) trustee (whether under an express, constructive, implied or resulting trust) for the taxpayer as beneficiary in relation to the activities of the structure; (c) any entity within the structure may be a resident of Australia under subsection 6(1) of the ITAA 1936; (d) the amounts received by the taxpayer or an associate may represent assessable income; (e) the amounts received under the alleged 'loans' may constitute dividends for the purposes of section 44 of the ITAA 1936; (f) the amounts received under the alleged 'loans' may constitute deemed dividends for the purposes of Division 7A of the ITAA 1936; (g) the income from the structure may be assessable to the taxpayer and their associates under the trust income provisions in Division 6 of the ITAA 1936; (h) the income of the structure may be attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; (i) offshore entities may be assessed as Australian residents under section 6-5 of the ITAA 1997 if the offshore entity is carrying on a business of 'share trading'; (j) a deduction or reduced deduction may be allowable to the taxpayer under the provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997); (k) any of the transactions may be subject to the transfer pricing provisions in Division 13 of Part III of the ITAA 1936; (l) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: (i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and (ii) it appears that the dominant purpose of entering into the arrangement is to obtain one or more tax benefits; (m) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purpose of Division 290 of Schedule 1 of the Tax Administration Act 1953 ; and (n) any taxation statements made in relation to the arrangement may be false or misleading; (o) any criminal offences may have been committed regarding the arrangement. | (a) all or any part of the arrangement (such as the purported expenses or loans) may constitute a sham at general law; (b) any entity within the structure, the promoter or other persons involved with the operation of the structure, its management and administration may be acting as: (i) agent for the taxpayer as principal in relation to the activities of the structure; or (ii) trustee (whether under an express, constructive, implied or resulting trust) for the taxpayer as beneficiary in relation to the activities of the structure; (c) any entity within the structure may be a resident of Australia under subsection 6(1) of the ITAA 1936; (d) the amounts received by the taxpayer or an associate may represent assessable income; (e) the amounts received under the alleged 'loans' may constitute dividends for the purposes of section 44 of the ITAA 1936; (f) the amounts received under the alleged 'loans' may constitute deemed dividends for the purposes of Division 7A of the ITAA 1936; (g) the income from the structure may be assessable to the taxpayer and their associates under the trust income provisions in Division 6 of the ITAA 1936; (h) the income of the structure may be attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; (i) offshore entities may be assessed as Australian residents under section 6-5 of the ITAA 1997 if the offshore entity is carrying on a business of 'share trading'; (j) a deduction or reduced deduction may be allowable to the taxpayer under the provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997); (k) any of the transactions may be subject to the transfer pricing provisions in Division 13 of Part III of the ITAA 1936; (l) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: (i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and (ii) it appears that the dominant purpose of entering into the arrangement is to obtain one or more tax benefits; (m) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purpose of Division 290 of Schedule 1 of the Tax Administration Act 1953 ; and (n) any taxation statements made in relation to the arrangement may be false or misleading; (o) any criminal offences may have been committed regarding the arrangement. | (i) agent for the taxpayer as principal in relation to the activities of the structure; or (ii) trustee (whether under an express, constructive, implied or resulting trust) for the taxpayer as beneficiary in relation to the activities of the structure; | The ATO has reviewed the arrangement and considers it is ineffective because some or all of the above issues apply. | Australian residents are required to declare world wide income derived directly or indirectly from all sources in or out of Australia. | Falsifying information in an attempt to inflate deductions or to disguise asset holdings or receipt of income, including through arrangements based in Samoa and other jurisdictions, in an attempt to avoid or evade these tax obligations may attract serious penalties including criminal sanctions or confiscation of criminal assets. Note 1 : Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if you make a voluntary disclosure to the ATO. If you have any information about specific people or entities involved in tax evasion arrangements please phone us on 1800 060 062 or fax 1800 804 544 . Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2 : In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where : • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings . Note 3 : Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PS LA 2007/7 and PS LA 2007/24 . Note 4 : Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed . Note 5 : The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6 . | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings .",,,,,PS LA 2008/15 | 44 | 167 | 6(1) | Division 6 | Division 6AAA | Division 7A | Part IVA | Part X | 6-5 | 8-1 | Part 3-1 | Part 3-95 | Division 290 | TA 2005/5 | TA 2005/6 | TA 2005/7 | TA 2005/8 | TA 2008/2 | TA 2008/8,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20104/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers
TA 2010/5,The use of an unrelated trust to circumvent superannuation lending restrictions,21 October 2010,Current,,"The ATO view regarding the giving of financial assistance to members or relatives of members of a self-managed superannuation fund is outlined in SMSFR 2008/1 This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | Taxpayer Alerts provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax and superannuation planning issues. Not all potential tax and superannuation planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO. In these latter cases, the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert. | Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers. | This Taxpayer Alert describes an arrangement where a self-managed superannuation fund (SMSF) invests funds in an unrelated trust. The trust then on lends the funds to an SMSF member or a relative of the member. | This arrangement attempts to circumvent the prohibition on SMSF trustees lending money or providing financial assistance to a member or a relative of the member using the resources of the fund. | Under the superannuation laws, trustees of SMSFs are prohibited from lending money or providing financial assistance to a member or a relative of the member using the resources of the fund. The provision of a loan or financial assistance through another entity may also contravene these laws. Contravention of this provision may result in the SMSF becoming a non-complying superannuation fund for tax purposes i.e. subject to 45% tax rate on the market value of assets at the start of the income year that the fund becomes non-complying less undeducted contributions. | This alert applies to arrangements with features that are substantially equivalent to the following: 1. An organiser sets up a trust ('the trust') which purports to offer fixed rate interest yielding investments to allegedly unrelated entities. 2. An SMSF invests in the trust. 3. The organiser (who may also be the trustee of the trust) or a licensee/franchisee of the organiser, sources borrowers ('the borrowers') to borrow funds from the trust. 4. The borrowers may include a member of the SMSF that invested in the trust or a relative of an SMSF member. 5. Each borrower enters into a loan agreement ('the loan') with the trust. The loan amount (or total loan amounts of all borrowers associated with the SMSF) may be comparable to the amount the SMSF invested in the trust. 6. Terms of the loan may include: a. a range of available interest rates; b. a range of interest payment terms, including flexibility in the repayment date (provided the funds are paid sometime in the future); c. security over the loan in the form of a mortgage, personal guarantee or caveat; and/or d. the use of borrowed funds for multiple purposes, including business, investment or personal use. 7. Each borrower makes interest only repayments on the loan to the trust for a substantial period of the loan. 8. The trustee of the trust pays the SMSF an interest yield on their purported investment. 9. Investment and loan fees payable under the arrangement may be considered excessive. | 1. An organiser sets up a trust ('the trust') which purports to offer fixed rate interest yielding investments to allegedly unrelated entities. 2. An SMSF invests in the trust. 3. The organiser (who may also be the trustee of the trust) or a licensee/franchisee of the organiser, sources borrowers ('the borrowers') to borrow funds from the trust. 4. The borrowers may include a member of the SMSF that invested in the trust or a relative of an SMSF member. 5. Each borrower enters into a loan agreement ('the loan') with the trust. The loan amount (or total loan amounts of all borrowers associated with the SMSF) may be comparable to the amount the SMSF invested in the trust. 6. Terms of the loan may include: a. a range of available interest rates; b. a range of interest payment terms, including flexibility in the repayment date (provided the funds are paid sometime in the future); c. security over the loan in the form of a mortgage, personal guarantee or caveat; and/or d. the use of borrowed funds for multiple purposes, including business, investment or personal use. 7. Each borrower makes interest only repayments on the loan to the trust for a substantial period of the loan. 8. The trustee of the trust pays the SMSF an interest yield on their purported investment. 9. Investment and loan fees payable under the arrangement may be considered excessive. | a. a range of available interest rates; b. a range of interest payment terms, including flexibility in the repayment date (provided the funds are paid sometime in the future); c. security over the loan in the form of a mortgage, personal guarantee or caveat; and/or d. the use of borrowed funds for multiple purposes, including business, investment or personal use. | The basic structure of the arrangement can be summarised diagrammatically as follows: | Superannuation regulatory issues | The ATO considers that arrangements of this type give rise to the following issues relevant to the application of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Superannuation Industry (Supervision) Regulations 1994, being whether : a. the sole purpose test under section 62 of the SIS Act may have been breached e.g. where a purpose of the fund investment is to obtain a present day benefit for fund members or a related party, rather than for the purpose of providing retirement benefits for the members; b. the trustee of the SMSF may have breached section 65 of the SIS Act which prohibits a trustee or an investment manager of a regulated superannuation fund from lending money or giving any other financial assistance, using the resources of the fund, to a fund member or a relative of the member; c. members of the SMSF may have illegally accessed superannuation benefits if they do not repay the loan from the trust; d. the trustee of the SMSF may have contravened section 109 of the SIS Act which requires that SMSF investments are made and maintained on an arm's length basis; e. the SMSF's investment in the trust may be an in-house asset under section 71 of the SIS Act and therefore subject to the 5% limit; and f. section 85 of the SIS Act may apply to a person undertaking an arrangement where the arrangement artificially reduces the market value ratio of the SMSF's in-house assets to avoid application of the in-house asset restrictions. | a. the sole purpose test under section 62 of the SIS Act may have been breached e.g. where a purpose of the fund investment is to obtain a present day benefit for fund members or a related party, rather than for the purpose of providing retirement benefits for the members; b. the trustee of the SMSF may have breached section 65 of the SIS Act which prohibits a trustee or an investment manager of a regulated superannuation fund from lending money or giving any other financial assistance, using the resources of the fund, to a fund member or a relative of the member; c. members of the SMSF may have illegally accessed superannuation benefits if they do not repay the loan from the trust; d. the trustee of the SMSF may have contravened section 109 of the SIS Act which requires that SMSF investments are made and maintained on an arm's length basis; e. the SMSF's investment in the trust may be an in-house asset under section 71 of the SIS Act and therefore subject to the 5% limit; and f. section 85 of the SIS Act may apply to a person undertaking an arrangement where the arrangement artificially reduces the market value ratio of the SMSF's in-house assets to avoid application of the in-house asset restrictions. | Taxation issues | The ATO considers that arrangements of this type also give rise to the following issues relevant to taxation laws, being whether : g. income derived by the SMSF may be 'non-arm's length income' for the purposes of section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore subject to a higher rate of tax; h. payment of interest above the commercial rate by the SMSF member/a relative of the member to the trust, which is subsequently paid to the SMSF as an investment yield may in fact be superannuation contributions and therefore should be reported for excess contributions tax under Division 292 of the ITAA 1997; i. any fee or commission received by the trust, licensee/franchisee and/or organiser of this arrangement may be assessable income for the relevant income year; j. the borrowing expense incurred by the borrower (SMSF member or relative of a member) may be deductible under section 8-1 or section 25-25 of the ITAA 1997, and the extent to which it is deductible; k. any investment fee purportedly incurred by the SMSF may be deductible under section 8-1 of the ITAA 1997 and the extent to which it may be so deductible; l. the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to all or part of the arrangement; and m. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | g. income derived by the SMSF may be 'non-arm's length income' for the purposes of section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore subject to a higher rate of tax; h. payment of interest above the commercial rate by the SMSF member/a relative of the member to the trust, which is subsequently paid to the SMSF as an investment yield may in fact be superannuation contributions and therefore should be reported for excess contributions tax under Division 292 of the ITAA 1997; i. any fee or commission received by the trust, licensee/franchisee and/or organiser of this arrangement may be assessable income for the relevant income year; j. the borrowing expense incurred by the borrower (SMSF member or relative of a member) may be deductible under section 8-1 or section 25-25 of the ITAA 1997, and the extent to which it is deductible; k. any investment fee purportedly incurred by the SMSF may be deductible under section 8-1 of the ITAA 1997 and the extent to which it may be so deductible; l. the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to all or part of the arrangement; and m. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The ATO is currently examining these arrangements. | We have provided guidance to SMSF trustees on the issue of giving financial assistance using the resources of a self managed superannuation fund to a member or relative of a member in Self Managed Superannuation Funds Ruling SMSFR 2008/1. Note 1: An administrative penalty of 20 penalty units may apply to a trustee who makes a false or misleading statement to the Commissioner. If you have any information about the current arrangement, phone us on 1800 060 062 . Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where someone makes a false or misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 13 10 20. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call us on 13 72 86 (and then key 3 and 4 for speed connection). Note 3: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. At the time of this publication a penalty unit is $110. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed.",,,,,SMSFR 2008/1 | PS LA 2008/15 | Section 62 | Section 65 | Section 71 | Section 85 | Section 109 | Part IVA | 8-1 | 25-25 | Division 295 | Division 290 of Schedule 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20105/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers
TA 2010/6,The use of an unrelated trust to access funds of a private company in an attempt to circumvent Division 7A,21 October 2010,Current,,"The ATO considers that the Division 7A interposed entity provisions in Subdivision E apply to arrangements of the type contemplated by TA 2010/6. Further guidance is set out in the fact sheet Division 7A - payments & loans through interposed entities | Taxpayer Alerts provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO. In these latter cases, the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert. | Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers. | This Taxpayer Alert describes an arrangement where a private company invests funds in an unrelated trust. The trust then on lends the funds to a shareholder, or an associate of a shareholder, of the private company. | This arrangement may be an attempt by the shareholder or associate to access funds of the company without due regard to the application of Division 7A of Part III (Division 7A) of the Income Tax Assessment Act 1936 (ITAA 1936). | Division 7A of ITAA 1936 is an integrity measure aimed at preventing private companies from making tax-free distributions of profits to shareholders or their associates. A private company may be taken to pay a dividend to a shareholder or their associate where it directly or indirectly makes a loan to them. | This alert applies to arrangements with features that are substantially equivalent to the following: 1. An organiser sets up a trust ('the trust') which purports to offer fixed rate interest yielding investments to allegedly unrelated entities. 2. A private company ('the company') invests in the trust. 3. The organiser (who may also be the trustee of the trust) or a licensee/franchisee of the organiser, sources borrowers ('the borrowers') to borrow funds from the trust. 4. The borrowers may include a shareholder of the company that invested in the trust (or an associate of a shareholder). 5. Each borrower enters into a loan agreement ('the loan') with the trust. The loan amount (or total loan amounts of all borrowers associated with the company) may be comparable to the amount the company invested in the trust. 6. Terms of the loan may include: (a) a range of available interest rates; (b) a range of interest payment terms, including flexibility in the repayment date (provided the funds are paid sometime in the future); (c) security over the loan in the form of a mortgage, personal guarantee or caveat; and/or (d) the use of borrowed funds for multiple purposes, including business, investment or personal use. 7. Each borrower makes interest only repayments on the loan to the trust for a substantial period of the loan. 8. The trustee of the trust pays the company an interest yield on their purported investment. 9. Investment and loan fees payable under the arrangement may be considered excessive. | 1. An organiser sets up a trust ('the trust') which purports to offer fixed rate interest yielding investments to allegedly unrelated entities. 2. A private company ('the company') invests in the trust. 3. The organiser (who may also be the trustee of the trust) or a licensee/franchisee of the organiser, sources borrowers ('the borrowers') to borrow funds from the trust. 4. The borrowers may include a shareholder of the company that invested in the trust (or an associate of a shareholder). 5. Each borrower enters into a loan agreement ('the loan') with the trust. The loan amount (or total loan amounts of all borrowers associated with the company) may be comparable to the amount the company invested in the trust. 6. Terms of the loan may include: (a) a range of available interest rates; (b) a range of interest payment terms, including flexibility in the repayment date (provided the funds are paid sometime in the future); (c) security over the loan in the form of a mortgage, personal guarantee or caveat; and/or (d) the use of borrowed funds for multiple purposes, including business, investment or personal use. 7. Each borrower makes interest only repayments on the loan to the trust for a substantial period of the loan. 8. The trustee of the trust pays the company an interest yield on their purported investment. 9. Investment and loan fees payable under the arrangement may be considered excessive. | (a) a range of available interest rates; (b) a range of interest payment terms, including flexibility in the repayment date (provided the funds are paid sometime in the future); (c) security over the loan in the form of a mortgage, personal guarantee or caveat; and/or (d) the use of borrowed funds for multiple purposes, including business, investment or personal use. | The basic structure of the arrangement can be summarised diagrammatically as follows: | The ATO considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether: a. the borrowing expense incurred by the borrower (shareholder of the private company or their associate) may be deductible under section 8-1 or section 25-25 of the Income Tax Assessment Act 1997 (ITAA 1997), and the extent to which it is deductible; b. any investment fee purportedly incurred by the company is deductible under section 8-1 of the ITAA 1997 and the extent to which it is deductible; c. any fee or commission received by the trust, licensee/franchisee and/or organiser of this arrangement should be included as assessable income for the relevant income year; d. the provisions of Division 7A of the ITAA 1936 apply to the arrangement, in particular whether the arrangement results in a loan to a shareholder or their associate by virtue of the interposed entity provisions in Subdivision E; e. the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to all or part of the arrangement; and f. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | a. the borrowing expense incurred by the borrower (shareholder of the private company or their associate) may be deductible under section 8-1 or section 25-25 of the Income Tax Assessment Act 1997 (ITAA 1997), and the extent to which it is deductible; b. any investment fee purportedly incurred by the company is deductible under section 8-1 of the ITAA 1997 and the extent to which it is deductible; c. any fee or commission received by the trust, licensee/franchisee and/or organiser of this arrangement should be included as assessable income for the relevant income year; d. the provisions of Division 7A of the ITAA 1936 apply to the arrangement, in particular whether the arrangement results in a loan to a shareholder or their associate by virtue of the interposed entity provisions in Subdivision E; e. the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to all or part of the arrangement; and f. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The ATO is currently examining these arrangements. Note 1: You may have already sought advice from the Tax Office in respect of your arrangement by way of a private ruling. If you have received a private ruling in respect of your arrangement, you can rely on that private ruling. A private ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the private ruling is later found to be incorrect. However, a private ruling only applies to the particular entity identified and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the private ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the ITAA 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where someone makes a false or misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 13 28 66. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call us on 13 72 86 (and then key 3 and 4 for speed connection). Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. At the time of this publication a penalty unit is $110. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed.",,,,,PS LA 2008/15 | Division 7A | Part IVA | 8-1 | 25-25 | Division 290 of Schedule 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20106/NAT/ATO/00001,
TA 2010/7,GST - Retirement Village operators who on-sell services to residents in an attempt to claim greater input tax credits,3 November 2010,Current,,"This Taxpayer Alert describes an arrangement in which a retirement village operator ('RVO') increases its claims for input tax credits (or for decreasing adjustments) by assuming the role of a service supplier, such as an electricity retailer. By buying services and on-supplying them to retirement village residents living in independent living units ('ILUs'), the RVO contends that it is making a taxable supply, separate from its input taxed supply of residential accommodation. | The alert applies to arrangements with features substantially equivalent to the following: 1. An RVO enters into a contract to acquire a service, for example, electricity from an energy company. The RVO assumes the role of an electricity retailer, and on-supplies the electricity to the residents of ILUs under separate contracts. 2. The energy company invoices the RVO for the electricity supplied to the retirement village. 3. The RVO charges individual residents for their use of electricity at a rate equivalent to that charged by the energy company. 4. The RVO treats its supply of electricity to residents as a taxable supply, separate from its input taxed supply of residential accommodation. On this basis, it claims input tax credits (or decreasing adjustments) on certain of its acquisitions, including infrastructure costs for such things as wiring and sub-stations, which it claims relate to the taxable supply of electricity. 5. Further, the RVO claims as input tax credits a higher percentage of its costs for its general acquisitions relating to the operation of the retirement village than it might if it were not making the purported taxable supplies of electricity. 6. This arrangement may replace existing contracts for a direct supply of electricity from the energy company to village residents or may be in place from the beginning of the village's operation. 7. The RVO may also supply other services to village residents under similar contracts. 8. The basic features of the arrangement can be summarised diagrammatically as follows. (The 'before' aspect is absent for villages that are set up under this arrangement from their inception): | 1. An RVO enters into a contract to acquire a service, for example, electricity from an energy company. The RVO assumes the role of an electricity retailer, and on-supplies the electricity to the residents of ILUs under separate contracts. 2. The energy company invoices the RVO for the electricity supplied to the retirement village. 3. The RVO charges individual residents for their use of electricity at a rate equivalent to that charged by the energy company. 4. The RVO treats its supply of electricity to residents as a taxable supply, separate from its input taxed supply of residential accommodation. On this basis, it claims input tax credits (or decreasing adjustments) on certain of its acquisitions, including infrastructure costs for such things as wiring and sub-stations, which it claims relate to the taxable supply of electricity. 5. Further, the RVO claims as input tax credits a higher percentage of its costs for its general acquisitions relating to the operation of the retirement village than it might if it were not making the purported taxable supplies of electricity. 6. This arrangement may replace existing contracts for a direct supply of electricity from the energy company to village residents or may be in place from the beginning of the village's operation. 7. The RVO may also supply other services to village residents under similar contracts. 8. The basic features of the arrangement can be summarised diagrammatically as follows. (The 'before' aspect is absent for villages that are set up under this arrangement from their inception): | The ATO considers that an arrangement of the type described above gives rise to taxation issues under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) that include whether: (a) the RVO's supply of electricity may be a taxable supply within the meaning of section 9-5 of the GST Act; (b) the RVO may be entitled to input tax credits under Division 11 (or decreasing adjustments under Division 129) of the GST Act on its acquisitions that are said to relate to that taxable supply and if so, to what extent; (c) the anti-avoidance provisions of Division 165 of the GST Act may apply to the arrangement or to any part of it; (d) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | (a) the RVO's supply of electricity may be a taxable supply within the meaning of section 9-5 of the GST Act; (b) the RVO may be entitled to input tax credits under Division 11 (or decreasing adjustments under Division 129) of the GST Act on its acquisitions that are said to relate to that taxable supply and if so, to what extent; (c) the anti-avoidance provisions of Division 165 of the GST Act may apply to the arrangement or to any part of it; (d) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The ATO is currently examining these arrangements. Note 1: If you have received a private ruling in respect of your arrangement, please check whether the application of Division 165 of the GST Act is considered in that ruling. You may not have sought for us to rule on the application of Division 165 to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Division 165 applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 2: Base penalties of up to 50% of the tax avoided can apply where Division 165 is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed.",,,,,PS LA 2008/15 | Division 9 | Division 11 | Division 40 | Division 129 | Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20107/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers
TA 2010/8,Gift deductions for donation of pharmaceuticals to charities operating overseas,6 December 2010,Current,,"An arrangement of the type described in this Taxpayer Alert has been investigated by the ATO. The features of the arrangement and the tax consequences for participants are described in Charity donation schemes This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | Taxpayer Alerts provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO. In these latter cases, the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert . | Taxpayer Alerts give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers . | This Taxpayer Alert describes an arrangement where a taxpayer claims a gift deduction for pharmaceuticals and other items ('pharmaceuticals') to a charity for use overseas. The taxpayer provides cash for a vendor to purchase the pharmaceuticals from a low cost overseas supplier. They are then valued for gifting purposes at a much higher cost. The difference in these amounts is balanced by what appears to be an unsecured, long term, low interest loan facilitated by the promoter of the arrangement and purportedly funded by the vendor. The pharmaceuticals are apparently made available to the charity through an overseas bonded warehouse. | Under this arrangement, the taxpayer claims a deduction for a donation and related costs that is much greater than the actual amount outlaid, e.g. for a cash outlay of $2,100 the taxpayer claims a gift deduction purportedly valued at $20,000. | Division 30 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and section 78A of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) deal with deductible gifts or contributions. | The alert applies to arrangements with features substantially equivalent to the following: 1. An Australian taxpayer (the 'participant') enters an agreement ('the agreement') to purchase pharmaceuticals for donation to a Deductible Gift Recipient (DGR). 2. Under the agreement, the participant makes a cash payment of an amount comprising: a) a payment to become a member of a facilitating entity (the promoter or an associated entity); b) a cash donation to the nominated DGR; c) an interest prepayment in respect of a purported long term, low interest loan alleged to fund the payment of pharmaceuticals; and d) a deposit (generally of 7.5% or less) of the nominated amount to be paid for the pharmaceuticals. 3. The agreement relies upon a loan that does not appear to be on normal commercial terms, because: a) the period of the loan for the pharmaceuticals is unusually long, in some cases up to 50 years, b) the rates of interest are unusually low (generally less than 1% per annum), even though this interest is allegedly prepaid, c) there is no security offered in respect of the principal amount, which may be a significant sum, and d) payment will not be required in certain circumstances (such as death of the participant), meaning that there is no certainty of repayment - especially considering the unusually long term of the loan. 4. Under the agreement, the promoter or facilitating entity deals exclusively with the vendor and any pharmaceuticals are purchased from a low-cost overseas supplier and alleged to be delivered to the DGR entirely outside Australia. 5. Under the agreement, the participant receives: a) a supply note from the DGR describing the pharmaceuticals b) an invoice from the vendor for the pharmaceuticals assigning a domestic value rather than the cash amount actually paid to the overseas supplier, to match the cash deposit and the amount of the loan, and c) a receipt from the DGR for any cash donation component. 6. On the basis of the agreement, the participant: a) claims a tax deduction for the gift of the pharmaceuticals to the DGR, for the purported value of the pharmaceuticals (i.e. the amount nominated by the vendor) at the date of the agreement, and b) purportedly receives a reduction in tax payable that significantly exceeds the total cash amount actually outlaid under the agreement. | 1. An Australian taxpayer (the 'participant') enters an agreement ('the agreement') to purchase pharmaceuticals for donation to a Deductible Gift Recipient (DGR). 2. Under the agreement, the participant makes a cash payment of an amount comprising: a) a payment to become a member of a facilitating entity (the promoter or an associated entity); b) a cash donation to the nominated DGR; c) an interest prepayment in respect of a purported long term, low interest loan alleged to fund the payment of pharmaceuticals; and d) a deposit (generally of 7.5% or less) of the nominated amount to be paid for the pharmaceuticals. 3. The agreement relies upon a loan that does not appear to be on normal commercial terms, because: a) the period of the loan for the pharmaceuticals is unusually long, in some cases up to 50 years, b) the rates of interest are unusually low (generally less than 1% per annum), even though this interest is allegedly prepaid, c) there is no security offered in respect of the principal amount, which may be a significant sum, and d) payment will not be required in certain circumstances (such as death of the participant), meaning that there is no certainty of repayment - especially considering the unusually long term of the loan. 4. Under the agreement, the promoter or facilitating entity deals exclusively with the vendor and any pharmaceuticals are purchased from a low-cost overseas supplier and alleged to be delivered to the DGR entirely outside Australia. 5. Under the agreement, the participant receives: a) a supply note from the DGR describing the pharmaceuticals b) an invoice from the vendor for the pharmaceuticals assigning a domestic value rather than the cash amount actually paid to the overseas supplier, to match the cash deposit and the amount of the loan, and c) a receipt from the DGR for any cash donation component. 6. On the basis of the agreement, the participant: a) claims a tax deduction for the gift of the pharmaceuticals to the DGR, for the purported value of the pharmaceuticals (i.e. the amount nominated by the vendor) at the date of the agreement, and b) purportedly receives a reduction in tax payable that significantly exceeds the total cash amount actually outlaid under the agreement. | a) a payment to become a member of a facilitating entity (the promoter or an associated entity); b) a cash donation to the nominated DGR; c) an interest prepayment in respect of a purported long term, low interest loan alleged to fund the payment of pharmaceuticals; and d) a deposit (generally of 7.5% or less) of the nominated amount to be paid for the pharmaceuticals. | a) the period of the loan for the pharmaceuticals is unusually long, in some cases up to 50 years, b) the rates of interest are unusually low (generally less than 1% per annum), even though this interest is allegedly prepaid, c) there is no security offered in respect of the principal amount, which may be a significant sum, and d) payment will not be required in certain circumstances (such as death of the participant), meaning that there is no certainty of repayment - especially considering the unusually long term of the loan. | a) a supply note from the DGR describing the pharmaceuticals b) an invoice from the vendor for the pharmaceuticals assigning a domestic value rather than the cash amount actually paid to the overseas supplier, to match the cash deposit and the amount of the loan, and c) a receipt from the DGR for any cash donation component. | a) claims a tax deduction for the gift of the pharmaceuticals to the DGR, for the purported value of the pharmaceuticals (i.e. the amount nominated by the vendor) at the date of the agreement, and b) purportedly receives a reduction in tax payable that significantly exceeds the total cash amount actually outlaid under the agreement. | The ATO considers that arrangements of this type give rise to the following issues relevant to taxation laws, including whether: a. the arrangement or any part of it may be a sham at general law; b. there may be any deductible gift of property under Division 30 of the ITAA 1997, including considering: i. the question of whether the pharmaceuticals actually exist ii. the market value of the pharmaceuticals at relevant times, if they do exist iii. who has custody and control of the pharmaceuticals at relevant times, if they do exist, and iv. the effect of the long-term low-interest unsecured loan on the arrangement; c. the anti-avoidance provisions of section 78A of the ITAA 1936 may operate to limit the availability of deductions claimed; d. any amounts may be allowable deductions under section 8-1 of the ITAA 1997, such as any amounts: i. paid in cash for the cost of purchasing the pharmaceuticals ii. borrowed for the cost of purchasing property, and/or iii. associated with such a loan or with deferral of payment of the cost such as interest. e. any amounts may be allowable as deductions for borrowing expenses under section 25-25 of the ITAA 1997 f. any of the transactions may be subject to the transfer pricing provisions in Division 13 of Part III of the ITAA 1936; g. the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may allow the cancellation of a tax benefit under all, or some part, of the arrangement h. private rulings may be denied to participants under section 359-35 and/or section 357-110 of Taxation Administration Act 1953 (TAA 1953); i. any fee, commission or other amount received by the promoter of this arrangement may be assessable income for any income year j. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the TAA 1953, k. any taxation statements made in relation to the arrangement may be false or misleading; and l. any criminal offences may have been committed regarding the arrangement. | a. the arrangement or any part of it may be a sham at general law; b. there may be any deductible gift of property under Division 30 of the ITAA 1997, including considering: i. the question of whether the pharmaceuticals actually exist ii. the market value of the pharmaceuticals at relevant times, if they do exist iii. who has custody and control of the pharmaceuticals at relevant times, if they do exist, and iv. the effect of the long-term low-interest unsecured loan on the arrangement; c. the anti-avoidance provisions of section 78A of the ITAA 1936 may operate to limit the availability of deductions claimed; d. any amounts may be allowable deductions under section 8-1 of the ITAA 1997, such as any amounts: i. paid in cash for the cost of purchasing the pharmaceuticals ii. borrowed for the cost of purchasing property, and/or iii. associated with such a loan or with deferral of payment of the cost such as interest. e. any amounts may be allowable as deductions for borrowing expenses under section 25-25 of the ITAA 1997 f. any of the transactions may be subject to the transfer pricing provisions in Division 13 of Part III of the ITAA 1936; g. the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may allow the cancellation of a tax benefit under all, or some part, of the arrangement h. private rulings may be denied to participants under section 359-35 and/or section 357-110 of Taxation Administration Act 1953 (TAA 1953); i. any fee, commission or other amount received by the promoter of this arrangement may be assessable income for any income year j. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the TAA 1953, k. any taxation statements made in relation to the arrangement may be false or misleading; and l. any criminal offences may have been committed regarding the arrangement. | i. the question of whether the pharmaceuticals actually exist ii. the market value of the pharmaceuticals at relevant times, if they do exist iii. who has custody and control of the pharmaceuticals at relevant times, if they do exist, and iv. the effect of the long-term low-interest unsecured loan on the arrangement; | i. paid in cash for the cost of purchasing the pharmaceuticals ii. borrowed for the cost of purchasing property, and/or iii. associated with such a loan or with deferral of payment of the cost such as interest. | The ATO is currently reviewing these arrangements, but our initial view is that they are not effective at law. Note 1: You may have already sought advice from the ATO in respect of your arrangement by way of a private ruling or class ruling. If you have received a private ruling or class ruling in respect of your arrangement, you can rely on that ruling. AA private or class ruling is legally binding against the Commissioner who will be bound to act in the way set out in the ruling, even if the ruling is later found to be incorrect. However, a private ruling only applies to a particular entity identified and the particular scheme described in the ruling, for the period the ruling specifies or if no period is specified for the period from when it is made to the end of the accounting period in which it is made. Similarly, a class ruling only applies to a specified class of entities and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity or on a class ruling in respect of a class of entities in which they are not included. The ATO is advised that some of these arrangements have been and are being marketed as the subject of a private ruling. Whether a private ruling relates to a scheme which is materially different to that being marketed, and whether that private ruling was given to the participants to whom these arrangements are marketed, are questions for you. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the Income Tax Assessment Act 1936 is considered in that ruling. The applicant may not have asked for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The current value of a penalty unit is $110. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 5: In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. Note 6: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PS LA 2007/7 and PS LA 2007/24. Note 7: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6. | AA private or class ruling is legally binding against the Commissioner who will be bound to act in the way set out in the ruling, even if the ruling is later found to be incorrect. However, a private ruling only applies to a particular entity identified and the particular scheme described in the ruling, for the period the ruling specifies or if no period is specified for the period from when it is made to the end of the accounting period in which it is made. Similarly, a class ruling only applies to a specified class of entities and the particular scheme described in the ruling. | If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity or on a class ruling in respect of a class of entities in which they are not included. | The ATO is advised that some of these arrangements have been and are being marketed as the subject of a private ruling. Whether a private ruling relates to a scheme which is materially different to that being marketed, and whether that private ruling was given to the participants to whom these arrangements are marketed, are questions for you. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. | Case References: AAT Case 12,314 Re Hodges v. FC of T 97 ATC 2158 (1997) 37 ATR 1091 Fletcher v. Federal Commissioner of Taxation (1991) 173 CLR 1 91 ATC 4950 (1991) 22 ATR 613 Leary v. FC of T 80 ATC 4438 (1980) 11 ATR 145 (1980) 32 ALR 221 Milroy v. Lord (1862) 45 ER 1185 4 De G F & J 264 [1861-73] All ER Rep 783 Re Rose (dec'd); Rose v. Inland Revenue Commissioners [1952] 1 All ER 1217 | AAT Case 12,314 Re Hodges v. FC of T 97 ATC 2158 (1997) 37 ATR 1091 | Fletcher v. Federal Commissioner of Taxation (1991) 173 CLR 1 91 ATC 4950 (1991) 22 ATR 613 | Leary v. FC of T 80 ATC 4438 (1980) 11 ATR 145 (1980) 32 ALR 221 | Milroy v. Lord (1862) 45 ER 1185 4 De G F & J 264 [1861-73] All ER Rep 783 | Re Rose (dec'd); Rose v. Inland Revenue Commissioners [1952] 1 All ER 1217",,,,,TR 2005/13 | PS LA 2005/24 | PS LA 2008/15 | Part IVA | Section 78A | Division 30 | Section 8-1 | Division 290 of Schedule 1 | 97 ATC 2158 | 91 ATC 4950 | 80 ATC 4438 | [1952] 1 All ER 1217,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20108/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers | Stefan Kovic Assistant Commissioner | Aggressive Tax Planning (ATP)
TA 2009/2,Certain cross-border Prepaid Forward Purchase Agreements,22 January 2009,Current,,"This Taxpayer Alert is intended to apply to arrangements with some or all of the following features: 1. A foreign resident (Foreign Sub) is a subsidiary of an Australian resident company (Aus Co). 2. Foreign Sub has a pre-existing interest bearing inter-company loan (""the loan"", e.g. for $100) with Aus Co that currently generates an interest income stream to Aus Co (or a related party) in Australia. 3. As part of a refinancing arrangement, Foreign Sub issues an interest bearing instrument (e.g. a Mandatory Convertible Note - ""the Note"") to a foreign resident counterparty (""the Counterparty"") in consideration for a payment equivalent to the loan (i.e. $100). 4. The Note will convert into ordinary shares in Foreign Sub at a future date (e.g. 5 years + 1 day). 5. Concurrently, the Counterparty enters into a Prepaid Forward Purchase Agreement (""the Agreement"") with Aus Co, entitling Aus Co to the transfer of the Note at a future date (e.g. 5 years). 6. The consideration payable by Aus Co under the Agreement equals the value of the Note, discounted by the net present value of the interest income stream from the loan (e.g. $100 - $40). 7. Foreign Sub repays the loan to Aus Co ($100). 8. Periodic interest coupons on the value of the Note (i.e. $100) are payable to the Counterparty by Foreign Sub, equalling $40 in net present value terms. These payments are not taxable in Australia. 9. In 5 years, the Note will be transferred to Aus Co, at which time it will automatically convert into a fixed number of ordinary shares in Foreign Sub. 10. Having acquired ordinary shares in Foreign Sub, Aus Co can subsequently dispose of these ordinary shares. 11. From an economic perspective, the arrangement allows Aus Co to: (a) receive a repayment of the loan from Foreign Sub (b) pay the purchase price for the Note, and (c) retain the difference of $40, being the net present value of the income stream from the loan. | 1. A foreign resident (Foreign Sub) is a subsidiary of an Australian resident company (Aus Co). 2. Foreign Sub has a pre-existing interest bearing inter-company loan (""the loan"", e.g. for $100) with Aus Co that currently generates an interest income stream to Aus Co (or a related party) in Australia. 3. As part of a refinancing arrangement, Foreign Sub issues an interest bearing instrument (e.g. a Mandatory Convertible Note - ""the Note"") to a foreign resident counterparty (""the Counterparty"") in consideration for a payment equivalent to the loan (i.e. $100). 4. The Note will convert into ordinary shares in Foreign Sub at a future date (e.g. 5 years + 1 day). 5. Concurrently, the Counterparty enters into a Prepaid Forward Purchase Agreement (""the Agreement"") with Aus Co, entitling Aus Co to the transfer of the Note at a future date (e.g. 5 years). 6. The consideration payable by Aus Co under the Agreement equals the value of the Note, discounted by the net present value of the interest income stream from the loan (e.g. $100 - $40). 7. Foreign Sub repays the loan to Aus Co ($100). 8. Periodic interest coupons on the value of the Note (i.e. $100) are payable to the Counterparty by Foreign Sub, equalling $40 in net present value terms. These payments are not taxable in Australia. 9. In 5 years, the Note will be transferred to Aus Co, at which time it will automatically convert into a fixed number of ordinary shares in Foreign Sub. 10. Having acquired ordinary shares in Foreign Sub, Aus Co can subsequently dispose of these ordinary shares. 11. From an economic perspective, the arrangement allows Aus Co to: (a) receive a repayment of the loan from Foreign Sub (b) pay the purchase price for the Note, and (c) retain the difference of $40, being the net present value of the income stream from the loan. | (a) receive a repayment of the loan from Foreign Sub (b) pay the purchase price for the Note, and (c) retain the difference of $40, being the net present value of the income stream from the loan. | Diagram of the arrangement | Features which concern us | The Tax Office considers that arrangements of this type give rise to the following taxation issues, including whether: 1. any amount may be assessable income of Aus Co under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), such as the difference between the value of the Note transferred to Aus Co and the purchase price paid for the Note under the Agreement 2. Division 16E of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to include an amount in the assessable income of Aus Co in relation to the Agreement over the term of the agreement 3. section 26BB of the ITAA 1936 may apply to include a gain in respect of the Agreement in Aus Co's assessable income on the delivery of the Note (as an alternative to point 2 above) 4. a CGT event under Division 104 of the ITAA 1997 may occur in relation to Aus Co, either during the term of or upon completion of the Agreement 5. the transfer pricing provisions in Division 13 of the ITAA 1936 may apply to all or some part of the arrangement, including Aus Co being assessed on deemed interest income over the period to conversion 6. any articles in a relevant tax treaty between Australia and another relevant country may apply, including: a. the business profits article, or b. the associated enterprises article 7. the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may allow the cancellation of a tax benefit under all, or some part, of the arrangement, and 8. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | 1. any amount may be assessable income of Aus Co under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), such as the difference between the value of the Note transferred to Aus Co and the purchase price paid for the Note under the Agreement 2. Division 16E of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to include an amount in the assessable income of Aus Co in relation to the Agreement over the term of the agreement 3. section 26BB of the ITAA 1936 may apply to include a gain in respect of the Agreement in Aus Co's assessable income on the delivery of the Note (as an alternative to point 2 above) 4. a CGT event under Division 104 of the ITAA 1997 may occur in relation to Aus Co, either during the term of or upon completion of the Agreement 5. the transfer pricing provisions in Division 13 of the ITAA 1936 may apply to all or some part of the arrangement, including Aus Co being assessed on deemed interest income over the period to conversion 6. any articles in a relevant tax treaty between Australia and another relevant country may apply, including: a. the business profits article, or b. the associated enterprises article 7. the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may allow the cancellation of a tax benefit under all, or some part, of the arrangement, and 8. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | a. the business profits article, or b. the associated enterprises article | The Tax Office is currently reviewing these arrangements. Note 1: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the ITAA 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 2: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 4: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 22 January 2009 | Date of Effect: 22 January 2009 | Related Practice Statements: PS LA 2008/15 PS LA 2007/7 PS LA 2007/24 | Subject References: Assessable income Associated enterprise Business profits Transfer pricing Traditional securities Double tax agreements International tax General anti-avoidance rule Promoter penalties | Legislative References: Income Tax Assessment Act 1997 6-5 Income Tax Assessment Act 1936 Division 13 Division 16E 26BB Part IVA International Tax Agreements Act 1953 The Act Taxation Administration Act 1953 Schedule 1 Div 290 | Contact Officer: Bruce Collins Assistant Commissioner Business Line: Aggressive Tax Planning Section: Technical and Case Leadership Phone: (02) 6216 2710",,,,,PS LA 2008/15 | PS LA 2007/7 | PS LA 2007/24 | 6-5 | Division 16E | 26BB | Part IVA | The Act | Schedule 1 Div 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20092/NAT/ATO/00001,This Taxpayer Alert describes an arrangement using a Prepaid Forward Purchase Agreement which attempts to reduce the assessable income of an Australian resident taxpayer.
TA 2009/3,Bringing forward deductions to rehabilitate a mine site,5 February 2009,Current,,"This Taxpayer Alert applies to arrangements which have some or all of the following features: 1. A mining company has a future obligation to rehabilitate a mine site after mining ceases. 2. The mining company enters into an arrangement with a second entity (which may be an associate or otherwise related entity) and pays that second entity to carry out the mine site rehabilitation at a future time. 3. The mining company seeks to claim an immediate income tax deduction for the payment. 4. The second entity does not return the full payment as assessable income on revenue account for Australian income tax purposes in the income year of receipt. 5. Alternatively, an intermediary may be used and the payment channelled through the intermediary to a related party or associate. 6. The second entity and any intermediary are situated overseas, frequently in a tax haven. | 1. A mining company has a future obligation to rehabilitate a mine site after mining ceases. 2. The mining company enters into an arrangement with a second entity (which may be an associate or otherwise related entity) and pays that second entity to carry out the mine site rehabilitation at a future time. 3. The mining company seeks to claim an immediate income tax deduction for the payment. 4. The second entity does not return the full payment as assessable income on revenue account for Australian income tax purposes in the income year of receipt. 5. Alternatively, an intermediary may be used and the payment channelled through the intermediary to a related party or associate. 6. The second entity and any intermediary are situated overseas, frequently in a tax haven. | Diagram of a typical arrangement | Features which concern us | The Tax Office considers that an arrangement which exhibits one or more of the features outlined above may give rise to taxation issues that include whether: 1. such an arrangement or certain steps in it may be a sham; 2. the mining company may be entitled to a deduction under section 8-1 Income Tax Assessment Act 1997 (ITAA 1997) in respect of the payment, and the timing of any such deduction; 3. the mining company may be entitled to a deduction under section 40-735 of the ITAA 1997 in respect of the payment and the timing of any such deduction; 4. any deduction allowable to an entity under section 40-735 is a non-arm's length transaction which may be reduced under section 40-765 of the ITAA 1997; 5. the income received by the second entity may properly constitute Australian-sourced income for the purposes of section 6-5(3) of the ITAA 1997, and the timing of that inclusion; 6. a provision of subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to payments under the arrangement; 7. payments under the arrangement may be affected by the transfer pricing provisions of Division 13 of Part III of the ITAA 1936; 8. any articles in a relevant tax treaty between Australia and another relevant country may apply, including: (a) the business profits article, or (b) the associated enterprises article 9. any offshore entity may be a non-resident entity of Australia for taxation purposes, and if so whether it may be a Controlled Foreign Company under Part X of the ITAA 1936; 10. any resident taxpayers who are investors in the offshore entity may be an attributable taxpayer under Part X of the ITAA 1936 in respect of the offshore entity's income, including tainted services income (under section 448 of ITAA 1936); 11. the general anti-avoidance rules contained in Part IVA ITAA 1936 may operate to cancel a tax benefit under the arrangement, for example in relation to the interposition of the offshore entity. 12. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. Note 1: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | 1. such an arrangement or certain steps in it may be a sham; 2. the mining company may be entitled to a deduction under section 8-1 Income Tax Assessment Act 1997 (ITAA 1997) in respect of the payment, and the timing of any such deduction; 3. the mining company may be entitled to a deduction under section 40-735 of the ITAA 1997 in respect of the payment and the timing of any such deduction; 4. any deduction allowable to an entity under section 40-735 is a non-arm's length transaction which may be reduced under section 40-765 of the ITAA 1997; 5. the income received by the second entity may properly constitute Australian-sourced income for the purposes of section 6-5(3) of the ITAA 1997, and the timing of that inclusion; 6. a provision of subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to payments under the arrangement; 7. payments under the arrangement may be affected by the transfer pricing provisions of Division 13 of Part III of the ITAA 1936; 8. any articles in a relevant tax treaty between Australia and another relevant country may apply, including: (a) the business profits article, or (b) the associated enterprises article 9. any offshore entity may be a non-resident entity of Australia for taxation purposes, and if so whether it may be a Controlled Foreign Company under Part X of the ITAA 1936; 10. any resident taxpayers who are investors in the offshore entity may be an attributable taxpayer under Part X of the ITAA 1936 in respect of the offshore entity's income, including tainted services income (under section 448 of ITAA 1936); 11. the general anti-avoidance rules contained in Part IVA ITAA 1936 may operate to cancel a tax benefit under the arrangement, for example in relation to the interposition of the offshore entity. 12. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | (a) the business profits article, or (b) the associated enterprises article | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 5 February 2009 | Date of Effect: 5 February 2009 | Subject References: Arrangement Associate Mining Site Rehabilitation Expenses Offshore arrangement | Legislative References: Income Tax Assessment Act 1936 Part IVA Subdivision H of Division 3 of Part III Section 448 of Part X Income Tax Assessment Act 1997 6-5 Section 8-1 Section 40-735 Section 40-765 Taxation Administration Act 1953 Division 290 | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical and Case Leadership Phone: (02) 6216 2710",,,,,Part IVA | Subdivision H of Division 3 of Part III | Section 448 of Part X | 6-5 | Section 8-1 | Section 40-735 | Section 40-765 | Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20093/NAT/ATO/00001,This Taxpayer Alert describes an arrangement where an entity attempts to bring forward an income tax deduction for a future obligation to rehabilitate a mine site.
TA 2009/4,Land owner's use of a registered associate to maximise input tax credit entitlements and reduce Goods and Services Tax (GST) payable under the margin scheme,17 February 2009,Current,,"The alert applies to arrangements having some or all of the following features: 1. An unregistered entity (the land owner) acquires land prior to 1 July 2000. 2. The land owner engages a GST registered associate to construct and market residential premises. 3. The associate engages a builder to construct the residential premises, provides payment for the construction services and claims input tax credits on these acquisitions. 4. The associate on-supplies these services to the land owner but does not require progress payments for the services. 5. The land owner registers for GST and receives an invoice from its associate, just prior to the sale of the premises. 6. The land owner claims a full input tax credit on its acquisition of the services from its associate. 7. The land owner calculates its GST payable on the sale of the premises under the margin scheme using a valuation of the land at the date of its GST registration. 8. The basic features of this arrangement can be summarised diagrammatically as follows: | 1. An unregistered entity (the land owner) acquires land prior to 1 July 2000. 2. The land owner engages a GST registered associate to construct and market residential premises. 3. The associate engages a builder to construct the residential premises, provides payment for the construction services and claims input tax credits on these acquisitions. 4. The associate on-supplies these services to the land owner but does not require progress payments for the services. 5. The land owner registers for GST and receives an invoice from its associate, just prior to the sale of the premises. 6. The land owner claims a full input tax credit on its acquisition of the services from its associate. 7. The land owner calculates its GST payable on the sale of the premises under the margin scheme using a valuation of the land at the date of its GST registration. 8. The basic features of this arrangement can be summarised diagrammatically as follows: | FEATURES WHICH CONCERN US | The Tax Office considers that an arrangement of the type described above gives rise to taxation issues that include whether: a. The land owner is entitled to a full input tax credit under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') on its acquisition of the services from its associate; b. The land owner is required under Divisions 23 and 188 of the GST Act to be registered at a point earlier than the date its registration takes effect; c. Any act or payment by the land owner causes the associate's GST to be attributable in accordance with section 29-5 of the GST Act to a tax period prior to the tax period to which the associate treats its GST as being attributable; d. Any act or payment by the land owner causes any input tax credit that the land owner is entitled to, to be unattributable under section 29-10 of the GST Act because the act or payment occurs at a time when the land owner is not registered or required to be registered for GST; e. The GST payable by the land owner on its sale of the residential premises is calculated correctly under the margin scheme in Division 75 of the GST Act; and f. The anti-avoidance provisions of Division 165 of the GST Act apply, as the arrangement appears artificial and contrived in its design and execution. | a. The land owner is entitled to a full input tax credit under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') on its acquisition of the services from its associate; b. The land owner is required under Divisions 23 and 188 of the GST Act to be registered at a point earlier than the date its registration takes effect; c. Any act or payment by the land owner causes the associate's GST to be attributable in accordance with section 29-5 of the GST Act to a tax period prior to the tax period to which the associate treats its GST as being attributable; d. Any act or payment by the land owner causes any input tax credit that the land owner is entitled to, to be unattributable under section 29-10 of the GST Act because the act or payment occurs at a time when the land owner is not registered or required to be registered for GST; e. The GST payable by the land owner on its sale of the residential premises is calculated correctly under the margin scheme in Division 75 of the GST Act; and f. The anti-avoidance provisions of Division 165 of the GST Act apply, as the arrangement appears artificial and contrived in its design and execution. | The Tax Office is currently reviewing these arrangements. Note 1 : If you have received a private ruling in respect of your arrangement, please check that the application of Division 165 of the GST Act is considered in that ruling. The applicant may not have sought for us to rule on the application of Division 165 to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Division 165 applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented . Note 2 : Base penalties of up to 50% of the tax avoided can apply where Division 165 is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. IfTax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3 : Penalties of up to 5, penalty units for individuals, 25, penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed . | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 17 February 2009 | Date of Effect: 17 February 2009 | Related Practice Statements: PS LA 2008/15 - Taxpayer Alerts | Subject References: Goods and Services Tax Creditable acquisition Pre-GST land Margin scheme Residential premises GST registration Associate | Legislative References: A New Tax System (Goods and Services Tax) Act 1999 Division 11 Division 23 29-5 29-10 Division 75 Division 165 Division 188 | Contact Officer: Karen Woodward Business Line: GST Section: Aggressive Tax Planning Phone: 03 927 54305",,,,,PS LA 2008/15 - Taxpayer Alerts | Division 11 | Division 23 | 29-5 | 29-10 | Division 75 | Division 165 | Division 188,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20094/NAT/ATO/00001,"This Taxpayer Alert describes an arrangement that purportedly allows a land owner to register for GST as late as possible to minimise its GST payable under the margin scheme, but still claim a full input tax credit on its acquisition of construction services from its associate."
TA 2009/5,Use of an associate to obtain Goods and Services Tax ('GST') benefits on construction of residential premises for lease,17 February 2009,Current,,"The alert applies to arrangements having some or all of the following features: 1. A land owner, who may or may not be registered for GST, plans to construct residential premises to lease to third parties. 2. The land owner engages its associate to construct the residential premises. 3. The associate either undertakes the construction or engages an arm's length builder, and claims input tax credits on its acquisitions. 4. The associate does not seek progress payments from, nor issues an invoice to, the land owner until the premises are ultimately sold. 5. The land owner leases the completed residential premises to third parties (an input taxed supply). 6. The associate only remits GST upon the sale of the residential premises by the land owner. 7. The basic features of this arrangement can be summarised diagrammatically as follows: | 1. A land owner, who may or may not be registered for GST, plans to construct residential premises to lease to third parties. 2. The land owner engages its associate to construct the residential premises. 3. The associate either undertakes the construction or engages an arm's length builder, and claims input tax credits on its acquisitions. 4. The associate does not seek progress payments from, nor issues an invoice to, the land owner until the premises are ultimately sold. 5. The land owner leases the completed residential premises to third parties (an input taxed supply). 6. The associate only remits GST upon the sale of the residential premises by the land owner. 7. The basic features of this arrangement can be summarised diagrammatically as follows: | FEATURES WHICH CONCERN US | The Tax Office considers that an arrangement of the type described above gives rise to taxation issues that include whether: a. the associate is carrying on an enterprise under section 9-20 of the A New Tax System (Goods and Services ) Act 1999 ('GST Act'); b. the associate is entitled to input tax credits under Division 11 of the GST Act on the acquisitions it makes in constructing, or arranging the construction of, the residential premises; c. any act or payment by the land owner causes the associate's GST to be attributable in accordance with section 29-5 of the GST Act to a tax period at a point earlier than the sale of the residential premises; d. Division 72 of the GST Act, which covers supplies to associates for no or inadequate consideration, applies to the supply by the associate to the land owner; and e. the anti-avoidance provisions in Division 165 of the GST Act apply, as the arrangement appears artificial and contrived in its design and execution. | a. the associate is carrying on an enterprise under section 9-20 of the A New Tax System (Goods and Services ) Act 1999 ('GST Act'); b. the associate is entitled to input tax credits under Division 11 of the GST Act on the acquisitions it makes in constructing, or arranging the construction of, the residential premises; c. any act or payment by the land owner causes the associate's GST to be attributable in accordance with section 29-5 of the GST Act to a tax period at a point earlier than the sale of the residential premises; d. Division 72 of the GST Act, which covers supplies to associates for no or inadequate consideration, applies to the supply by the associate to the land owner; and e. the anti-avoidance provisions in Division 165 of the GST Act apply, as the arrangement appears artificial and contrived in its design and execution. | The Tax Office is currently reviewing these arrangements. Note 1 : If you have received a private ruling in respect of your arrangement, please check that the application of Division 165 of the GST Act is considered in that ruling. The applicant may not have sought for us to rule on the application of Division 165 to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Division 165 applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented . Note 2 : Base penalties of up to 50% of the tax avoided can apply where Division 165 is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3 : Penalties of up to 5, penalty units for individuals, 25, penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed . | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 17 February 2009 | Date of Effect: 17 February 2009 | Related Practice Statements: PS LA 2008/15 - Taxpayer Alerts | Subject References: Goods and Services Tax Creditable acquisition Residential premises Associate Lease Construction | Legislative References: A New Tax System (Goods and Services Tax) Act 1999 9-20 Division 11 29-5 Division 72 Division 165 | Contact Officer: Karen Woodward Business Line: GST Section: Aggressive Tax Planning Phone: 03 927 54305",,,,,GSTR 2010/1 | PS LA 2008/15 - Taxpayer Alerts | 9-20 | Division 11 | 29-5 | Division 72 | Division 165,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20095/NAT/ATO/00001,"This Taxpayer Alert describes an arrangement where an entity uses an associate in an attempt to secure input tax credits on the construction of residential premises for lease and defer the corresponding GST liability, in some cases indefinitely."
TA 2009/6,Use of uncommercial indirect marketing arrangements to reduce wine equalisation tax (WET),1 April 2009,Current,,"This alert applies to arrangements with features substantially equivalent to the following: 1. A retailer either purchased, or would purchase, wine directly from suppliers to on-sell directly to customers through its retail outlets. WET would be imposed on the supplier calculated on the wholesale selling price. 2. An entity is interposed ('the marketer') between the suppliers and the retailer purportedly to purchase the wine that is to be sold by the retailer. The retailer then sells the wine through its retail outlets as agent for the marketer. WET is now imposed on the marketer for a lesser amount (under the half retail price method). 3. Under the terms of the arrangement, there are minimal requirements placed upon the marketer and the marketer bears little or no economic risk. 4. Suppliers are aware that they are contracting with the marketer and invoice the marketer for their supplies of wine. 5. The wine may be transported directly from the suppliers to the retailer's premises. 6. The retailer selects the wine to be purchased, and negotiates the prices to be paid, by the marketer. The retailer also sets the sale price of the wine sold from its retail outlets on behalf of the marketer. 7. The retailer guarantees that the marketer will pay the suppliers for the wine. 8. The marketer is entitled to receive some percentage of the sale price charged at the retailer's outlets. A significant part of this amount may be retained by the retailer as an agent's commission, and/or other charges making the actual amount received by the marketer relatively small. 9. Where the retail price mark up is relatively low, calculating WET using the half retail price method can result in a lower WET liability than if the WET liability arose on the prior wholesale sale. This enables the retailer to sell the wine to its customers at a lower price and/or retain a higher profit. | 1. A retailer either purchased, or would purchase, wine directly from suppliers to on-sell directly to customers through its retail outlets. WET would be imposed on the supplier calculated on the wholesale selling price. 2. An entity is interposed ('the marketer') between the suppliers and the retailer purportedly to purchase the wine that is to be sold by the retailer. The retailer then sells the wine through its retail outlets as agent for the marketer. WET is now imposed on the marketer for a lesser amount (under the half retail price method). 3. Under the terms of the arrangement, there are minimal requirements placed upon the marketer and the marketer bears little or no economic risk. 4. Suppliers are aware that they are contracting with the marketer and invoice the marketer for their supplies of wine. 5. The wine may be transported directly from the suppliers to the retailer's premises. 6. The retailer selects the wine to be purchased, and negotiates the prices to be paid, by the marketer. The retailer also sets the sale price of the wine sold from its retail outlets on behalf of the marketer. 7. The retailer guarantees that the marketer will pay the suppliers for the wine. 8. The marketer is entitled to receive some percentage of the sale price charged at the retailer's outlets. A significant part of this amount may be retained by the retailer as an agent's commission, and/or other charges making the actual amount received by the marketer relatively small. 9. Where the retail price mark up is relatively low, calculating WET using the half retail price method can result in a lower WET liability than if the WET liability arose on the prior wholesale sale. This enables the retailer to sell the wine to its customers at a lower price and/or retain a higher profit. | FEATURES WHICH CONCERN US | The Tax Office considers that an arrangement of the type described above gives rise to taxation issues that include whether: (a) The sale of wine by the marketer is an indirect marketing sale as defined in section 5-20 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act). (b) The marketer is entitled to quote its Australian Business Number (ABN) pursuant to section 13-5(1) of the WET Act. (c) The taxable value of the wine sold by the marketer is correctly based upon the notional wholesale selling price of the wine; calculated using the half retail price method. (d) The anti-avoidance provisions in Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 may apply. (e) Any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | (a) The sale of wine by the marketer is an indirect marketing sale as defined in section 5-20 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act). (b) The marketer is entitled to quote its Australian Business Number (ABN) pursuant to section 13-5(1) of the WET Act. (c) The taxable value of the wine sold by the marketer is correctly based upon the notional wholesale selling price of the wine; calculated using the half retail price method. (d) The anti-avoidance provisions in Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 may apply. (e) Any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | The Tax Office is currently reviewing these arrangements. Note 1: Base penalties of up to 50% of the tax avoided can apply where Division 165 is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 1 April 2009 | Date of Effect: 1 April 2009 | Related Rulings/Determinations: WETD 2010/1 | Related Practice Statements: PS LA 2008/15 - Taxpayer Alerts | Subject References: Wine Equalisation Tax Indirect marketing General anti-avoidance rule Promoter penalties | Legislative References: A New Tax System (Wine Equalisation Tax) Act 1999 Section 5-5, AD2d Section 5-20 Subdivision 9-B Section 7-10 Subsection 13-5(1) A New Tax System (Goods and Services Tax) Act 1999 Division 165 Taxation Administration Act 1953 Schedule 1 Div 290 | Contact Officer: Wayne Barford Assistant Commissioner Business Line: Excise Section: Compliance and Interpretive Assistance Phone: (02) 9374 8881",,,,,"WETD 2010/1 | PS LA 2008/15 - Taxpayer Alerts | Section 5-5, AD2d | Section 5-20 | Subdivision 9-B | Section 7-10 | Subsection 13-5(1) | Division 165 | Schedule 1 Div 290",False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20096/NAT/ATO/00001,"The Taxation Office view on this arrangement is set out in Wine Equalisation Tax Determination WETD 2010/1 This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | This Taxpayer Alert describes uncommercial and collusive arrangements that seek to reduce WET liability by using an interposed entity and an agency relationship to shift the point where WET liability is determined and to manipulate which methodology is used in determining it."
TA 2009/7,Uncommercial contract manufacture arrangements to claim the wine equalisation tax (WET) producer rebate,1 April 2009,Current,,"This alert applies to arrangements with features substantially equivalent to the following: 1. A winemaker either purchased, or would purchase, grapes (or fruit or vegetables) from one or more growers to make wine. Such growers would not be eligible for the producer rebate. However, the winemaker may be eligible to the producer rebate subject to a maximum of $500,000 per annum. 2. The winemaker enters into contracts with the grower/s to make wine from their produce on their behalf, on the basis that the grower/s retain ownership of that produce and resulting wine. 3. At or around the time of entering into the contract with the grower/s, the winemaker commits to buy the resulting wine (possibly at a predetermined price). This removes the majority of commercial risk to the grower/s from the winemaking process, such as that which may arise from the quality of the wine produced. 4. Once the wine is made by the winemaker, the winemaker pays the purchase price and the title of the wine is transferred to them. 5. The winemaker then sells the wine to a buyer in a transaction that is or would be liable to WET (i.e. if the purchaser had not quoted their ABN). 6. Each such grower claims a wine producer rebate of up to $500,000 per annum each for the wine that they have 'sold' to the winemaker. The sum of the rebates claimed by the grower/s and the winemaker is likely to exceed the maximum that the winemaker would be entitled to claim from the production of wine in that year. 7. The basic features of this arrangement can be summarised diagrammatically as follows: | 1. A winemaker either purchased, or would purchase, grapes (or fruit or vegetables) from one or more growers to make wine. Such growers would not be eligible for the producer rebate. However, the winemaker may be eligible to the producer rebate subject to a maximum of $500,000 per annum. 2. The winemaker enters into contracts with the grower/s to make wine from their produce on their behalf, on the basis that the grower/s retain ownership of that produce and resulting wine. 3. At or around the time of entering into the contract with the grower/s, the winemaker commits to buy the resulting wine (possibly at a predetermined price). This removes the majority of commercial risk to the grower/s from the winemaking process, such as that which may arise from the quality of the wine produced. 4. Once the wine is made by the winemaker, the winemaker pays the purchase price and the title of the wine is transferred to them. 5. The winemaker then sells the wine to a buyer in a transaction that is or would be liable to WET (i.e. if the purchaser had not quoted their ABN). 6. Each such grower claims a wine producer rebate of up to $500,000 per annum each for the wine that they have 'sold' to the winemaker. The sum of the rebates claimed by the grower/s and the winemaker is likely to exceed the maximum that the winemaker would be entitled to claim from the production of wine in that year. 7. The basic features of this arrangement can be summarised diagrammatically as follows: | Figure: Uncommercial contract manufacture arrangements to claim the wine equalisation tax (WET) producer rebate | FEATURES WHICH CONCERN US | The Tax Office considers that an arrangement of the type described above gives rise to taxation issues that include whether: (a) The grower satisfies the definition of 'producer' as defined in section 33-1 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act). (b) The grower is eligible for a producer rebate under Division 19 of the WET Act. (c) The anti-avoidance provisions in Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 may apply. (d) Any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | (a) The grower satisfies the definition of 'producer' as defined in section 33-1 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act). (b) The grower is eligible for a producer rebate under Division 19 of the WET Act. (c) The anti-avoidance provisions in Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 may apply. (d) Any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | The Tax Office is currently reviewing these arrangements. Note 1: Base penalties of up to 50% of the tax avoided can apply where Division 165 is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 1 April 2009 | Date of Effect: 1 April 2009 | Related Practice Statements: PS LA 2008/15 | Subject References: Wine Equalisation Tax Producer Rebate Wine Wine producer General anti-avoidance rule Promoter penalties | Legislative References: A New Tax System (Wine Equalisation Tax) Act 1999 Division 19 33-1 A New Tax System (Goods and Services Tax) Act 1999 Division 165 Taxation Administration Act 1953 Schedule 1 Div 290 | Contact Officer: Wayne Barford Assistant Commissioner Business Line: Excise Section: Compliance and Interpretative Assistance Phone: (02) 9374 8881",,,,,WETD 2011/1 | PS LA 2008/15 | Division 19 | 33-1 | Division 165 | Schedule 1 Div 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20097/NAT/ATO/00001,"The ATO view on the arrangement described in TA 2009/7 is set out in WETD 2011/1 . This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | This Taxpayer Alert describes uncommercial and collusive arrangements where one or more growers use a contract winemaker, so each such grower can attempt to claim the WET producer rebate by retaining title to their produce and resulting wine, until a pre-arranged sale to the winemaker."
TA 2009/8,Exploitation of 1999 superannuation transitional provisions to obtain taxation and regulatory benefits,17 April 2009,Current,,"This Taxpayer Alert describes an arrangement that involves the transfer of benefits associated with the 1999 'transitional provisions' for self-managed superannuation funds (SMSFs) with pre-existing interests in unit trusts. The concern is that these arrangements may not satisfy the requirement that the pre 1999 SMSF has to be continuously maintained to provide retirement benefits to members both before and after its sale. | Transitional provisions that expire on 30 June 2009 were put in place when the definition of 'in-house asset' in the superannuation laws was amended with effect from 11 August 1999 to include investments in a related trust. Amongst other things, these transitional provisions allow SMSFs up until 30 June 2009 to pay up on any partly paid shares and units, or make additional investments in a related entity, if that investment was acquired by 11 August 1999. Where in-house assets for an SMSF exceed 5% of the market value of the fund's assets, the trustee needs to rectify the breach (usually within 12 months) or the fund may be made non-complying [1] and the fund's trustee may be liable to civil penalties. | This Alert applies to arrangements with features substantially equivalent to the following: 1. An organiser ('the organiser') has in possession one or more inactive SMSFs registered before 11 August 1999 ('pre 1999 SMSF') that hold an interest in a related unit trust which was acquired before 11 August 1999 ('the interest' in 'the unit trust'). The pre 1999 SMSFs may be inactive because, while registered with a nominal contribution, they may not have: • had any active members; • received any subsequent contributions; • made any investments; or • been continuously maintained for providing superannuation benefits to members on retirement e.g. where the fund was established, or subsequently sold, for the purpose of making a profit. 2. The organiser advertises the sale of a pre 1999 SMSF and the unit trust. Typically, the advertising material states that the arrangement qualifies under the transitional provisions and therefore provides taxation and superannuation regulatory benefits, including: a. Allowing ownership of a residential property through the pre 1999 SMSF and gearing through a related unit trust, then leasing the property to a related party (e.g. a member of the SMSF), which would not otherwise be permitted for post 1999 SMSFs; b. Deducting interest expense which may not be deductible to other parties (i.e. private or domestic expenses of a member of the SMSF, or expenses incurred in producing exempt income of the SMSF); c. Reducing/avoiding potential capital gains tax through the lower taxes paid by the SMSF (i.e. on the property held through the unit trust), and; d. Circumventing the superannuation regulatory restrictions (especially the in-house asset rules) that would result in the SMSF's income or capital gains being subject to higher rates of tax. 3. The organiser may also allege that the arrangement is supported by a Tax Office view (such as ATOID 2002/388) without any qualification regarding materially different facts. This may mean that the arrangement does not qualify under the transitional provisions and that the advertised superannuation regulatory or taxation benefits would not be available. 4. A taxpayer pays a fee to the organiser to effectively gain control of, or membership in, an inactive pre 1999 SMSF which holds the interest in the unit trust. 5. The organiser then changes the control of the pre 1999 SMSF to the taxpayer by arranging for a change in the member(s) and trustee(s), or director(s) in the case of a corporate trustee, and moves previous member(s) account balance(s) out of the SMSF. 6. The fund investment strategy of the pre 1999 SMSF may be updated to cover the fund's new investments (to meet other superannuation regulatory requirements). 7. To attempt to exploit the transitional provisions (and gain the advertised superannuation regulatory or taxation benefits), the new member(s) make contributions and/or rollover existing benefits held in complying superannuation fund(s) to the pre 1999 SMSF, which are then invested in the related unit trust. This investment may include paying up partly paid up units or applying the funds to existing units to facilitate the purchase of a property or land. 8. The organiser charges a substantial fee for establishing this arrangement, based upon the perceived commercial advantages of the advertised superannuation regulatory or taxation benefits. | 1. An organiser ('the organiser') has in possession one or more inactive SMSFs registered before 11 August 1999 ('pre 1999 SMSF') that hold an interest in a related unit trust which was acquired before 11 August 1999 ('the interest' in 'the unit trust'). The pre 1999 SMSFs may be inactive because, while registered with a nominal contribution, they may not have: • had any active members; • received any subsequent contributions; • made any investments; or • been continuously maintained for providing superannuation benefits to members on retirement e.g. where the fund was established, or subsequently sold, for the purpose of making a profit. 2. The organiser advertises the sale of a pre 1999 SMSF and the unit trust. Typically, the advertising material states that the arrangement qualifies under the transitional provisions and therefore provides taxation and superannuation regulatory benefits, including: a. Allowing ownership of a residential property through the pre 1999 SMSF and gearing through a related unit trust, then leasing the property to a related party (e.g. a member of the SMSF), which would not otherwise be permitted for post 1999 SMSFs; b. Deducting interest expense which may not be deductible to other parties (i.e. private or domestic expenses of a member of the SMSF, or expenses incurred in producing exempt income of the SMSF); c. Reducing/avoiding potential capital gains tax through the lower taxes paid by the SMSF (i.e. on the property held through the unit trust), and; d. Circumventing the superannuation regulatory restrictions (especially the in-house asset rules) that would result in the SMSF's income or capital gains being subject to higher rates of tax. 3. The organiser may also allege that the arrangement is supported by a Tax Office view (such as ATOID 2002/388) without any qualification regarding materially different facts. This may mean that the arrangement does not qualify under the transitional provisions and that the advertised superannuation regulatory or taxation benefits would not be available. 4. A taxpayer pays a fee to the organiser to effectively gain control of, or membership in, an inactive pre 1999 SMSF which holds the interest in the unit trust. 5. The organiser then changes the control of the pre 1999 SMSF to the taxpayer by arranging for a change in the member(s) and trustee(s), or director(s) in the case of a corporate trustee, and moves previous member(s) account balance(s) out of the SMSF. 6. The fund investment strategy of the pre 1999 SMSF may be updated to cover the fund's new investments (to meet other superannuation regulatory requirements). 7. To attempt to exploit the transitional provisions (and gain the advertised superannuation regulatory or taxation benefits), the new member(s) make contributions and/or rollover existing benefits held in complying superannuation fund(s) to the pre 1999 SMSF, which are then invested in the related unit trust. This investment may include paying up partly paid up units or applying the funds to existing units to facilitate the purchase of a property or land. 8. The organiser charges a substantial fee for establishing this arrangement, based upon the perceived commercial advantages of the advertised superannuation regulatory or taxation benefits. | • had any active members; • received any subsequent contributions; • made any investments; or • been continuously maintained for providing superannuation benefits to members on retirement e.g. where the fund was established, or subsequently sold, for the purpose of making a profit. | a. Allowing ownership of a residential property through the pre 1999 SMSF and gearing through a related unit trust, then leasing the property to a related party (e.g. a member of the SMSF), which would not otherwise be permitted for post 1999 SMSFs; b. Deducting interest expense which may not be deductible to other parties (i.e. private or domestic expenses of a member of the SMSF, or expenses incurred in producing exempt income of the SMSF); c. Reducing/avoiding potential capital gains tax through the lower taxes paid by the SMSF (i.e. on the property held through the unit trust), and; d. Circumventing the superannuation regulatory restrictions (especially the in-house asset rules) that would result in the SMSF's income or capital gains being subject to higher rates of tax. | Superannuation regulatory issues | The ATO considers that arrangements of this type involve the following superannuation regulatory issues, being whether: a. the inactive pre 1999 SMSF meets the definition of a superannuation fund at all times, i.e. both before and after the implementation of this arrangement; b. the transitional provisions contained in sections 71A to 71F of the Superannuation Industry Supervision Act 1993 (SIS Act) apply (e.g. due to the exit of the original member/s from the SMSF); and c. section 85 of the SIS Act, which prohibits a fund from entering into any scheme to avoid the application of the in-house asset, has been breached. | a. the inactive pre 1999 SMSF meets the definition of a superannuation fund at all times, i.e. both before and after the implementation of this arrangement; b. the transitional provisions contained in sections 71A to 71F of the Superannuation Industry Supervision Act 1993 (SIS Act) apply (e.g. due to the exit of the original member/s from the SMSF); and c. section 85 of the SIS Act, which prohibits a fund from entering into any scheme to avoid the application of the in-house asset, has been breached. | Taxation issues | The ATO considers that arrangements of this type also involve the following taxation issues, being whether: d. the interest expense incurred by the related unit trust is deductible under section 8-1 the Income Tax Assessment Act 1997 (ITAA 1997); e. any capital gains tax concessions for complying superannuation funds apply; f. any fee or commission paid is allowable as a deduction by the Australian resident taxpayer for that income year; g. the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the arrangement; h. any fee or commission received by the organiser/s of this arrangement constitutes assessable income for the relevant income year; and i. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | d. the interest expense incurred by the related unit trust is deductible under section 8-1 the Income Tax Assessment Act 1997 (ITAA 1997); e. any capital gains tax concessions for complying superannuation funds apply; f. any fee or commission paid is allowable as a deduction by the Australian resident taxpayer for that income year; g. the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the arrangement; h. any fee or commission received by the organiser/s of this arrangement constitutes assessable income for the relevant income year; and i. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The Australian Taxation Office is currently examining these arrangements. Note 1 Base penalties of up to 75% of the tax avoided can apply where someone makes a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2 Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 3 Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24. | [1] Non-complying funds are subject to 45% tax rates on their income (and assets other than undeducted contributions in the year that the fund becomes non-complying).",,,,,PS LA 2007/7 | PS LA 2007/24 | ATO ID 2002/388 | 167 | Pt IVA | Division 290 of Schedule 1 | 71A | 71F | 8-1 | The Regulations,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20098/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers
TA 2009/9,Contrived cross-border arrangements that seek to generate debt deductions for non-assessable non-exempt income,23 April 2009,Current,,"This Taxpayer Alert describes certain cross-border financing arrangements which seek to generate debt deductions in Australia. These arrangements have little or no commercial or economic purpose and appear to be driven by the tax benefits that arise under section 25-90 of the Income Tax Assessment Act 1997 (ITAA 1997). | Section 25-90 of the ITAA 1997 allows a deduction for an amount or outgoing that is a cost in relation to debt interests where the cost is incurred in deriving non-assessable non-exempt income under section 23AI, 23AJ or 23AK of the Income Tax Assessment Act 1936 (ITAA 1936). | This Alert focuses on blatant, artificial and contrived cross-border financing arrangements that attempt to generate a deduction under section 25-90 for costs incurred in deriving non-assessable non-exempt dividends under section 23AJ of the ITAA 1936. | 1. Arrangements covered by this Alert show at least one, but may show several, of the following relevant criteria: a. the arrangement which is returning non-assessable non-exempt income is in substance the provision of financial accommodation to an unrelated party and by contrivance the return for the provision of financial accommodation is made a non-portfolio dividend from a related party; b. the arrangement which is returning non-assessable non-exempt income is in substance an investment by a non-resident entity in another non-resident entity, where Australia is artificially interposed in the investment to secure a tax deduction matched by non-assessable income; c. the arrangement which is returning non-assessable non-exempt income is in substance an investment by an Australian resident in another Australian resident, and a non-portfolio investment in a non-resident company is artificially interposed in the investment to secure non-assessable income; d. the arrangement which is returning non-assessable non-exempt income is designed to match the income with the cost deducted under section 25-90 to secure a '""free"" tax deduction. Funds advanced under the arrangement are effectively returned to the provider of the funds, or an associate. Promissory notes or other non-cash means of making advances may be employed; e. the structure used in the arrangement is unduly complex or contrived - an example of such complexity is where an entity is interposed into the arrangement structure where such interposition is unnecessary from a commercial viewpoint. In some cases, the Australian resident may be instructed by the marketer or lender to add apparently unnecessary layers of complexity to the financing arrangement; f. absent the tax benefits, the arrangement has little or no commercial or economic purpose; g. the flow of funds in the arrangement is circular, so that the funds ultimately flow back to the initial investor or lender (for example, a borrowing from the capital markets may be linked to the counterparty to the transaction); or , h. there may be no commercial reason for involving an Australian resident entity in the transaction - that is, in an ordinary commercial arrangement the foreign entity would not have sourced its investment from Australia. For example, the arrangement might economically be an investment from Europe into Asia but routed through Australia apparently for the dominant purpose of obtaining tax benefits available under section 25-90 of the ITAA 1997; and i. deductions are claimed under section 25-90 in respect of costs incurred in deriving the non-assessable non-exempt income. | a. the arrangement which is returning non-assessable non-exempt income is in substance the provision of financial accommodation to an unrelated party and by contrivance the return for the provision of financial accommodation is made a non-portfolio dividend from a related party; b. the arrangement which is returning non-assessable non-exempt income is in substance an investment by a non-resident entity in another non-resident entity, where Australia is artificially interposed in the investment to secure a tax deduction matched by non-assessable income; c. the arrangement which is returning non-assessable non-exempt income is in substance an investment by an Australian resident in another Australian resident, and a non-portfolio investment in a non-resident company is artificially interposed in the investment to secure non-assessable income; d. the arrangement which is returning non-assessable non-exempt income is designed to match the income with the cost deducted under section 25-90 to secure a '""free"" tax deduction. Funds advanced under the arrangement are effectively returned to the provider of the funds, or an associate. Promissory notes or other non-cash means of making advances may be employed; e. the structure used in the arrangement is unduly complex or contrived - an example of such complexity is where an entity is interposed into the arrangement structure where such interposition is unnecessary from a commercial viewpoint. In some cases, the Australian resident may be instructed by the marketer or lender to add apparently unnecessary layers of complexity to the financing arrangement; f. absent the tax benefits, the arrangement has little or no commercial or economic purpose; g. the flow of funds in the arrangement is circular, so that the funds ultimately flow back to the initial investor or lender (for example, a borrowing from the capital markets may be linked to the counterparty to the transaction); or , h. there may be no commercial reason for involving an Australian resident entity in the transaction - that is, in an ordinary commercial arrangement the foreign entity would not have sourced its investment from Australia. For example, the arrangement might economically be an investment from Europe into Asia but routed through Australia apparently for the dominant purpose of obtaining tax benefits available under section 25-90 of the ITAA 1997; and i. deductions are claimed under section 25-90 in respect of costs incurred in deriving the non-assessable non-exempt income. | 2. Relevant arrangements may also include one or more of the following features: a. many or all of the participants in the arrangement are related parties; b. the transaction may be structured in a manner such that no income or minimal income is included in the assessable income of the Australian resident entity under the controlled foreign company (CFC) and foreign investment fund (FIF) provisions; c. in economic substance, the income received from the non-resident entity is more like interest rather than a share of business profits; d. the net pre-tax return on the investment is less than the target rates of return of the entity in its general business; e. the return from the non-resident entity has been structured to eliminate the operational and market risk that would normally be expected from commercial business transactions; f. in the case of an investment by way of redeemable preference shares, returns are predetermined and the Australian entity is not entitled to participate in any upside of the investment; g. where the transaction structure has a variable element such as a floating return or variable rate of interest, this may be swapped for a fixed return or cost to lock in the income and fix the tax benefits generated by the arrangement; or , h. the transaction may be structured so that no tax or minimal tax is paid in the offshore jurisdiction. This includes arrangements where tax is paid offshore and then claimed back as a credit by an associated non-resident entity. | a. many or all of the participants in the arrangement are related parties; b. the transaction may be structured in a manner such that no income or minimal income is included in the assessable income of the Australian resident entity under the controlled foreign company (CFC) and foreign investment fund (FIF) provisions; c. in economic substance, the income received from the non-resident entity is more like interest rather than a share of business profits; d. the net pre-tax return on the investment is less than the target rates of return of the entity in its general business; e. the return from the non-resident entity has been structured to eliminate the operational and market risk that would normally be expected from commercial business transactions; f. in the case of an investment by way of redeemable preference shares, returns are predetermined and the Australian entity is not entitled to participate in any upside of the investment; g. where the transaction structure has a variable element such as a floating return or variable rate of interest, this may be swapped for a fixed return or cost to lock in the income and fix the tax benefits generated by the arrangement; or , h. the transaction may be structured so that no tax or minimal tax is paid in the offshore jurisdiction. This includes arrangements where tax is paid offshore and then claimed back as a credit by an associated non-resident entity. | 3. Some arrangements involve a third party who, although prima facie at arm's length, participates in the arrangement in order to share the tax benefits generated by the arrangement. | 4. Such a third party will often be a marketer of the arrangement and will receive a fee that will generally take the form of a commercial return associated with the arrangement. In substance that commercial return will often be a disguised fee for marketing the arrangement. | Example 1 1. The Australian resident entity enters into the arrangement by borrowing funds (in this example, $1bn) from the capital markets or from a related party with the intention of using the funds to obtain equity in a non-resident entity. In some cases, it appears that the borrowed funds may be sourced from the marketer of the arrangement. In other cases, it appears that the funds are borrowed short-term and that all or a substantial part of the funds quickly flow back to the lender via a series of back to back steps in the transaction structure. 2. The marketer of the arrangement agrees to effectively return part of its fee to the non-resident entity. This part of the fee is then returned to the Australian resident as non-assessable non-exempt income and provides the Australian resident with an apparent commercial return on their investment. This is illustrated in the diagram below: Example 2 1. The arrangement involves an intra-group transfer of an income stream from a non-resident entity to an Australian resident which in turn transfers it to another non-resident entity. Redeemable preference shares are issued by the related entities as part of the financing of the transfer of the income streams. 2. The obligations of the parties to pay dividends on the redeemable preference shares are satisfied by way of the initial issue and subsequent endorsement and re-endorsement of a promissory note. The dividend paid on the redeemable preference shares issued by the non-resident entity to the Australian resident is then returned to the Australian resident as non-assessable non-exempt income. This dividend is then on-paid by the Australian resident to another Australian resident and then ultimately to the original non-resident entity. This generates a deduction under section 25-90 of the ITAA 1997. This is illustrated in the diagram below: | Example 1 1. The Australian resident entity enters into the arrangement by borrowing funds (in this example, $1bn) from the capital markets or from a related party with the intention of using the funds to obtain equity in a non-resident entity. In some cases, it appears that the borrowed funds may be sourced from the marketer of the arrangement. In other cases, it appears that the funds are borrowed short-term and that all or a substantial part of the funds quickly flow back to the lender via a series of back to back steps in the transaction structure. 2. The marketer of the arrangement agrees to effectively return part of its fee to the non-resident entity. This part of the fee is then returned to the Australian resident as non-assessable non-exempt income and provides the Australian resident with an apparent commercial return on their investment. This is illustrated in the diagram below: | Example 2 1. The arrangement involves an intra-group transfer of an income stream from a non-resident entity to an Australian resident which in turn transfers it to another non-resident entity. Redeemable preference shares are issued by the related entities as part of the financing of the transfer of the income streams. 2. The obligations of the parties to pay dividends on the redeemable preference shares are satisfied by way of the initial issue and subsequent endorsement and re-endorsement of a promissory note. The dividend paid on the redeemable preference shares issued by the non-resident entity to the Australian resident is then returned to the Australian resident as non-assessable non-exempt income. This dividend is then on-paid by the Australian resident to another Australian resident and then ultimately to the original non-resident entity. This generates a deduction under section 25-90 of the ITAA 1997. This is illustrated in the diagram below: | The ATO considers that arrangements substantially of this type give rise to taxation issues, including whether: a. the arrangement or certain steps within it constitute a sham at general law; b. any amount of income received by any entity involved in the arrangement is assessable to them under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); c. any amount of income received by any entity involved in the arrangement is assessable to them under paragraph 44(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936); d. any income received or receivable is a non-portfolio dividend for the purposes of section 23AJ of the ITAA 1936; e. any amount expended by the Australian resident entity would be deductible under section 8-1 of the ITAA 1997, including the extent to which such an amount was incurred in gaining or producing non-assessable non-exempt income; f. any costs incurred on the borrowed funds are properly incurred under section 25-90 of the ITAA 1997 in deriving non-assessable non-exempt income; g. any income derived by the non-resident entity should be attributable income of the Australian resident entity for the purposes of the CFC rules under Part X of the ITAA 1936; h. any income derived by the non-resident entity should be attributed to the Australian resident entity as FIF income under Part XI of the ITAA 1936; i. any transaction which forms part of the arrangement may be subject to the transfer pricing provisions contained in Division 13 of the ITAA 1936 (for example, the rate of interest payable on any loan); j. any articles in applicable tax treaties between Australia and a relevant country may apply; k. the general anti-avoidance rules contained in Part IVA of the ITAA 1936 apply to cancel any tax benefits under the arrangement; and l. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | a. the arrangement or certain steps within it constitute a sham at general law; b. any amount of income received by any entity involved in the arrangement is assessable to them under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); c. any amount of income received by any entity involved in the arrangement is assessable to them under paragraph 44(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936); d. any income received or receivable is a non-portfolio dividend for the purposes of section 23AJ of the ITAA 1936; e. any amount expended by the Australian resident entity would be deductible under section 8-1 of the ITAA 1997, including the extent to which such an amount was incurred in gaining or producing non-assessable non-exempt income; f. any costs incurred on the borrowed funds are properly incurred under section 25-90 of the ITAA 1997 in deriving non-assessable non-exempt income; g. any income derived by the non-resident entity should be attributable income of the Australian resident entity for the purposes of the CFC rules under Part X of the ITAA 1936; h. any income derived by the non-resident entity should be attributed to the Australian resident entity as FIF income under Part XI of the ITAA 1936; i. any transaction which forms part of the arrangement may be subject to the transfer pricing provisions contained in Division 13 of the ITAA 1936 (for example, the rate of interest payable on any loan); j. any articles in applicable tax treaties between Australia and a relevant country may apply; k. the general anti-avoidance rules contained in Part IVA of the ITAA 1936 apply to cancel any tax benefits under the arrangement; and l. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | The ATO is currently reviewing these arrangements. After considering two variations on such arrangements, the preliminary ATO view is that they are ineffective at law or that the general anti-avoidance provisions contained in Part IVA of ITAA 1936 apply to them. Note 1: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed.","The ATO considers that arrangements substantially of this type give rise to taxation issues, including whether: a. the arrangement or certain steps within it constitute a sham at general law; b. any amount of income received by any entity involved in the arrangement is assessable to them under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); c. any amount of income received by any entity involved in the arrangement is assessable to them under paragraph 44(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936); d. any income received or receivable is a non-portfolio dividend for the purposes of section 23AJ of the ITAA 1936; e. any amount expended by the Australian resident entity would be deductible under section 8-1 of the ITAA 1997, including the extent to which such an amount was incurred in gaining or producing non-assessable non-exempt income; f. any costs incurred on the borrowed funds are properly incurred under section 25-90 of the ITAA 1997 in deriving non-assessable non-exempt income; g. any income derived by the non-resident entity should be attributable income of the Australian resident entity for the purposes of the CFC rules under Part X of the ITAA 1936; h. any income derived by the non-resident entity should be attributed to the Australian resident entity as FIF income under Part XI of the ITAA 1936; i. any transaction which forms part of the arrangement may be subject to the transfer pricing provisions contained in Division 13 of the ITAA 1936 (for example, the rate of interest payable on any loan); j. any articles in applicable tax treaties between Australia and a relevant country may apply; k. the general anti-avoidance rules contained in Part IVA of the ITAA 1936 apply to cancel any tax benefits under the arrangement; and l. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | a. the arrangement or certain steps within it constitute a sham at general law; b. any amount of income received by any entity involved in the arrangement is assessable to them under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); c. any amount of income received by any entity involved in the arrangement is assessable to them under paragraph 44(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936); d. any income received or receivable is a non-portfolio dividend for the purposes of section 23AJ of the ITAA 1936; e. any amount expended by the Australian resident entity would be deductible under section 8-1 of the ITAA 1997, including the extent to which such an amount was incurred in gaining or producing non-assessable non-exempt income; f. any costs incurred on the borrowed funds are properly incurred under section 25-90 of the ITAA 1997 in deriving non-assessable non-exempt income; g. any income derived by the non-resident entity should be attributable income of the Australian resident entity for the purposes of the CFC rules under Part X of the ITAA 1936; h. any income derived by the non-resident entity should be attributed to the Australian resident entity as FIF income under Part XI of the ITAA 1936; i. any transaction which forms part of the arrangement may be subject to the transfer pricing provisions contained in Division 13 of the ITAA 1936 (for example, the rate of interest payable on any loan); j. any articles in applicable tax treaties between Australia and a relevant country may apply; k. the general anti-avoidance rules contained in Part IVA of the ITAA 1936 apply to cancel any tax benefits under the arrangement; and l. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | The ATO is currently reviewing these arrangements. After considering two variations on such arrangements, the preliminary ATO view is that they are ineffective at law or that the general anti-avoidance provisions contained in Part IVA of ITAA 1936 apply to them. Note 1: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 23 April 2009 | Date of Effect: 23 April 2009 | Related Rulings/Determinations: TD 2008/23 TD 2008/24 TD 2008/25 | Subject References: Aggressive tax planning Arrangement Promoters | Legislative References: Income Tax Assessment Act 1936 Part IVA Part X Part XI Division 13 Section 23AJ Section 44 Income Tax Assessment Act 1997 Section 6-5 Section 8-1 Section 25-90 Taxation Administration Act 1953 Schedule 1 Div 290 | Contact Officer: Paul Suppree Business Line: Large Business & International Section: Financial Services Industry Group Phone: (03) 9937 9242",,,,TD 2008/23 | TD 2008/24 | TD 2008/25 | Part IVA | Part X | Section 44 | Section 6-5 | Section 8-1 | Section 25-90 | Schedule 1 Div 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20099/NAT/ATO/00001,
TA 2009/10,Non-commercial use of negotiable instruments involving self-managed superannuation funds,18 May 2009,Current,,"The ATO view on the arrangement described in TA 2009/10 is set out in SMSFR 2010/1 , TR 2010/1 and SMSFD 2011/1 . This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | This Taxpayer Alert describes arrangements involving non-commercial use of negotiable instruments to pay a benefit from or make a contribution to a self-managed superannuation fund (SMSF). The Tax Office is concerned that some SMSF trustees and members are attempting to use negotiable instruments in a non-commercial and contrived manner to artificially avoid liquidity problems, change the timing of transactions or to obtain taxation advantages. | This Alert applies to arrangements with features that are substantially equivalent to the following: 1. A non-commercial use of a negotiable instrument (usually a promissory note) involves a transaction between an entity and an SMSF. Such transactions involving an SMSF may include: a) a trustee of an SMSF giving a promissory note to a member to pay a benefit; b) a person giving a promissory note to an SMSF as a contribution; or c) a combination of the above two transactions, often within a very short period of time. The same effect may be attempted through non-commercial use of cheques, such as post-dating a cheque or only presenting a cheque for payment after a significant period of time has passed. 2. Such non-commercial use of a promissory note includes where the note is: a) never intended to be honoured; b) immediately re-endorsed back to the issuer; c) post-dated; or d) while on its face immediately payable, it is only intended to be honoured after a significant period of time has passed (e.g. longer than would occur in a normal commercial context for arm's length parties). | 1. A non-commercial use of a negotiable instrument (usually a promissory note) involves a transaction between an entity and an SMSF. Such transactions involving an SMSF may include: a) a trustee of an SMSF giving a promissory note to a member to pay a benefit; b) a person giving a promissory note to an SMSF as a contribution; or c) a combination of the above two transactions, often within a very short period of time. The same effect may be attempted through non-commercial use of cheques, such as post-dating a cheque or only presenting a cheque for payment after a significant period of time has passed. 2. Such non-commercial use of a promissory note includes where the note is: a) never intended to be honoured; b) immediately re-endorsed back to the issuer; c) post-dated; or d) while on its face immediately payable, it is only intended to be honoured after a significant period of time has passed (e.g. longer than would occur in a normal commercial context for arm's length parties). | a) a trustee of an SMSF giving a promissory note to a member to pay a benefit; b) a person giving a promissory note to an SMSF as a contribution; or c) a combination of the above two transactions, often within a very short period of time. | a) never intended to be honoured; b) immediately re-endorsed back to the issuer; c) post-dated; or d) while on its face immediately payable, it is only intended to be honoured after a significant period of time has passed (e.g. longer than would occur in a normal commercial context for arm's length parties). | The Tax Office is considering the following issues for arrangements of this type: | Superannuation regulatory issues | The Tax Office considers that arrangements of this type give rise to the following issues relevant to the application of the Superannuation Industry (Supervision) Act 1993 and Regulations, being whether the: a) arrangement, or some step within it, may be a sham at general law; b) benefit payment standards may not be met; c) contributions standards may not be met; d) restriction on SMSFs acquiring assets from related parties may apply; e) restriction on SMSFs providing financial assistance to a member or relative of a member may apply; and f) in-house asset provisions may not be met. | a) arrangement, or some step within it, may be a sham at general law; b) benefit payment standards may not be met; c) contributions standards may not be met; d) restriction on SMSFs acquiring assets from related parties may apply; e) restriction on SMSFs providing financial assistance to a member or relative of a member may apply; and f) in-house asset provisions may not be met. | Taxation issues | The Tax Office considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether: g) the arrangement, or some step within it, may be a sham at general law; h) the arrangement attempts to change the timing of a contribution to an SMSF in order to reduce or eliminate liability for excess contributions tax under Division 292 of the Income Tax Assessment Act 1997; i) any assessable income may arise to one of the parties, and if so, at what time such income may arise; j) income tax deductions may be available to one of the parties, and if so, at what time such deductions may be allowable; k) the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement or some part of it; and l) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | g) the arrangement, or some step within it, may be a sham at general law; h) the arrangement attempts to change the timing of a contribution to an SMSF in order to reduce or eliminate liability for excess contributions tax under Division 292 of the Income Tax Assessment Act 1997; i) any assessable income may arise to one of the parties, and if so, at what time such income may arise; j) income tax deductions may be available to one of the parties, and if so, at what time such deductions may be allowable; k) the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement or some part of it; and l) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The Tax Office is currently examining these arrangements. Note 1: Base penalties of up to 75% of the tax avoided can apply where someone makes a false or misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 3: Note 3: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24.",,,,,SMSFR 2010/1 | TR 2010/1 | SMSFD 2011/1 | PS LA 2007/7 | PS LA 2007/24 | Superannuation Industry (Supervision) Act 1993 | Superannuation Industry (Supervision) Regulations 1994 | Income Tax Assessment Act 1936 | Income Tax Assessment Act 1997 | Taxation Administration Act 1953,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200910/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers
TA 2009/11,Retail Premiums paid on unexercised share entitlements,19 May 2009,Current,,"The Alert applies to arrangements with features substantially equivalent to the following: 1. A company grants rights ('entitlements') to existing shareholders that allow them to subscribe for an allotment of new shares in the company at an amount called the 'offer price', subject to their eligibility to do so. 2. The offer price is less than the amount the shareholder would otherwise have to pay to subscribe for the same amount of shares (i.e. on the share market). That is, the subscription when exercising entitlements under the rights offer is at a discount. 3. Some shareholders choose not to exercise some or all their entitlement to the offered allotment or, alternatively, are not eligible to receive or exercise an entitlement. 4. Entitlements for such shareholders, which they did not take up or could not take up, are collectively referred to in this Alert as 'unexercised entitlements'. 5. The company issuing the entitlements arranges to offer a number of shares equivalent to the unexercised entitlements to other entities, such as to institutional investors, in what is referred to as a 'bookbuild process'. 6. Where the issue of shares under a bookbuild process realises an amount above the offer price (this is usually the case because of the discounted issue price), the company arranges payment of a pro rata 'Retail Premium' to shareholders who have unexercised entitlements after the offer period closes. 7. The Retail Premium paid may be all or part of the difference between the offer price under the unexercised entitlements and the price at which the buyers subscribed for the shares. 8. At the time of the initial offer or the time of payment of the Retail Premium, the company issuing the shares or another entity may offer advice to shareholders that Retail Premiums received should be treated as a capital gain, and potentially, where the original shares have been held for more than 12 months, qualify for the capital gains tax discount (e.g. for shareholders that are individuals or trustees of trusts). | 1. A company grants rights ('entitlements') to existing shareholders that allow them to subscribe for an allotment of new shares in the company at an amount called the 'offer price', subject to their eligibility to do so. 2. The offer price is less than the amount the shareholder would otherwise have to pay to subscribe for the same amount of shares (i.e. on the share market). That is, the subscription when exercising entitlements under the rights offer is at a discount. 3. Some shareholders choose not to exercise some or all their entitlement to the offered allotment or, alternatively, are not eligible to receive or exercise an entitlement. 4. Entitlements for such shareholders, which they did not take up or could not take up, are collectively referred to in this Alert as 'unexercised entitlements'. 5. The company issuing the entitlements arranges to offer a number of shares equivalent to the unexercised entitlements to other entities, such as to institutional investors, in what is referred to as a 'bookbuild process'. 6. Where the issue of shares under a bookbuild process realises an amount above the offer price (this is usually the case because of the discounted issue price), the company arranges payment of a pro rata 'Retail Premium' to shareholders who have unexercised entitlements after the offer period closes. 7. The Retail Premium paid may be all or part of the difference between the offer price under the unexercised entitlements and the price at which the buyers subscribed for the shares. 8. At the time of the initial offer or the time of payment of the Retail Premium, the company issuing the shares or another entity may offer advice to shareholders that Retail Premiums received should be treated as a capital gain, and potentially, where the original shares have been held for more than 12 months, qualify for the capital gains tax discount (e.g. for shareholders that are individuals or trustees of trusts). | FEATURES WHICH CONCERN US | The Tax Office considers that arrangements of this type give rise to a number of taxation issues, including whether: (a) Retail Premium payments should be treated as unfrankable dividends in line with the operation of the dividend provisions of sections 6(1), 6(4), 44(1) and 44(1B) of the Income Tax Assessment Act 1936. (b) Retail Premium payments, and any similar payments made are also ordinary income under section 6-5 of the Income Tax Assessment Act 1997 under the principles discussed in Commissioner of Taxation v McNeil [2007] HCA 5; 2007 ATC 4223; (2007) 64 ATR 431. (c) Retail Premium payments, as unfranked dividends and/or ordinary income, should not be treated as capital gains and would not be eligible for the capital gains tax discount. | (a) Retail Premium payments should be treated as unfrankable dividends in line with the operation of the dividend provisions of sections 6(1), 6(4), 44(1) and 44(1B) of the Income Tax Assessment Act 1936. (b) Retail Premium payments, and any similar payments made are also ordinary income under section 6-5 of the Income Tax Assessment Act 1997 under the principles discussed in Commissioner of Taxation v McNeil [2007] HCA 5; 2007 ATC 4223; (2007) 64 ATR 431. (c) Retail Premium payments, as unfranked dividends and/or ordinary income, should not be treated as capital gains and would not be eligible for the capital gains tax discount. | The Tax Office is reviewing these arrangements and their tax treatment. | The revised Decision Impact Statement for the McNeil decision clarifies the distinction between the tax treatment of compensation for surrender of rights in respect of shares in companies and the legislative change in the treatment of the acquisition of such rights that followed the McNeil decision. | Date of Issue: 19 May 2009 | Date of Effect: 19 May 2009 | Related Practice Statements: PS LA 2008/15 | Other References: Decision Impact Statement McNeil (S56/2006) | Subject References: Entitlement Offer Retail Premium | Legislative References: Income Tax Assessment Act 1936 Section 6(1) Section 6(4) Section 44(1) Section 44(1B) Income Tax Assessment Act 1997 Section 6-5 | Case References: Commissioner of Taxation v McNeil [2007] HCA 5 2007 ATC 4223 (2007) 64 ATR 431 | Commissioner of Taxation v McNeil [2007] HCA 5 2007 ATC 4223 (2007) 64 ATR 431 | Contact Officer: Peter Nash Business Line: Micro Enterprises & Individuals Section: Tax Technical Network Phone: (02) 9354 3224",,,,,TR 2012/1 | PS LA 2008/15 | Decision Impact Statement | Section 6(1) | Section 6(4) | Section 44(1) | Section 44(1B) | Section 6-5 | 2007 ATC 4223,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200911/NAT/ATO/00001,"The ATO view for the arrangement described in TA 2009/11 is set out in TR 2012/1 . | This Taxpayer Alert describes arrangements where a company pays shareholders, who have unexercised share entitlements an amount (referred to in this Alert as a 'Retail Premium'), in respect of those unexercised entitlements. | The Tax Office is concerned that shareholders are choosing whether or not to exercise entitlements to shares on the basis of information provided by the company issuing the shares indicating that any Retail Premiums should be treated as capital for tax purposes."
TA 2009/12,Re-characterising capital losses as revenue losses,21 May 2009,Current,,"This taxpayer alert is intended to apply to arrangements having features that are substantially equivalent to the following: 1. The taxpayer is an individual investor who holds shares. 2. The taxpayer has previously disposed of shares realising a profit, and treated that profit as a capital gain. This is done on the basis that the shares were held with the intention of benefiting from a long term increase in capital value and/or the receipt of dividend income during the holding period. The taxpayer's records are maintained on this basis. 3. As the taxpayer is an individual and had held the shares for more than 12 months, the taxpayer claimed the 50% CGT discount in their income tax return for each of the relevant financial years. 4. The value of shares still held by the taxpayer decreases as a result of market conditions and the taxpayer has an unrealised loss in respect of those shares. 5. The taxpayer may receive advice from a tax professional or financial advisor regarding the deductibility of losses incurred on the sale of shares for the current income year, including the benefits of being regarded as holding shares as a share trader when making such a loss. 6. Without changing the economic substance of their shareholdings, the taxpayer decides to arbitrarily re-characterise their shareholding in order to claim the net loss from their sale as a revenue deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA). This is done on the basis that the taxpayer is now carrying on a business of share trading (as opposed to carrying forward capital losses indefinitely to be offset against any future capital gains, as would be the case for an investor). 7. To support a contention that the taxpayer is carrying on a business of share trading, the taxpayer may artificially adopt specific practices to present a pretence of being a share trader, but with no objective, material change in either the nature of investments held (or sold) or their holding activities. Some of these practices (which in the relevant circumstances a reasonable person would regard as artificial and contrived) may include: a) Purchasing or selling shares on a more regular basis (often with small net volumes). This is often called ""window dressing""; b) Creating a trading plan for their share transaction activities with a newly stated goal of maximising profit - even though the shares sold will generate a loss, rather than a profit; c) Increasing recording of time spent per week on the investment process (without any significant change in the total value of transactions); and d) Maintaining additional records to evidence share transactions including additional reliance on guidance from others (without any significant change in the total value of transactions). 8. The taxpayer subsequently decides to dispose of the shares to realise the net loss. 9. The change in approach is applied on a prospective basis only, such that only future transactions are affected, even though there has been no substantive change in objective facts between the current year and previous years. | 1. The taxpayer is an individual investor who holds shares. 2. The taxpayer has previously disposed of shares realising a profit, and treated that profit as a capital gain. This is done on the basis that the shares were held with the intention of benefiting from a long term increase in capital value and/or the receipt of dividend income during the holding period. The taxpayer's records are maintained on this basis. 3. As the taxpayer is an individual and had held the shares for more than 12 months, the taxpayer claimed the 50% CGT discount in their income tax return for each of the relevant financial years. 4. The value of shares still held by the taxpayer decreases as a result of market conditions and the taxpayer has an unrealised loss in respect of those shares. 5. The taxpayer may receive advice from a tax professional or financial advisor regarding the deductibility of losses incurred on the sale of shares for the current income year, including the benefits of being regarded as holding shares as a share trader when making such a loss. 6. Without changing the economic substance of their shareholdings, the taxpayer decides to arbitrarily re-characterise their shareholding in order to claim the net loss from their sale as a revenue deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA). This is done on the basis that the taxpayer is now carrying on a business of share trading (as opposed to carrying forward capital losses indefinitely to be offset against any future capital gains, as would be the case for an investor). 7. To support a contention that the taxpayer is carrying on a business of share trading, the taxpayer may artificially adopt specific practices to present a pretence of being a share trader, but with no objective, material change in either the nature of investments held (or sold) or their holding activities. Some of these practices (which in the relevant circumstances a reasonable person would regard as artificial and contrived) may include: a) Purchasing or selling shares on a more regular basis (often with small net volumes). This is often called ""window dressing""; b) Creating a trading plan for their share transaction activities with a newly stated goal of maximising profit - even though the shares sold will generate a loss, rather than a profit; c) Increasing recording of time spent per week on the investment process (without any significant change in the total value of transactions); and d) Maintaining additional records to evidence share transactions including additional reliance on guidance from others (without any significant change in the total value of transactions). 8. The taxpayer subsequently decides to dispose of the shares to realise the net loss. 9. The change in approach is applied on a prospective basis only, such that only future transactions are affected, even though there has been no substantive change in objective facts between the current year and previous years. | a) Purchasing or selling shares on a more regular basis (often with small net volumes). This is often called ""window dressing""; b) Creating a trading plan for their share transaction activities with a newly stated goal of maximising profit - even though the shares sold will generate a loss, rather than a profit; c) Increasing recording of time spent per week on the investment process (without any significant change in the total value of transactions); and d) Maintaining additional records to evidence share transactions including additional reliance on guidance from others (without any significant change in the total value of transactions).","A taxpayer with some or all of the above features enters into the following situation: | Features which concern us | Depending upon the individual facts and circumstances, the ATO considers that arrangements of this type may give rise to taxation issues including whether: (a) any transactions from the taxpayer's activity are covered by the capital loss provisions under Part 3-1 of the ITAA 1997; (b) any losses incurred from the disposal may be allowed as a deduction under section 8-1 of the ITAA 1997; (c) any transactions from the taxpayer's activity are covered by the trading stock rules under Division 70 of the ITAA 1997; (d) any losses incurred are able to be substantiated by evidence necessary to determine/support the intention of the acquisition as explained in TD 2007/2. In particular, whether records have been retained until the later of: i. the end of the statutory record of retention period, e.g. s.262A(4) of the Income Tax Assessment Act 1936 (ITAA 1936), or ii. the end of the statutory period of review for an assessment for the year of income when the tax loss is fully deducted or the net capital loss is fully applied; (e) the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may be applied to cancel any tax benefit under all, or some part, of the arrangement; and (f) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | (a) any transactions from the taxpayer's activity are covered by the capital loss provisions under Part 3-1 of the ITAA 1997; (b) any losses incurred from the disposal may be allowed as a deduction under section 8-1 of the ITAA 1997; (c) any transactions from the taxpayer's activity are covered by the trading stock rules under Division 70 of the ITAA 1997; (d) any losses incurred are able to be substantiated by evidence necessary to determine/support the intention of the acquisition as explained in TD 2007/2. In particular, whether records have been retained until the later of: i. the end of the statutory record of retention period, e.g. s.262A(4) of the Income Tax Assessment Act 1936 (ITAA 1936), or ii. the end of the statutory period of review for an assessment for the year of income when the tax loss is fully deducted or the net capital loss is fully applied; (e) the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may be applied to cancel any tax benefit under all, or some part, of the arrangement; and (f) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | i. the end of the statutory record of retention period, e.g. s.262A(4) of the Income Tax Assessment Act 1936 (ITAA 1936), or ii. the end of the statutory period of review for an assessment for the year of income when the tax loss is fully deducted or the net capital loss is fully applied; | The ATO is currently reviewing these arrangements. | Further information on share trading can be found on www.ato.gov.au under ' Carrying on a business of share trading ' and in ATO ID 2001/745. Note 1: You may have already sought advice from the ATO in respect of your arrangement by way of a private ruling. If you have received a private ruling in respect of your arrangement, you can rely on that private ruling. A private ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the private ruling is later found to be incorrect. However, a private ruling only applies to the particular entity identified and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the private ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the Income Tax Assessment Act 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953 . The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 5: Where appropriate, section 167 of the Income Tax Assessment Act 1936 (ITAA 1936) may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24. Note 6: A registered tax agent may have their registration cancelled or suspended by the Tax Agents' Board under section 251K of the Income Tax Assessment Act 1936 if they are guilty of misconduct as a tax agent or are not considered a fit and proper person to prepare income tax returns. A person under a sentence of imprisonment for a serious taxation offence is not a fit and proper person. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 21 May 2009 | Date of Effect: 21 May 2009 | Related Rulings/Determinations: TD 2007/2 | Related Practice Statements: PS LA 2007/7 PS LA 2007/24 PS LA 2008/15 | Other References: ATO ID 2001/745 | Subject References: Aggressive tax planning Part IVA Capital losses Capital gain Revenue account Share trading Promoters | Legislative References: Income Tax Assessment Act 1997 8-1 Division 35 Division 70 Division 102 Subdivision 115A Part 3-1 Income Tax Assessment Act 1936 Part IVA 167 251K 262A(4) Tax Administration Act 1953 Schedule 1 Div 290 | Case References: Sun Newspapers Ltd v FCT (1938) 61 CLR 337 Ferguson v FCT (1979) 37 FLR 310 79 ATC 4261 (1979) 9 ATR 873 Case X86 90 ATC 621 (1990) 21 ATR 3747 FC of T v Radnor Pty Ltd 91 ATC 4689 (1991) 22 ATR 344 (1991) 102 ALR 187 Shields v DC of T (Cth) [1999] AATA 4 (1999) 99 ATC 2037 (1999) 41 ATR 1042 | Sun Newspapers Ltd v FCT (1938) 61 CLR 337 | Ferguson v FCT (1979) 37 FLR 310 79 ATC 4261 (1979) 9 ATR 873 | Case X86 90 ATC 621 (1990) 21 ATR 3747 | FC of T v Radnor Pty Ltd 91 ATC 4689 (1991) 22 ATR 344 (1991) 102 ALR 187 | Shields v DC of T (Cth) [1999] AATA 4 (1999) 99 ATC 2037 (1999) 41 ATR 1042 | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical & Case Leadership Phone: (02) 6216 2710",,,,TD 2007/2 | PS LA 2007/7 | PS LA 2007/24 | PS LA 2008/15 | ATO ID 2001/745 | 8-1 | Division 35 | Division 70 | Division 102 | Subdivision 115A | Part 3-1 | Part IVA | 167 | 262A(4) | Schedule 1 Div 290 | (1938) 61 CLR 337 | 79 ATC 4261 | 90 ATC 621 | 91 ATC 4689 | (1999) 99 ATC 2037,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200912/NAT/ATO/00001,"This Taxpayer Alert describes an arrangement whereby taxpayers seek to re-characterise their shareholding status from that of a long term capital investor to a trader in shares. Taxpayers involved have claimed the capital gains tax (CGT) discount on previous receipts, but are now realising losses which they seek to claim as tax deductions against ordinary income (as opposed to capital losses which are only able to be offset against capital gains)."
TA 2009/13,Managed Investment Schemes: Purported partnership participation,21 May 2009,Current,,"This Taxpayer Alert describes an arrangement where a purported partnership is inserted into an investment in an afforestation, agricultural or horticultural Managed Investment Scheme (MIS) in order to generate deductions for the newly inserted partners. In addition to other taxation issues, because of the inserted partnership, the implementation of the arrangement is likely to be materially different from that described in any relevant product rulings for the underlying MIS. | Schemes of the type described in this alert are not covered by Tax Office product rulings or other tax clearances. | The alert applies to arrangements with features substantially equivalent to the following: 1. A person (the representative) becomes an authorised representative of a financial services licensee to market and sell specific Managed Investment Scheme (MIS) interests. 2. The representative, or their associate, executes the MIS documentation in their own name to create a MIS interest. The representative, or their associate, does not indicate in any of this documentation that they are acting on behalf of other parties, i.e. any partnership. 3. To fund the cost of acquiring the MIS interests the representative, or their associate, applies for loans covering 100% of the initial subscription price from a finance entity associated with the MIS. The loan is provided by the finance entity for 100% of the initial subscription costs, subject to security over the relevant MIS interest and is made on a ""low-doc"" basis. 4. The representative receives commissions from the MIS manager or financial services licensee for the sale of the relevant MIS interest. 5. Subsequently, the representative organises groups of individual investors, to invest in these MIS interests on the basis that they will purportedly be partners in a partnership (the 'partnership'). The representative advises these investors that they will be covered by relevant Product Rulings for the particular MIS. 6. There is limited or no documentation supporting the formation of the 'partnership' or the ongoing obligations and rights of investors. In some cases, investors are allegedly admitted to the 'partnership' later, even after the income year in which the expenditure is incurred. 7. The investors do not execute any MIS documentation themselves, nor are their details provided to the Responsible Entity for the relevant MIS. 8. The representative may be the tax agent for the investors and may administer the 'partnership'. 9. Repayments on the loan to acquire the MIS interest are initially planned to be met by: a. tax refunds from investors claiming deductions for: (i) a share of the loss from the 'partnership' arising from the initial subscription, and (ii) subsequent year interest claims for the loan to acquire the MIS interest, b. the input tax credits claimed in respect of the initial subscription price, c. purportedly assigned commissions received by the representative for selling the MIS interests, and d. returns from investment of the tax refunds, input tax credits and commissions received before the periodic repayments of loan and interest. There may be no other mechanism to repay the balance of the loan or meet interest commitments. 10. The representative may retain a bonus or other fee from the income earned from the investments of the above funds or from the MIS interest itself, prior to applying the balance in repayment of the loan. 11. The representative may seek to assign the 'partnership' interests to other entities before the MIS produces income. 12. Subsequently, the 'partnership' defaults on loan repayments; the financier follows collection procedures and may ultimately take ownership of the MIS interest to mitigate losses, including recovery of the outstanding loan balance. 13. Due to the above features, investors in the 'partnership' may not have either a legal liability for the loans or a legal entitlement to any income from the MIS interests. | 1. A person (the representative) becomes an authorised representative of a financial services licensee to market and sell specific Managed Investment Scheme (MIS) interests. 2. The representative, or their associate, executes the MIS documentation in their own name to create a MIS interest. The representative, or their associate, does not indicate in any of this documentation that they are acting on behalf of other parties, i.e. any partnership. 3. To fund the cost of acquiring the MIS interests the representative, or their associate, applies for loans covering 100% of the initial subscription price from a finance entity associated with the MIS. The loan is provided by the finance entity for 100% of the initial subscription costs, subject to security over the relevant MIS interest and is made on a ""low-doc"" basis. 4. The representative receives commissions from the MIS manager or financial services licensee for the sale of the relevant MIS interest. 5. Subsequently, the representative organises groups of individual investors, to invest in these MIS interests on the basis that they will purportedly be partners in a partnership (the 'partnership'). The representative advises these investors that they will be covered by relevant Product Rulings for the particular MIS. 6. There is limited or no documentation supporting the formation of the 'partnership' or the ongoing obligations and rights of investors. In some cases, investors are allegedly admitted to the 'partnership' later, even after the income year in which the expenditure is incurred. 7. The investors do not execute any MIS documentation themselves, nor are their details provided to the Responsible Entity for the relevant MIS. 8. The representative may be the tax agent for the investors and may administer the 'partnership'. 9. Repayments on the loan to acquire the MIS interest are initially planned to be met by: a. tax refunds from investors claiming deductions for: (i) a share of the loss from the 'partnership' arising from the initial subscription, and (ii) subsequent year interest claims for the loan to acquire the MIS interest, b. the input tax credits claimed in respect of the initial subscription price, c. purportedly assigned commissions received by the representative for selling the MIS interests, and d. returns from investment of the tax refunds, input tax credits and commissions received before the periodic repayments of loan and interest. There may be no other mechanism to repay the balance of the loan or meet interest commitments. 10. The representative may retain a bonus or other fee from the income earned from the investments of the above funds or from the MIS interest itself, prior to applying the balance in repayment of the loan. 11. The representative may seek to assign the 'partnership' interests to other entities before the MIS produces income. 12. Subsequently, the 'partnership' defaults on loan repayments; the financier follows collection procedures and may ultimately take ownership of the MIS interest to mitigate losses, including recovery of the outstanding loan balance. 13. Due to the above features, investors in the 'partnership' may not have either a legal liability for the loans or a legal entitlement to any income from the MIS interests. | a. tax refunds from investors claiming deductions for: (i) a share of the loss from the 'partnership' arising from the initial subscription, and (ii) subsequent year interest claims for the loan to acquire the MIS interest, b. the input tax credits claimed in respect of the initial subscription price, c. purportedly assigned commissions received by the representative for selling the MIS interests, and d. returns from investment of the tax refunds, input tax credits and commissions received before the periodic repayments of loan and interest. | (i) a share of the loss from the 'partnership' arising from the initial subscription, and (ii) subsequent year interest claims for the loan to acquire the MIS interest, | The ATO considers that arrangements substantially of this type give rise to taxation issues, including whether: 1. such an arrangement, or certain steps within it, may be a sham; 2. there is any 'partnership' under general or taxation law, either in the first year of income or at any later time; 3. interests in the MIS have been taken up by or on behalf of any such 'partnership'; 4. investors are entitled to deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or under section 92 of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of losses; 5. investors are entitled to offset losses from investment in the MIS against other assessable income as governed by Division 35 of the ITAA 1997; 6. investors are entitled to a share of the income from the MIS which is assessable under section 6-5 of the ITAA 1997; 7. the tax treatment of any disposal of an MIS interest is subject to sections 82KZMGA or 82KZMGB of the ITAA 1936; 8. commission fees received by the representative are assessable under section 6-5 of the ITAA 1997; 9. the representative is entitled to deductions under section 8-1 of the ITAA 1997 for amounts contributed to the 'partnership'; 10. the arrangement constitutes a scheme to which the general anti-avoidance rules in Part IVA of the ITAA 1936 may apply; 11. investors or the representative are entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act); 12. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act, 1953 (TAA); 13. any entity involved in the arrangement has implemented a product ruling scheme in a materially different way for the purposes of Division 290 of Schedule 1 to the TAA; 14. any criminal offences have been committed by investors, the representative or any associates in relation to the arrangement; and 15. a registered tax agent involved in the arrangement may have their registration suspended or cancelled by the Tax Agents' Board under section 251K of the ITAA 1936. | 1. such an arrangement, or certain steps within it, may be a sham; 2. there is any 'partnership' under general or taxation law, either in the first year of income or at any later time; 3. interests in the MIS have been taken up by or on behalf of any such 'partnership'; 4. investors are entitled to deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or under section 92 of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of losses; 5. investors are entitled to offset losses from investment in the MIS against other assessable income as governed by Division 35 of the ITAA 1997; 6. investors are entitled to a share of the income from the MIS which is assessable under section 6-5 of the ITAA 1997; 7. the tax treatment of any disposal of an MIS interest is subject to sections 82KZMGA or 82KZMGB of the ITAA 1936; 8. commission fees received by the representative are assessable under section 6-5 of the ITAA 1997; 9. the representative is entitled to deductions under section 8-1 of the ITAA 1997 for amounts contributed to the 'partnership'; 10. the arrangement constitutes a scheme to which the general anti-avoidance rules in Part IVA of the ITAA 1936 may apply; 11. investors or the representative are entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act); 12. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act, 1953 (TAA); 13. any entity involved in the arrangement has implemented a product ruling scheme in a materially different way for the purposes of Division 290 of Schedule 1 to the TAA; 14. any criminal offences have been committed by investors, the representative or any associates in relation to the arrangement; and 15. a registered tax agent involved in the arrangement may have their registration suspended or cancelled by the Tax Agents' Board under section 251K of the ITAA 1936. | Indeed we have seen cases where there appears to have been backdating of the documents, and we are considering criminal prosecution action. | The ATO is currently reviewing these arrangements. Note 1: You may have already received advice from the ATO in respect of your arrangement by way of a product ruling. A product ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the ruling is later found to be incorrect. However, the product ruling does not cover the commercial viability of the scheme. Also a product ruling only applies to a class of entities identified within the product ruling and to the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the ruling will not be legally binding on the Commissioner. Note 2: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3: In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. Note 4: A registered tax agent may have their registration cancelled or suspended by the Tax Agents' Board under section 251K of the Income Tax Assessment Act 1936 if they are guilty of misconduct as a tax agent or are not considered a fit and proper person to prepare income tax returns. A person under a sentence of imprisonment for a serious taxation offence is not a fit and proper person. Note 5: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008/6. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings.",,,,,PS LA 2008/6 | PS LA 2008/15 | Section 6-5 | Section 8-1 | Div 35 | Part IVA | Section 82KZMGA | Section 82KZMGB | Section 92 | Schedule 1 Div 290 | Section 11-20,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200913/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers | Technical & Case Leadership
TA 2009/14,Artificially creating capital losses through default beneficiary arrangement to offset capital gains,21 May 2009,Current,,"The ATO view on the arrangement described in TA 2009/14 is set out in TD 2009/19 . This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | This Taxpayer Alert describes arrangements where a taxpayer with a current or future capital gain attempts to artificially create an offsetting capital loss by becoming a default beneficiary for a discretionary trust (for no consideration) and then transferring their interest in that trust (for no consideration). | The alert applies to arrangements having features that are substantially equivalent to the following: 1. A trust is established for the benefit of discretionary objects. 2. The deed for that trust confers discretionary powers of appointment of income and capital on the trustee or a third party appointor. 3. The trust has a named default beneficiary who on the termination date will take any trust capital that has not been appointed. 4. The default beneficiary may also be one of the discretionary objects. 5. The default beneficiary does not give any money or property to acquire the interest in the trust capital. 6. The default beneficiary assigns all their interests (default and discretionary interests) in the trust to a third party (for example, a spouse). 7. The assignment of rights to trust capital is said to produce entitlement to a capital loss for the default beneficiary (under CGT event E8). 8. The basic features of the arrangement can be summarised diagrammatically as follows: | 1. A trust is established for the benefit of discretionary objects. 2. The deed for that trust confers discretionary powers of appointment of income and capital on the trustee or a third party appointor. 3. The trust has a named default beneficiary who on the termination date will take any trust capital that has not been appointed. 4. The default beneficiary may also be one of the discretionary objects. 5. The default beneficiary does not give any money or property to acquire the interest in the trust capital. 6. The default beneficiary assigns all their interests (default and discretionary interests) in the trust to a third party (for example, a spouse). 7. The assignment of rights to trust capital is said to produce entitlement to a capital loss for the default beneficiary (under CGT event E8). 8. The basic features of the arrangement can be summarised diagrammatically as follows: | The Tax Office considers that the arrangement outlined above gives rise to taxation issues which includes whether: (i) a valid trust has been created at general law; (ii) any subsequent purported assignment is valid at general law; (iii) the assignment of a default interest in the capital of a trust will result in either CGT event E8 or CGT event A1 happening to the holder of the interest and the calculations associated with such an event; (iv) a default interest in the capital of a trust constitutes an 'interest in the trust capital' for the purposes of CGT event E8 and the appropriate valuation of such an interest; (v) the arrangement may constitute a scheme to which the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may be applied to cancel a relevant tax benefit; and (vi) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | (i) a valid trust has been created at general law; (ii) any subsequent purported assignment is valid at general law; (iii) the assignment of a default interest in the capital of a trust will result in either CGT event E8 or CGT event A1 happening to the holder of the interest and the calculations associated with such an event; (iv) a default interest in the capital of a trust constitutes an 'interest in the trust capital' for the purposes of CGT event E8 and the appropriate valuation of such an interest; (v) the arrangement may constitute a scheme to which the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may be applied to cancel a relevant tax benefit; and (vi) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | Indeed we have seen cases where there appears to have been backdating of the documents, and we are considering criminal prosecution action. | The Australian Taxation Office is currently reviewing these arrangements. Note 1: Penalties of up to 50% of the tax avoided may be imposed where Part IVA applies. Base penalties for intentional disregard of the tax law are imposed at 75% of the tax avoided. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 3: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion.",,,,,TD 2009/19 | PS LA 2008/15 | Part IVA | Div 104 | Schedule 1 Div 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200914/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers | Technical & Case Leadership
TA 2009/15,Payment of inflated insurance premiums to a related party,4 June 2009,Current,,"This Taxpayer Alert describes an arrangement involving payments of amounts described as insurance premiums which are excessive by reference to the coverage provided and feature no significant transfer of insurance risk. | This Taxpayer Alert applies to arrangements with features substantially equivalent to the following: 1. An entity (the paying entity) pays amounts described as insurance premiums to another party (the recipient). 2. The recipient may either pay on amounts to an entity controlled by the paying entity, or effectively hold the funds on the paying entity's behalf. 3. The paying entity and the recipient may be associates or otherwise related entities. 4. Alternatively, an intermediary may be used and the payment channelled through the intermediary to a related party or associate. 5. The recipient and any associated entity are situated overseas, frequently in a tax haven. 6. The paying entity claims a deduction for the inflated insurance premium. 7. Although allegedly for insurance, (a) the amounts paid may be excessive in comparison to any insurance coverage provided, considering the conditions for future purported insurance recoveries, and/or (b) there is no significant transfer of insurance risk. 8. In some cases, the dominant purpose of the arrangement may be to attempt to convert what is in substance an investment of funds into the form of a tax-deductible insurance premium. Some arrangements may also combine the above features with characteristics substantially equivalent to those described in Taxpayer Alert TA 2009/9, ""Contrived cross-border arrangements that seek to generate debt deductions for non-assessable non-exempt income"" . For a discussion of the Tax Office approach to evaluating whether there has been a transfer of insurance risk please refer to Law Administration Practice Statement PS LA 2007/8 . | 1. An entity (the paying entity) pays amounts described as insurance premiums to another party (the recipient). 2. The recipient may either pay on amounts to an entity controlled by the paying entity, or effectively hold the funds on the paying entity's behalf. 3. The paying entity and the recipient may be associates or otherwise related entities. 4. Alternatively, an intermediary may be used and the payment channelled through the intermediary to a related party or associate. 5. The recipient and any associated entity are situated overseas, frequently in a tax haven. 6. The paying entity claims a deduction for the inflated insurance premium. 7. Although allegedly for insurance, (a) the amounts paid may be excessive in comparison to any insurance coverage provided, considering the conditions for future purported insurance recoveries, and/or (b) there is no significant transfer of insurance risk. 8. In some cases, the dominant purpose of the arrangement may be to attempt to convert what is in substance an investment of funds into the form of a tax-deductible insurance premium. | (a) the amounts paid may be excessive in comparison to any insurance coverage provided, considering the conditions for future purported insurance recoveries, and/or (b) there is no significant transfer of insurance risk. | Some arrangements may also combine the above features with characteristics substantially equivalent to those described in Taxpayer Alert TA 2009/9, ""Contrived cross-border arrangements that seek to generate debt deductions for non-assessable non-exempt income"" . | For a discussion of the Tax Office approach to evaluating whether there has been a transfer of insurance risk please refer to Law Administration Practice Statement PS LA 2007/8 . | The Tax Office considers that an arrangement which exhibits the features outlined above may give rise to taxation issues that include whether: 1. such an arrangement or certain steps in it may be a sham; 2. the paying entity is entitled to a deduction under section 8-1 Income Tax Assessment Act 1997 (ITAA 1997) in relation to what is described as an insurance premium, and the timing of any such deduction; 3. the amounts received by non-resident parties to the arrangement are properly Australian-sourced income for the purposes of subsection 6-5(3) of the ITAA 1997, and the timing of the inclusion of any amounts in assessable income; 4. payments under the arrangement are affected by the transfer pricing provisions of Division 13 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936); 5. payments under the arrangement are dealt with by a Double Tax Agreement; 6. entities related to the paying entity making the payments are non-resident entities of Australia for taxation purposes, and if so whether they may be Controlled Foreign Companies under Part X of the ITAA 1936; 7. any resident taxpayers who are parties to the arrangement may be attributable taxpayers under Part X of the ITAA 1936 in respect of that entity's income, including tainted services income (under section 448 of ITAA 1936); 8. the general anti-avoidance rules contained in Part IVA ITAA 1936 may operate to cancel a tax benefit under the arrangement; and 9. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | 1. such an arrangement or certain steps in it may be a sham; 2. the paying entity is entitled to a deduction under section 8-1 Income Tax Assessment Act 1997 (ITAA 1997) in relation to what is described as an insurance premium, and the timing of any such deduction; 3. the amounts received by non-resident parties to the arrangement are properly Australian-sourced income for the purposes of subsection 6-5(3) of the ITAA 1997, and the timing of the inclusion of any amounts in assessable income; 4. payments under the arrangement are affected by the transfer pricing provisions of Division 13 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936); 5. payments under the arrangement are dealt with by a Double Tax Agreement; 6. entities related to the paying entity making the payments are non-resident entities of Australia for taxation purposes, and if so whether they may be Controlled Foreign Companies under Part X of the ITAA 1936; 7. any resident taxpayers who are parties to the arrangement may be attributable taxpayers under Part X of the ITAA 1936 in respect of that entity's income, including tainted services income (under section 448 of ITAA 1936); 8. the general anti-avoidance rules contained in Part IVA ITAA 1936 may operate to cancel a tax benefit under the arrangement; and 9. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | The Tax Office approach to evaluating these types of insurance arrangements is set out in Practice Statement PS LA 2007/8. Note 1: Administrative penalties of up to 50% of the scheme shortfall amount can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Civil Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may be imposed by the Federal Court of Australia to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed.",,,,,PS LA 2007/8 | Section 448 | Part IVA | Part X | Section 6-5 | Section 8-1 | Division 290 of Schedule 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200915/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers | Technical & Case Leadership
TA 2009/16,Circumvention of in-house asset rules by self-managed superannuation funds using related party agreements,10 June 2009,Current,,"The Taxation Office view on this arrangement is set out in Self Managed Superannuation Funds Ruling SMSFR 2009/4 This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | This Taxpayer Alert describes an arrangement where a self-managed superannuation fund (SMSF) enters into an agreement (sometimes referred to as a joint venture agreement) with a related trust to acquire assets such as rental property in order to obtain certain taxation and superannuation benefits. The Tax Office is concerned that such an arrangement may breach the superannuation in-house asset rules. | Subject to limited exceptions, an investment in or loan to a related party by an SMSF is an in-house asset. SMSF trustees are prohibited from acquiring an in-house asset if, after the acquisition, the market value of the SMSF's in-house assets exceeds 5% of the total market value of the fund's assets. SMSFs are also prohibited from maintaining a level of in-house assets in excess of the 5% limit. Where in-house assets for an SMSF exceed the 5% limit, the trustee needs to rectify the breach, usually within 12 months. | The contravention of these provisions may result in the SMSF becoming a non-complying superannuation fund for tax purposes, i.e. subject to 45% tax rates on its income (and assets other than undeducted contributions in the year that the fund becomes non-complying). In certain circumstances, the fund's trustee may also be liable to civil or criminal consequences. | This alert applies to arrangements with features that are substantially equivalent to the following: 1. A trustee of an SMSF ('the trustee') pays a fee to an organiser ('the organiser') to set up an agreement, possibly referred to as a 'joint venture agreement' ('the agreement'), between the SMSF and a related trust (""the trust""). 2. The trust may be a hybrid trust of the type described in Taxpayer Alert TA 2008/3 Uncommercial use of certain trusts and Taxpayer Alert TA 2008/4 Self-managed superannuation funds deriving income from certain uncommercial trusts . 3. The organiser claims that the purpose of setting the agreement is to buy investments to provide mutual financial rewards to the SMSF and the trust. 4. Under the agreement, the SMSF contributes capital to fund the acquisition and possible development of an asset ('the asset'), typically real property, which is acquired by the trust. 5. Typically the agreement would state that the SMSF acquires no legal, equitable or other interest in the asset. 6. In exchange for the capital contribution, the agreement provides the SMSF with rights to a proportionate share of the profits from the commercial usage of the asset from the trust. Therefore, the return on the investment, and the investment risk, is dependent on the trust. 7. The trust uses the funds from the SMSF (e.g. 15%) and a borrowed amount (e.g. 85%) to purchase and potentially develop the asset. 8. The borrowed amount the trust puts towards the investment in the asset (e.g. 85%) may come from the following source(s): • the trust borrows an amount from a financial institution; and/or • an individual borrows an amount from a financial institution and subscribes units in the trust. The asset may be used as security for the above borrowing(s). 9. Legal title in the asset lies with the trust and not the SMSF. 10. In some cases, the asset may be leased to a member or members either at market rate or below market rate. 11. The benefits arising from the investment i.e. rents and profits from the sale of the asset are split in proportion to the risk capital invested by the SMSF and the trust based on gross proceeds (e.g. 15% to the SMSF and 85% to the trust). The trust pays all expenses. 12. The SMSF can make further capital contributions to the arrangement via variation/amendment to the agreement to increase its financial risk. 13. The organiser may allege that the arrangement falls outside previous negative Tax Office view (such as ATOID 2006/335) on similar arrangements without any qualification regarding materially different facts. 14. The organiser charges a fee for establishing this arrangement, based upon the perceived commercial advantages of the promoted superannuation regulatory and taxation benefits. | 1. A trustee of an SMSF ('the trustee') pays a fee to an organiser ('the organiser') to set up an agreement, possibly referred to as a 'joint venture agreement' ('the agreement'), between the SMSF and a related trust (""the trust""). 2. The trust may be a hybrid trust of the type described in Taxpayer Alert TA 2008/3 Uncommercial use of certain trusts and Taxpayer Alert TA 2008/4 Self-managed superannuation funds deriving income from certain uncommercial trusts . 3. The organiser claims that the purpose of setting the agreement is to buy investments to provide mutual financial rewards to the SMSF and the trust. 4. Under the agreement, the SMSF contributes capital to fund the acquisition and possible development of an asset ('the asset'), typically real property, which is acquired by the trust. 5. Typically the agreement would state that the SMSF acquires no legal, equitable or other interest in the asset. 6. In exchange for the capital contribution, the agreement provides the SMSF with rights to a proportionate share of the profits from the commercial usage of the asset from the trust. Therefore, the return on the investment, and the investment risk, is dependent on the trust. 7. The trust uses the funds from the SMSF (e.g. 15%) and a borrowed amount (e.g. 85%) to purchase and potentially develop the asset. 8. The borrowed amount the trust puts towards the investment in the asset (e.g. 85%) may come from the following source(s): • the trust borrows an amount from a financial institution; and/or • an individual borrows an amount from a financial institution and subscribes units in the trust. The asset may be used as security for the above borrowing(s). 9. Legal title in the asset lies with the trust and not the SMSF. 10. In some cases, the asset may be leased to a member or members either at market rate or below market rate. 11. The benefits arising from the investment i.e. rents and profits from the sale of the asset are split in proportion to the risk capital invested by the SMSF and the trust based on gross proceeds (e.g. 15% to the SMSF and 85% to the trust). The trust pays all expenses. 12. The SMSF can make further capital contributions to the arrangement via variation/amendment to the agreement to increase its financial risk. 13. The organiser may allege that the arrangement falls outside previous negative Tax Office view (such as ATOID 2006/335) on similar arrangements without any qualification regarding materially different facts. 14. The organiser charges a fee for establishing this arrangement, based upon the perceived commercial advantages of the promoted superannuation regulatory and taxation benefits. | • the trust borrows an amount from a financial institution; and/or • an individual borrows an amount from a financial institution and subscribes units in the trust. | The Tax Office considers that arrangements of this type give rise to the following issues: | Superannuation regulatory issues | The Tax Office considers that arrangements of this type give rise to the following issues relevant to the application of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and Regulations, being whether: a. the in-house asset provisions may not be met as there has been an investment by the SMSF in a related party which is over the 5% limit; b. section 85 of the SIS Act, which prohibits a fund from entering into any scheme to avoid the application of the in-house asset rules, may have been breached; c. the restriction on SMSFs intentionally acquiring assets from a related party under section 66 of the SIS Act may have been breached; and d. the sole purpose test under section 62 of the SIS Act may have been breached e.g. where a purpose of the fund investment is to obtain a present day benefit for fund members or a related party, rather than for the purpose of providing retirement benefits for the members. | a. the in-house asset provisions may not be met as there has been an investment by the SMSF in a related party which is over the 5% limit; b. section 85 of the SIS Act, which prohibits a fund from entering into any scheme to avoid the application of the in-house asset rules, may have been breached; c. the restriction on SMSFs intentionally acquiring assets from a related party under section 66 of the SIS Act may have been breached; and d. the sole purpose test under section 62 of the SIS Act may have been breached e.g. where a purpose of the fund investment is to obtain a present day benefit for fund members or a related party, rather than for the purpose of providing retirement benefits for the members. | Taxation issues | The Tax Office considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether: e. income derived by the SMSF under the agreement may be 'non-arm's length income' for the purposes of section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore is subject to a higher rate of tax; f. the borrowing expense incurred by the individual taxpayer or the trust may be deductible under section 8-1 or section 25-25 of ITAA 1997, and the extent to which it is deductible; g. any capital gains tax consequences may arise e.g. when trust interests are redeemed, new interests are issued or upon the disposal of the property; h. any fee or commission paid should not be allowable as a deduction by the SMSF for that income year; i. the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement; j. any fee or commission received by the organiser/s of this arrangement should be included as assessable income for the relevant income year; and k. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | e. income derived by the SMSF under the agreement may be 'non-arm's length income' for the purposes of section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore is subject to a higher rate of tax; f. the borrowing expense incurred by the individual taxpayer or the trust may be deductible under section 8-1 or section 25-25 of ITAA 1997, and the extent to which it is deductible; g. any capital gains tax consequences may arise e.g. when trust interests are redeemed, new interests are issued or upon the disposal of the property; h. any fee or commission paid should not be allowable as a deduction by the SMSF for that income year; i. the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement; j. any fee or commission received by the organiser/s of this arrangement should be included as assessable income for the relevant income year; and k. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The Tax Office is currently examining these arrangements. | The Tax Office issued Draft Self Managed Superannuation Funds Ruling SMSFR 2008/D5 Self Managed Superannuation Funds: the meaning of 'asset', 'loan', 'investment in', 'lease' and 'lease arrangement' in the definition of an 'in-house asset' in the Superannuation Industry (Supervision) Act 1993 which outlines when a transaction between the SMSF and a related party will be regarded as an investment in that related party (refer paragraph 17 of the draft ruling) Note 1: Base penalties of up to 75% of the tax avoided can apply where someone makes a false or misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 0800 060 0662. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 3: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24.",,,,,SMSFR 2009/4 | Taxpayer Alert TA 2008/3 Uncommercial use of certain trusts | Taxpayer Alert TA 2008/4 Self-managed superannuation funds deriving income from certain uncommercial trusts | PS LA 2007/7 | PS LA 2007/24 | ATO ID 2006/335 | Section 62 | Section 66 | Section 85 | Section 167 | Part IVA | Section 8-1 | Section 25-25 | Section 295-550 | Division 290 of Schedule 1 | TA 2008/3 | TA 2008/4,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200916/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers
TA 2009/17,Life insurance bonds issued by tax haven entities,23 November 2009,Current,,"The ATO view on the arrangement described in TA 2009/17 is set out in TR 2004/3 . This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | This Taxpayer Alert is concerned with life insurance bonds issued from tax haven entities to Australian residents which are designed to circumvent the Australian tax payable under the foreign investment fund measures. | Investors in these types of insurance bonds may not be eligible for concessional tax treatment such as capital gains tax exemption and the special rules applicable to reversionary bonus paid from life insurance bonds. | This Alert applies to arrangements with features that are substantially equivalent to the following: 1. A person or group of persons (the promoter), operating in a tax haven, including Vanuatu, approaches Australian residents offering what purports to be a life insurance policy. 2. In some cases, a facilitator in Australia may assist in the marketing of these arrangements. 3. Australian resident participants involved in these arrangements may be individuals, companies, trusts, or self-managed superannuation funds (SMSFs). 4. The promoter arranges what purports to be a life insurance bond policy through an insurance company located in a tax haven jurisdiction. 5. Generally, the promoter or an Australian facilitator markets these arrangements on the basis that they will qualify as life insurance bonds for Australian tax purposes and that as a result investors will be able to qualify for concessional tax treatment, such as capital gains tax exemption and the special rules applicable to reversionary bonuses paid. 6. Typically, these purported life insurance policies may not qualify for the expected concessional tax treatment, as they do not satisfy the requirement for these concessions. 7. In addition, the promoter or an Australian facilitator may also indicate that fees paid in respect of such life insurance policies may be tax deductible in Australia. | 1. A person or group of persons (the promoter), operating in a tax haven, including Vanuatu, approaches Australian residents offering what purports to be a life insurance policy. 2. In some cases, a facilitator in Australia may assist in the marketing of these arrangements. 3. Australian resident participants involved in these arrangements may be individuals, companies, trusts, or self-managed superannuation funds (SMSFs). 4. The promoter arranges what purports to be a life insurance bond policy through an insurance company located in a tax haven jurisdiction. 5. Generally, the promoter or an Australian facilitator markets these arrangements on the basis that they will qualify as life insurance bonds for Australian tax purposes and that as a result investors will be able to qualify for concessional tax treatment, such as capital gains tax exemption and the special rules applicable to reversionary bonuses paid. 6. Typically, these purported life insurance policies may not qualify for the expected concessional tax treatment, as they do not satisfy the requirement for these concessions. 7. In addition, the promoter or an Australian facilitator may also indicate that fees paid in respect of such life insurance policies may be tax deductible in Australia. | The Tax Office considers that arrangements of this type give rise to the following income tax and superannuation regulatory issues, including whether: a. the arrangement, or certain steps within it, may constitute a sham at general law; b. upfront fees incurred in investing in these arrangements are deductible expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997); c. section 79D of the Income Tax Assessment Act 1936 (ITAA 1936) (repealed from 24 September 2007) applies to limit the deductions for foreign sourced income; d. a capital gain or loss could arise under section 104-25 of the ITAA 1997 upon redemption of the bond; e. the foreign investment fund provisions under Part XI of the ITAA 1936 apply to include the accretion in value of the amount held in the life insurance bond policy in the assessable income of the taxpayer on an annual basis; f. section 26AH of the ITAA 1936 applies to include any reversionary bonuses paid on surrender to taxpayers who surrender their policies within 10 years of acquisition as assessable income; g. SMSFs are able to claim a deduction of 30% of the life insurance premium under section 279 of the ITAA 1936 (replaced by section 295-465 of the ITAA 1997 from the 2007-08 income year onwards); h. the Capital Gains Tax exemption under section 118-300 of the ITAA 1997 applies to SMSFs who invest in these arrangements; i. any provision of the Superannuation Industry (Supervision) Act 1993 (SISA 1993) has been contravened; j. any penalties or interest charges should be applied to any understatement of such assessable income for the Australian resident; k. the general anti-avoidance rules contained in Part IVA of the ITAA 1936 may operate to cancel a tax benefit under the arrangement; l. any fee or commission received by the promoters or marketers of this arrangement should be included as assessable income for the relevant income year; m. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953); n. any criminal offences may have been committed by the promoter, or their associates; and o. the conduct of a registered tax agent, involved in the marketing or facilitation of the arrangement, should be referred to the relevant tax agent board. | a. the arrangement, or certain steps within it, may constitute a sham at general law; b. upfront fees incurred in investing in these arrangements are deductible expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997); c. section 79D of the Income Tax Assessment Act 1936 (ITAA 1936) (repealed from 24 September 2007) applies to limit the deductions for foreign sourced income; d. a capital gain or loss could arise under section 104-25 of the ITAA 1997 upon redemption of the bond; e. the foreign investment fund provisions under Part XI of the ITAA 1936 apply to include the accretion in value of the amount held in the life insurance bond policy in the assessable income of the taxpayer on an annual basis; f. section 26AH of the ITAA 1936 applies to include any reversionary bonuses paid on surrender to taxpayers who surrender their policies within 10 years of acquisition as assessable income; g. SMSFs are able to claim a deduction of 30% of the life insurance premium under section 279 of the ITAA 1936 (replaced by section 295-465 of the ITAA 1997 from the 2007-08 income year onwards); h. the Capital Gains Tax exemption under section 118-300 of the ITAA 1997 applies to SMSFs who invest in these arrangements; i. any provision of the Superannuation Industry (Supervision) Act 1993 (SISA 1993) has been contravened; j. any penalties or interest charges should be applied to any understatement of such assessable income for the Australian resident; k. the general anti-avoidance rules contained in Part IVA of the ITAA 1936 may operate to cancel a tax benefit under the arrangement; l. any fee or commission received by the promoters or marketers of this arrangement should be included as assessable income for the relevant income year; m. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953); n. any criminal offences may have been committed by the promoter, or their associates; and o. the conduct of a registered tax agent, involved in the marketing or facilitation of the arrangement, should be referred to the relevant tax agent board. | Taxation Ruling TR 2004/3 discusses taxation of foreign life insurance policies, while ATO ID 2009/99 and ATO ID 2009/100 discuss the life insurance premium deduction under section 279 of the ITAA 1936 (for years prior to the 2007-08 income year) and section 295-465 of the ITAA 1997 (from the 2007-08 income year onwards). | The Tax Office is investigating arrangements covered by this Alert, including through Project Wickenby. Note 1: Base penalties of up to 75% of the tax avoided can apply where someone makes a false and misleading statement to the Commissioner. Where there is a false or misleading statement over consecutive years, an uplift of 20% may apply. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you wish to make a voluntary disclosure about the current arrangement or have any information about promotion of these arrangements, phone us on 1800 060 062 . Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 3: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24.",,,,,TR 2004/3 | PS LA 2007/7 | PS LA 2007/24 | PS LA 2008/15 | ATO ID 2009/99 | ATO ID 2009/100 | Section 26AH | Section 167 | Section 279 | Part IVA | Section 8-1 | Section 104-25 | Section 118-300 | Section 295-465 | Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200917/NAT/ATO/00001,Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline number
TA 2009/18,Discretionary Option Arrangement,8 December 2009,Current,,"The alert applies to arrangements with features substantially equivalent to the following: 1. The Employer (the Employer) makes an extra cash contribution to a Trustee of a Trust (the Trustee), in respect of acquisition of several discretionary options for employees, and claims this amount as a tax deduction. 2. The Trustee pays the cash contribution back to the Employer as consideration for acquiring several such options ('the options') from the Employer. The acquisition price of the option is determined in accordance with a valuation methodology adopted by the Employer. 3. The options may be exercised or cancelled. • An option that is exercised enables its owner to acquire a share in the Employer on the exercise of the option. • An option that is cancelled gives its owner a cash amount referable to the market value of a share in the Employer at the time the option is cancelled. 4. The legal and beneficial ownership of the options is initially held by the Trust for the benefit of employees of the Employer generally. 5. In a later financial year and at the direction of the Employer, the Trustee allocates each such option to a specific employee. At this time, the legal and beneficial ownership of the option passes from the Trustee to that employee (the employee). 6. The employee holds the option and can exercise or cancel the option in accordance with the option vesting conditions. The conditions may include performance hurdles, a minimum holding period, or the exercise of a discretion by the Employer to allow the option to be exercised or cancelled. 7. Once the vesting conditions have been satisfied, the employee may exercise or cancel the option. However, the Employer may at its discretion, do one of two things in respect of the option: (a) allow the option to be exercised and issue a share to the employee; or (b) cancel the option. 8. Where the option is exercised and a share is issued to the employee, the cost of the share to the employee is the option exercise price. The option exercise price is the market value of the share at the time the option is acquired by the Trustee. 9. Where the option is cancelled, the employer will pay to the employee a cash amount equal to the difference between the option exercise price and the value of a share in the Employer at the time the option is cancelled. | 1. The Employer (the Employer) makes an extra cash contribution to a Trustee of a Trust (the Trustee), in respect of acquisition of several discretionary options for employees, and claims this amount as a tax deduction. 2. The Trustee pays the cash contribution back to the Employer as consideration for acquiring several such options ('the options') from the Employer. The acquisition price of the option is determined in accordance with a valuation methodology adopted by the Employer. 3. The options may be exercised or cancelled. • An option that is exercised enables its owner to acquire a share in the Employer on the exercise of the option. • An option that is cancelled gives its owner a cash amount referable to the market value of a share in the Employer at the time the option is cancelled. 4. The legal and beneficial ownership of the options is initially held by the Trust for the benefit of employees of the Employer generally. 5. In a later financial year and at the direction of the Employer, the Trustee allocates each such option to a specific employee. At this time, the legal and beneficial ownership of the option passes from the Trustee to that employee (the employee). 6. The employee holds the option and can exercise or cancel the option in accordance with the option vesting conditions. The conditions may include performance hurdles, a minimum holding period, or the exercise of a discretion by the Employer to allow the option to be exercised or cancelled. 7. Once the vesting conditions have been satisfied, the employee may exercise or cancel the option. However, the Employer may at its discretion, do one of two things in respect of the option: (a) allow the option to be exercised and issue a share to the employee; or (b) cancel the option. 8. Where the option is exercised and a share is issued to the employee, the cost of the share to the employee is the option exercise price. The option exercise price is the market value of the share at the time the option is acquired by the Trustee. 9. Where the option is cancelled, the employer will pay to the employee a cash amount equal to the difference between the option exercise price and the value of a share in the Employer at the time the option is cancelled. | • An option that is exercised enables its owner to acquire a share in the Employer on the exercise of the option. • An option that is cancelled gives its owner a cash amount referable to the market value of a share in the Employer at the time the option is cancelled. | (a) allow the option to be exercised and issue a share to the employee; or (b) cancel the option. | Diagram of a typical arrangement | The Tax Office considers that an arrangement which exhibits the features outlined above may give rise to taxation issues that include whether: (a) the arrangement, or certain steps within it, may constitute a sham at general law; (b) the Employer may have incurred the expenditure for the contribution it makes to the trustee, in order to entitle it to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), noting the circular flow of funds; (c) the Employer may be assessable on the consideration it receives for issue of ""Options"" to the Trustee under section 6-5 of the ITAA 1997; (d) the employee may be assessable on receipt of the ""Options"" under section 6-5 or 15-2 of the ITAA 1997; (e) the provisions of Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) (and any superseding legislation) may apply to the arrangement; (f) the receipt of a cancellation payment on cancellation of options may be assessable income of the employee under section 6-5 or 15-2 of the ITAA 1997; (g) the cancellation of the Options may constitute a CGT event C2 under section 104-25 of the ITAA 1997 for the employee or a CGT event C3 under section 104-30 of the ITAA 1997 for the employer; (h) the arrangement may constitute a scheme to which the general anti-avoidance rules in Part IVA of the ITAA 1936 apply; (i) the arrangement may result in the provision of fringe benefits for the purposes of the Fringe Benefits Tax Assessment Act 1986 ; and (j) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | (a) the arrangement, or certain steps within it, may constitute a sham at general law; (b) the Employer may have incurred the expenditure for the contribution it makes to the trustee, in order to entitle it to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), noting the circular flow of funds; (c) the Employer may be assessable on the consideration it receives for issue of ""Options"" to the Trustee under section 6-5 of the ITAA 1997; (d) the employee may be assessable on receipt of the ""Options"" under section 6-5 or 15-2 of the ITAA 1997; (e) the provisions of Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) (and any superseding legislation) may apply to the arrangement; (f) the receipt of a cancellation payment on cancellation of options may be assessable income of the employee under section 6-5 or 15-2 of the ITAA 1997; (g) the cancellation of the Options may constitute a CGT event C2 under section 104-25 of the ITAA 1997 for the employee or a CGT event C3 under section 104-30 of the ITAA 1997 for the employer; (h) the arrangement may constitute a scheme to which the general anti-avoidance rules in Part IVA of the ITAA 1936 apply; (i) the arrangement may result in the provision of fringe benefits for the purposes of the Fringe Benefits Tax Assessment Act 1986 ; and (j) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | The Tax Office is currently reviewing these arrangements. | The Tax Office approach to the acquisition of options which is subject to a discretion and/or approval is contained in ATO ID 2007/66: Income Tax Employee Share Scheme: rights to acquire shares subject to shareholder approval . | At the time of the alert being issued, the new employee share scheme legislation Division 83A of the Income Tax Assessment Act 1997 was passed on 2 December 2009, and is yet to receive the Royal Assent . Note 1: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the Income Tax Assessment Act 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 2: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 4: Where appropriate, section 167 of the Income Tax Assessment Act 1936 (ITAA 1936) may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PS LA 2007/7 and PS LA 2007/24. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 8 December 2009 | Date of Effect: 8 December 2009 | Other References: ATO ID 2007/66 | Subject References: Arrangement Anti-avoidance Options Fringe Benefit Tax Part IVA | Legislative References: Income Tax Assessment Act 1936 Part IVA Division 13A Income Tax Assessment Act 1997 8-1 6-5 15-2 Part 3-1 Fringe Benefits Tax Assessment Act 1986 136 Taxation Administration Act 1953 Division 290 | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical and Case Leadership Phone: (02) 6216 2710",,,,,ATO ID 2007/66 | Part IVA | 8-1 | 6-5 | 15-2 | Part 3-1 | 136 | Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200918/NAT/ATO/00001,This Taxpayer Alert describes an arrangement where an employer attempts to artificially create an up front tax deduction by issuing a discretionary option to employees utilising a trust and round robin cash-flows. The employer has a discretion as to whether the employees will receive shares or cash from the arrangement and any tax for employees will be deferred until a later income year.
TA 2009/19,Uncommercial offshore superannuation trusts,15 December 2009,Current,,"This Taxpayer Alert applies to arrangements with features substantially equivalent to the following: Arrangement 1 1. An individual living overseas establishes an offshore trust fund ('offshore trust fund'). This offshore trust fund purports to be a superannuation fund and its trustee is usually resident in a tax haven. 2. In preparation for movement of contributions into the offshore trust fund, the individual establishes a purported employer entity ('the employer entity'), located in a tax haven. The employer entity does not perform any business functions, does not usually have any arm's length employees and in some circumstances, does not establish a bank account. The individual becomes a director and primary shareholder of the employer entity. 3. The offshore trust fund receives contributions from the employer entity and/or an associate of the individual just prior to and/or in anticipation of the individual becoming a resident of Australia. Such an associate may be a related individual, a partner, a trustee, a company or a non-common law ownership structure, such as a stichting, stiftung, anstalt, foundation, etc. 4. The offshore trust fund may invest contributions that it receives in an unrelated entity or an entity owned or controlled by the individual. The offshore trust fund ordinarily derives earnings from this investment which are accumulated in that fund. 5. After a period of time (often many years), both the capital amounts and the earnings may be moved to Australia in the form of purported retirement benefits or contributions to a complying superannuation fund. 6. Prior to this point, the individual will not pay tax in Australia on the amounts of accrued income held in the offshore trust fund under Australia's foreign source income attribution regimes. Arrangement 2 1. An individual, who is a resident of Australia for taxation purposes, establishes an offshore trust fund ('offshore trust fund'). This offshore trust fund purports to be a superannuation fund and its trustee is usually a resident in a tax haven. 2. The individual performs arm's length work or services offshore for a non-resident service entity. Contributions are paid to the offshore trust fund purportedly as superannuation contributions by the non-resident service entity in respect of work performed by the individual while overseas. 3. The offshore trust fund invests contributions it receives by making loans on less than commercial terms to related resident entities of the individual or by making direct investment by way of acquisition of shares or units in resident entities owned and controlled by the individual. Some of the units or shares in the related resident entity receiving the loans might be owned by a complying superannuation fund which may be a self managed superannuation fund (SMSF). 4. After a period of time (often many years), both the capital amounts and the earnings may be moved to Australia in the form of purported retirement payments. 5. Prior to this point, the individual will not pay tax in Australia on the amounts of accrued income held in the offshore trust fund under Australia's foreign source income attribution regimes. | Arrangement 1 1. An individual living overseas establishes an offshore trust fund ('offshore trust fund'). This offshore trust fund purports to be a superannuation fund and its trustee is usually resident in a tax haven. 2. In preparation for movement of contributions into the offshore trust fund, the individual establishes a purported employer entity ('the employer entity'), located in a tax haven. The employer entity does not perform any business functions, does not usually have any arm's length employees and in some circumstances, does not establish a bank account. The individual becomes a director and primary shareholder of the employer entity. 3. The offshore trust fund receives contributions from the employer entity and/or an associate of the individual just prior to and/or in anticipation of the individual becoming a resident of Australia. Such an associate may be a related individual, a partner, a trustee, a company or a non-common law ownership structure, such as a stichting, stiftung, anstalt, foundation, etc. 4. The offshore trust fund may invest contributions that it receives in an unrelated entity or an entity owned or controlled by the individual. The offshore trust fund ordinarily derives earnings from this investment which are accumulated in that fund. 5. After a period of time (often many years), both the capital amounts and the earnings may be moved to Australia in the form of purported retirement benefits or contributions to a complying superannuation fund. 6. Prior to this point, the individual will not pay tax in Australia on the amounts of accrued income held in the offshore trust fund under Australia's foreign source income attribution regimes. | Arrangement 2 1. An individual, who is a resident of Australia for taxation purposes, establishes an offshore trust fund ('offshore trust fund'). This offshore trust fund purports to be a superannuation fund and its trustee is usually a resident in a tax haven. 2. The individual performs arm's length work or services offshore for a non-resident service entity. Contributions are paid to the offshore trust fund purportedly as superannuation contributions by the non-resident service entity in respect of work performed by the individual while overseas. 3. The offshore trust fund invests contributions it receives by making loans on less than commercial terms to related resident entities of the individual or by making direct investment by way of acquisition of shares or units in resident entities owned and controlled by the individual. Some of the units or shares in the related resident entity receiving the loans might be owned by a complying superannuation fund which may be a self managed superannuation fund (SMSF). 4. After a period of time (often many years), both the capital amounts and the earnings may be moved to Australia in the form of purported retirement payments. 5. Prior to this point, the individual will not pay tax in Australia on the amounts of accrued income held in the offshore trust fund under Australia's foreign source income attribution regimes. | Diagram of typical arrangement | The Tax Office is considering the following issues for arrangements of this type: | Superannuation regulatory issues | The arrangements may involve entities that are regulated under the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Superannuation Industry (Supervision) Regulations . For those entities, arrangements of this type give rise to issues about whether there may be a breach of the: 1. in-house asset provisions, and/or 2. the sole purpose test under section 62 of the SIS Act. | 1. in-house asset provisions, and/or 2. the sole purpose test under section 62 of the SIS Act. | Taxation issues | The Tax Office considers that arrangements of this type give rise to the following issues under taxation laws about whether: 3. any amounts received by any entity associated with the arrangement may be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); 4. such offshore trust funds may be superannuation funds as defined in section 995-1 of the ITAA 1997 and/or subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); 5. contributions may have been made by the employer entity to the offshore trust fund; 6. contributions to the offshore trust funds in these circumstances may be deductible to employer entities under section 290-60 of the ITAA 1997; 7. contributions to the offshore trust funds may be excluded from being fringe benefits as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ; 8. contributions to complying superannuation funds may exceed the concessional/non-concessional caps and attract excess contributions tax under Division 292 of the ITAA 1997; 9. amounts applied by the offshore trust funds for the benefit of employees may be subject to section 99B of the ITAA 1936; 10. liability to withholding tax may apply to interest amounts under section 128B of the ITAA 1936; 11. the trustee of the offshore trust fund or complying superannuation fund may be liable to pay tax under subsection 295-5(2) of the ITAA 1997; 12. lump sum payments may be non assessable and non exempt under sections 305-60 and 305-65 of the ITAA 1997; 13. payments received may be 'applicable fund earnings' and assessable under section 305-70 of the ITAA 1997; 14. the income of the offshore entity structure may be attributable to the employee under Australia's anti-deferral regime for controlled foreign companies contained in Part X of the ITAA 1936; 15. the income of the offshore entity structure may be attributable to the employee under Australia's anti-deferral regime for transferor trusts contained in Division 6AAA of Part III of the ITAA 1936; 16. the income of the offshore entity structure may be attributable to the employee under Australia's anti-deferral regime for foreign investment funds in Part XI of the ITAA 1936; 17. the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the ITAA 1936 apply; and 18. any amounts received by any entity marketing or otherwise encouraging the arrangement may be assessable income in Australia under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); 19. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | 3. any amounts received by any entity associated with the arrangement may be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); 4. such offshore trust funds may be superannuation funds as defined in section 995-1 of the ITAA 1997 and/or subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); 5. contributions may have been made by the employer entity to the offshore trust fund; 6. contributions to the offshore trust funds in these circumstances may be deductible to employer entities under section 290-60 of the ITAA 1997; 7. contributions to the offshore trust funds may be excluded from being fringe benefits as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ; 8. contributions to complying superannuation funds may exceed the concessional/non-concessional caps and attract excess contributions tax under Division 292 of the ITAA 1997; 9. amounts applied by the offshore trust funds for the benefit of employees may be subject to section 99B of the ITAA 1936; 10. liability to withholding tax may apply to interest amounts under section 128B of the ITAA 1936; 11. the trustee of the offshore trust fund or complying superannuation fund may be liable to pay tax under subsection 295-5(2) of the ITAA 1997; 12. lump sum payments may be non assessable and non exempt under sections 305-60 and 305-65 of the ITAA 1997; 13. payments received may be 'applicable fund earnings' and assessable under section 305-70 of the ITAA 1997; 14. the income of the offshore entity structure may be attributable to the employee under Australia's anti-deferral regime for controlled foreign companies contained in Part X of the ITAA 1936; 15. the income of the offshore entity structure may be attributable to the employee under Australia's anti-deferral regime for transferor trusts contained in Division 6AAA of Part III of the ITAA 1936; 16. the income of the offshore entity structure may be attributable to the employee under Australia's anti-deferral regime for foreign investment funds in Part XI of the ITAA 1936; 17. the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the ITAA 1936 apply; and 18. any amounts received by any entity marketing or otherwise encouraging the arrangement may be assessable income in Australia under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); 19. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | The Tax Office is currently reviewing these arrangements. Note 1: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ) or report information online at www.ato.gov.au/reportevasion . Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 3: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline number | Date of Issue: 15 December 2009 | Date of Effect: 15 December 2009 | Related Practice Statements: PS 2007/7 PS 2007/24 | Subject References: offshore trust fund complying superannuation fund in house asset anti avoidance controlled foreign company foreign investment fund assessable income | Legislative References: Income Tax Assessment Act 1936 Section 6(1) Section 99B Division 6AAA of Part III Section 128B Part IVA Part XI Income Tax Assessment Act 1997 Section 290-60 Division 292 Section 295-5 Section 305-60 Section 305-65 Section 305-70 Section 995-1 Fringe Benefits Tax Assessment Act 1986 136(1) Taxation Administration Act 1953 Division 290 Superannuation Industry (Supervision) Act 1993 62 Superannuation Industry (Supervision) Regulations 1994 | Contact Officer: Paul Cheetham Business Line: Serious Non Compliance Section: Project Wickenby Phone: (02) 9374 8740",,,,,PS 2007/7 | PS 2007/24 | Section 6(1) | Section 99B | Division 6AAA of Part III | Section 128B | Part IVA | Section 290-60 | Division 292 | Section 295-5 | Section 305-60 | Section 305-65 | Section 305-70 | Section 995-1 | 136(1) | Division 290 | 62 | Superannuation Industry (Supervision) Regulations 1994,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200919/NAT/ATO/00001,This Taxpayer Alert describes arrangements that use offshore trust structures (purported to be superannuation funds) in an attempt to shift funds into Australia in a concessionally taxed manner or substantially defer the time at which such amounts are subject to tax in Australia.
TA 2009/20,Interest deduction generators involving promoter controlled companies,22 December 2009,Current,,"The alert applies to arrangements with features substantially equivalent to the following: 1. A promoter approaches a taxpayer offering an investment plan involving investments in foreign companies, partly funded by re-financing of the taxpayer's existing home loan equity. Generally, the taxpayers involved do not understand the operation of the arrangement and are guided by advice from the promoter or their associate. 2. The promoter arranges for the taxpayer to refinance their existing home loan through a third party financial institution. Under the new loan, the taxpayer obtains two loan facilities: a home loan (Loan A) for the outstanding balance on their previous home loan; and an interest only investment loan (Loan B). The Loan B amount is the maximum offered by the third party financial institution having regard to the equity in the taxpayer's home. Both Loan A and Loan B are secured over the taxpayer's home. 3. The taxpayer makes the principal and interest repayments on Loan A. The promoter undertakes to pay the interest on Loan B on behalf of the taxpayer. 4. The promoter arranges a purported unsecured investment loan (Loan C) for the taxpayer. Loan C is provided on non-commercial terms by an entity controlled by the promoter, including either no recourse or recourse limited to the shares in the promoter controlled company. The Loan C amount is well in excess of the taxpayer's borrowing capacity under normal arm's length lending criteria. 5. Funds from Loan B and Loan C are purportedly used to purchase shares in various companies controlled by the promoter. None of these companies appear to be carrying on a business or otherwise producing assessable income. Generally, the taxpayer does not derive any dividend income from the purported share investments and in all cases appears unlikely to do so in the future. 6. The taxpayer claims the interest incurred on Loan B and the interest purportedly incurred on Loan C as allowable deductions. In addition, many taxpayers may also seek to obtain a PAYG withholding variation to reduce the amount of tax deducted from their salary or wages during the course of the financial year. | 1. A promoter approaches a taxpayer offering an investment plan involving investments in foreign companies, partly funded by re-financing of the taxpayer's existing home loan equity. Generally, the taxpayers involved do not understand the operation of the arrangement and are guided by advice from the promoter or their associate. 2. The promoter arranges for the taxpayer to refinance their existing home loan through a third party financial institution. Under the new loan, the taxpayer obtains two loan facilities: a home loan (Loan A) for the outstanding balance on their previous home loan; and an interest only investment loan (Loan B). The Loan B amount is the maximum offered by the third party financial institution having regard to the equity in the taxpayer's home. Both Loan A and Loan B are secured over the taxpayer's home. 3. The taxpayer makes the principal and interest repayments on Loan A. The promoter undertakes to pay the interest on Loan B on behalf of the taxpayer. 4. The promoter arranges a purported unsecured investment loan (Loan C) for the taxpayer. Loan C is provided on non-commercial terms by an entity controlled by the promoter, including either no recourse or recourse limited to the shares in the promoter controlled company. The Loan C amount is well in excess of the taxpayer's borrowing capacity under normal arm's length lending criteria. 5. Funds from Loan B and Loan C are purportedly used to purchase shares in various companies controlled by the promoter. None of these companies appear to be carrying on a business or otherwise producing assessable income. Generally, the taxpayer does not derive any dividend income from the purported share investments and in all cases appears unlikely to do so in the future. 6. The taxpayer claims the interest incurred on Loan B and the interest purportedly incurred on Loan C as allowable deductions. In addition, many taxpayers may also seek to obtain a PAYG withholding variation to reduce the amount of tax deducted from their salary or wages during the course of the financial year. | FEATURES WHICH CONCERN US | The Tax Office considers that arrangements of this type give rise to a number of income tax issues, including whether: (a) Loan C may be a sham at general law; (b) the taxpayer's purported purchase of shares in companies controlled by the promoter may be a sham at general law; (c) a deduction may be available to the taxpayer for any interest incurred on Loan B under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997); (d) a deduction may be available to the taxpayer for any interest purportedly incurred on Loan C under section 8-1 of the ITAA 1997 if Loan C is not a sham; (e) the arrangement may constitute a scheme to which the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 apply; (f) any fee, commission or other amount received by the promoter of this arrangement should be included as assessable income for the relevant income year; (g) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953; and | (a) Loan C may be a sham at general law; (b) the taxpayer's purported purchase of shares in companies controlled by the promoter may be a sham at general law; (c) a deduction may be available to the taxpayer for any interest incurred on Loan B under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997); (d) a deduction may be available to the taxpayer for any interest purportedly incurred on Loan C under section 8-1 of the ITAA 1997 if Loan C is not a sham; (e) the arrangement may constitute a scheme to which the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 apply; (f) any fee, commission or other amount received by the promoter of this arrangement should be included as assessable income for the relevant income year; (g) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953; and | The Tax Office is currently reviewing these arrangements. Note 1 : Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the ATO. If you have any information about the current arrangement, phone us on 1800 060 062. Note 2 : Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 3 : A registered tax agent may have their registration cancelled or suspended by the Tax Agents' Board under section 251K of the Income Tax Assessment Act 1936 if they are guilty of misconduct as a tax agent or are not considered a fit and proper person to prepare income tax returns. A person under a sentence of imprisonment for a serious taxation offence is not a fit and proper person. Note 4 : The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement PSLA 2008 / 6 . | Date of amendment Comment 19 January 2024 Updated ATO tip-off hotline number | Date of Issue: 22 December 2009 | Date of Effect: 22 December 2009 | Subject References: Deductions & expenses Interest expenses Schemes & shams Scheme promoters | Legislative References: Income Tax Assessment Act 1936 Part IVA Section 251K Income Tax Assessment Act 1997 Section 8-1 Taxation Administration Act 1953 Division 290 of Schedule 1 | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical & Case Leadership Phone: (02) 6216 2710",,,,,Part IVA | Section 8-1 | Division 290 of Schedule 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200920/NAT/ATO/00001,This Taxpayer Alert describes an arrangement which seeks to generate interest deductions for the taxpayer through refinancing a taxpayer's existing home loan and establishing purported investment loans to fund the purchase of shares in companies controlled by the promoter of the arrangement. The taxpayer claims large deductions for the interest purportedly incurred on the investment loans. The arrangement may be promoted as part of a 'mortgage management plan' said to assist taxpayers to repay their home loan sooner.
TA 2009/21,R&D tax offset abuse through registered research agencies,22 December 2009,Current,,"This Alert applies to arrangements that have features that are substantially equivalent to the following: 1. A company is incorporated with a minimal amount of paid-up capital. The company accounts for GST and income tax on an accruals basis but generates negligible income. 2. The company enters an R&D services agreement with an RRA for the provision of R&D services for a period of up to 13 months, often within the last month of an income year. The agreement provides that the RRA will manage the R&D project and will engage sub-contractors to perform the work required under the agreement. The sub-contractors often may be associated with the company. 3. The RRA issues a tax invoice for an amount up to $1,100,000 [1] for the provision of future R&D services. 4. The RRA does not commence services, or provides only insignificant services, in the income year that the agreement is signed and the tax invoice is issued. The company makes no payments in respect of the agreement in that income year and the entire amount is said to have accrued. 5. The company lodges a Business Activity Statement ('BAS"") for the period in which it received the tax invoice from the RRA and claims an input tax credit relating to the invoice. The company receives a refund of up to $100,000 ($1,100,000 x 1/11). 6. The company lodges its income tax return for the year in which it entered into the agreement with the RRA and reports that it has contracted expenditure to an RRA of an amount up to $1,000,000. The company elects to receive the R&D tax offset of up to $375,000 rather than a tax deduction ($1,000,000 x 125% x 30%). 7. The company applies funds from the GST refund and R&D tax offset to the balance owing under the R&D services agreement with the RRA. 8. In some instances funding arrangements to the company are provided by the RRA or parties associated with the RRA. This creates round robin cash-flows among the company, RRA and the parties associated with the RRA or the company. | 1. A company is incorporated with a minimal amount of paid-up capital. The company accounts for GST and income tax on an accruals basis but generates negligible income. 2. The company enters an R&D services agreement with an RRA for the provision of R&D services for a period of up to 13 months, often within the last month of an income year. The agreement provides that the RRA will manage the R&D project and will engage sub-contractors to perform the work required under the agreement. The sub-contractors often may be associated with the company. 3. The RRA issues a tax invoice for an amount up to $1,100,000 [1] for the provision of future R&D services. 4. The RRA does not commence services, or provides only insignificant services, in the income year that the agreement is signed and the tax invoice is issued. The company makes no payments in respect of the agreement in that income year and the entire amount is said to have accrued. 5. The company lodges a Business Activity Statement ('BAS"") for the period in which it received the tax invoice from the RRA and claims an input tax credit relating to the invoice. The company receives a refund of up to $100,000 ($1,100,000 x 1/11). 6. The company lodges its income tax return for the year in which it entered into the agreement with the RRA and reports that it has contracted expenditure to an RRA of an amount up to $1,000,000. The company elects to receive the R&D tax offset of up to $375,000 rather than a tax deduction ($1,000,000 x 125% x 30%). 7. The company applies funds from the GST refund and R&D tax offset to the balance owing under the R&D services agreement with the RRA. 8. In some instances funding arrangements to the company are provided by the RRA or parties associated with the RRA. This creates round robin cash-flows among the company, RRA and the parties associated with the RRA or the company. | DIAGRAM OF A TYPICAL ARANGEMENT | FEATURES WHICH CONCERN US | The Tax Office considers that arrangements of this type give rise to the following income tax issues, of whether: a. the transaction, or certain steps within it, may be a sham at general law; b. the expenditure may have been 'incurred' for the purposes of subsection 73B(13) of the Income Tax Assessment Act 1936 (ITAA 1936); c. the expenditure may have the character of 'contracted expenditure' for the purposes of subsection 73B(13) of the ITAA 1936; d. the expenditure, if not 'contracted expenditure', is otherwise 'research and development expenditure', deductible under subsection 73B(14) of the ITAA 1936; e. the prepayment rules in Subdivision H of Division 3 of Part III of the ITAA 1936 apply; f. the company and the RRA dealt with each other at arm's length in relation to purported R&D expenditure; g. the Commissioner ought to form an opinion under subsection 73B(31) of the ITAA 1936 of the 'reasonable' amount of expenditure to be allowed, if the parties had dealt at arm's length; h. the RRA's are including fees, payments or commissions received under the arrangement as assessable income under section 6-5 of the ITAA 1997; and i. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | a. the transaction, or certain steps within it, may be a sham at general law; b. the expenditure may have been 'incurred' for the purposes of subsection 73B(13) of the Income Tax Assessment Act 1936 (ITAA 1936); c. the expenditure may have the character of 'contracted expenditure' for the purposes of subsection 73B(13) of the ITAA 1936; d. the expenditure, if not 'contracted expenditure', is otherwise 'research and development expenditure', deductible under subsection 73B(14) of the ITAA 1936; e. the prepayment rules in Subdivision H of Division 3 of Part III of the ITAA 1936 apply; f. the company and the RRA dealt with each other at arm's length in relation to purported R&D expenditure; g. the Commissioner ought to form an opinion under subsection 73B(31) of the ITAA 1936 of the 'reasonable' amount of expenditure to be allowed, if the parties had dealt at arm's length; h. the RRA's are including fees, payments or commissions received under the arrangement as assessable income under section 6-5 of the ITAA 1997; and i. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The Tax Office is currently reviewing these arrangements. Note 1 : Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you would like to make a voluntary disclosure or have any information about the current arrangement, phone us on 1800 060 062. Note 2 : Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 3 : In appropriate cases, sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. Note 4 : A registered tax agent may have their registration cancelled or suspended by the Tax Agents' Board under section 251K of the Income Tax Assessment Act 1936 if they are guilty of misconduct as a tax agent or are not considered a fit and proper person to prepare income tax returns. A person under a sentence of imprisonment for a serious taxation offence is not a fit and proper person. Note 5 : The Commissioner may amend an assessment at any time to disallow a claim for R&D tax deductions or the R&D tax offset. The Commissioner may also amend an assessment at any time where he is of the opinion there has been avoidance of tax due to fraud or evasion. See Law Administration Practice Statement PSLA 2008/6. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings. | Date of amendment Comment 20 February 2024 Updated ATO tip-off hotline number | Date of Issue: 22 December 2009 | Date of Effect: 22 December 2009 | [1] This relates to the maximum amount of expenditure that can be claimed in relation to the 2009 and earlier income years ($1,000,000). For the 2010 income year the amount has been increased to $2,000,000 | Subject References: Aggressive tax planning Research and development expenses Research and development tax offset R&D contracted expenditure | Legislative References: Income Tax Assessment Act 1936 Section 73B Subsection 73B(13) Subsection 73B(14) Subsection 73B(31) Subdivision H Division 3 of Part III Income Tax Assessment Act 1997 Section 6-5 Industry Research and Development Act 1986 The Act Taxation Administration Act 1953 Division 290 | Contact Officer: Ian Cooper Business Line: Large Business and International Section: Innovation Phone: (08) 8208 1880",,,,,Subdivision H Division 3 of Part III | Section 6-5 | The Act | Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200921/NAT/ATO/00001,"This Taxpayer Alert is concerned with the Research and Development ('R&D') tax offset allowable under certain conditions to eligible companies. These companies can choose the tax offset rather than a tax deduction for their R&D expenditure, if their aggregate research and development amount is not more than $1 million per year for the 2009 and prior income years and $2 million per year for the 2010 income year. | The R&D rules also allow a concession for prepayments of 'contracted expenditure' to a research agency registered under the Industry Research and Development Act 1986 . | Some companies have been identified as structuring contracts with a registered research agency ('RRA') to take advantage of the prepayment concession, but they may not be eligible for the tax offset."
TA 2008/1,Certain stapled securities involving notes and preference shares,14 January 2008,Current,,"The alert applies to arrangements that may have some or all of the following features: 1. An Australian resident public entity (the Company) issues Notes from one of its overseas branches or subsidiaries to an Initial Purchaser for a fixed amount. This amount is not repayable. 2. At the same time, the Initial Purchaser enters into an irrevocable agreement with the Company to offer to assign the Notes back to the Company (or one of its subsidiaries) for nil consideration upon certain events occurring, called ""Assignment Events"". These may occur in a number of specified circumstances, including at the election of the Company. 3. Also at the same time, the Company issues Preference Shares to the Initial Purchaser at a fully paid face value, said to be in consideration of the offer to assign. (NB that it is thought that this extinguishes any indebtedness if a debt was created on issue of the Note.) The Note and the Preference Share have the same face value and no further money is paid for the Preference Share. 4. In some cases, the steps listed above may differ in that an overseas resident subsidiary of the Company issues the Notes to the Initial Purchaser for a fixed amount. Immediately after the issue of the Notes to the Initial Purchaser, the Initial Purchaser enters into an irrevocable agreement with an Australian resident subsidiary of the Company (Aus Sub) to offer to assign the Notes to Aus Sub for nil consideration upon certain events occurring, the so-called Assignment Events. 5. The Preference Shares are stapled to the Notes one-for-one, and will remain stapled until the occurrence of an Assignment Event. 6. The Initial Purchasers on-sell the Stapled Securities to resident individuals, companies and super funds (the Investors) for an amount equal to the fixed amount paid for the issue of the Notes. For example, the Stapled Security is purchased by the Investor for $500, even though the Stapled Security consists of a Note and Preference Share, each with a face value of $500. 7. The Investors are bound by the same terms as the Initial Purchasers. The irrevocable offer of assignment is embedded in the Note Terms. 8. While the Notes and the Preference Shares remain stapled, an amount is payable on the Notes on the same terms on which dividends would be payable on the Preference Shares, that is, subject to there being distributable profits and subject to certain requirements regarding solvency, at the discretion of the Company and no dividends are payable on the Preference Shares. 9. When an Assignment Event occurs dividends become payable on the Preference Shares on the same terms as the amounts on the Notes. Alternatively, the Preference Shares are converted into Ordinary Shares in the Company. | 1. An Australian resident public entity (the Company) issues Notes from one of its overseas branches or subsidiaries to an Initial Purchaser for a fixed amount. This amount is not repayable. 2. At the same time, the Initial Purchaser enters into an irrevocable agreement with the Company to offer to assign the Notes back to the Company (or one of its subsidiaries) for nil consideration upon certain events occurring, called ""Assignment Events"". These may occur in a number of specified circumstances, including at the election of the Company. 3. Also at the same time, the Company issues Preference Shares to the Initial Purchaser at a fully paid face value, said to be in consideration of the offer to assign. (NB that it is thought that this extinguishes any indebtedness if a debt was created on issue of the Note.) The Note and the Preference Share have the same face value and no further money is paid for the Preference Share. 4. In some cases, the steps listed above may differ in that an overseas resident subsidiary of the Company issues the Notes to the Initial Purchaser for a fixed amount. Immediately after the issue of the Notes to the Initial Purchaser, the Initial Purchaser enters into an irrevocable agreement with an Australian resident subsidiary of the Company (Aus Sub) to offer to assign the Notes to Aus Sub for nil consideration upon certain events occurring, the so-called Assignment Events. 5. The Preference Shares are stapled to the Notes one-for-one, and will remain stapled until the occurrence of an Assignment Event. 6. The Initial Purchasers on-sell the Stapled Securities to resident individuals, companies and super funds (the Investors) for an amount equal to the fixed amount paid for the issue of the Notes. For example, the Stapled Security is purchased by the Investor for $500, even though the Stapled Security consists of a Note and Preference Share, each with a face value of $500. 7. The Investors are bound by the same terms as the Initial Purchasers. The irrevocable offer of assignment is embedded in the Note Terms. 8. While the Notes and the Preference Shares remain stapled, an amount is payable on the Notes on the same terms on which dividends would be payable on the Preference Shares, that is, subject to there being distributable profits and subject to certain requirements regarding solvency, at the discretion of the Company and no dividends are payable on the Preference Shares. 9. When an Assignment Event occurs dividends become payable on the Preference Shares on the same terms as the amounts on the Notes. Alternatively, the Preference Shares are converted into Ordinary Shares in the Company. | Diagrams | a) Investor purchases the Stapled Security via the Prospectus. The Investor is entitled to interest payments on the Notes. | b) In an Assignment Event, the Note is assigned back to the Issuer. Preference Share becomes dividend paying. | c) Investor disposes of the Stapled Security on the ASX for the market price. | FEATURES WHICH THE TAX OFFICE CONSIDERS GIVE RISE TO TAXATION ISSUES | The Tax Office considers that an arrangement of this type gives rise to taxation issues including: (a) whether the Stapled Security constitutes one or two assets for CGT purposes; (b) whether the 'traditional security' provisions (sections 26BB and 70B of the ITAA 1936) apply to gains/losses on disposal of the Stapled Security on market and when the Note is assigned back to the Company; (c) if the Note is a traditional security, whether the assignment of the Note constitutes a disposal for the purposes of section 70B; and (d) whether Part IVA applies to cancel a section 70B deduction. | (a) whether the Stapled Security constitutes one or two assets for CGT purposes; (b) whether the 'traditional security' provisions (sections 26BB and 70B of the ITAA 1936) apply to gains/losses on disposal of the Stapled Security on market and when the Note is assigned back to the Company; (c) if the Note is a traditional security, whether the assignment of the Note constitutes a disposal for the purposes of section 70B; and (d) whether Part IVA applies to cancel a section 70B deduction. | The Australian Taxation Office is examining these arrangements . | Date of Issue: 14 January 2008 | Date of Effect: 14 January 2008 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: traditional security stapled security losses | Legislative References: Income Tax Assessment Act 1936 section 70B section 26BB Part IVA Income Tax Assessment Act 1997 section 8-1 section 6-5 | Contact Officer: Usha Narain Business Line: Law & Practice Section: Tax Counsel Network Phone: (02)6216 2355",,,,,TD 2009/14 | PS LA 2005/13 - Taxpayer Alerts | section 70B | section 26BB | Part IVA | section 8-1 | section 6-5,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20081/NAT/ATO/00001,"The ATO view on the arrangement described in TA 2008/1 is set out in Taxation Determination TD 2009/14 . | This Taxpayer Alert describes arrangements where an Australian resident public company issues a Stapled Security consisting of a Note and a Preference Share to resident investors. | The purpose of this Taxpayer Alert is to inform investors in such products that the Tax Office is considering whether or not investors will be entitled to a deduction under section 70B of the Income Tax Assessment Act 1936 (ITAA 1936) when they sell the Stapled Security on the Australian Securities Exchange (ASX) at a loss, or on the occurrence of a so-called Assignment Event (see below). If investors intend to sell their Stapled Securities on the ASX, they should not assume that they are entitled to a deduction under section 70B. | A profit from the sale of a Stapled Security may be assessable as a capital gain, rather than as statutory income under section 26BB, and if the Stapled Security has been held for more than a year, the taxpayer may be entitled to a CGT discount. | Taxpayers who acquire and sell the Stapled Securities in the ordinary course of business, however, will be entitled to a deduction for a loss under s.8-1 if a loss is incurred, and will be assessable under section 6-5 if a profit is made."
TA 2008/2,Use of certain legal structures established in Liechtenstein to attempt to avoid or evade Australian tax obligations,13 March 2008,Current,,"This Taxpayer Alert describes an arrangement under which an Australian resident uses legal structures established under the laws of Liechtenstein to attempt to avoid or evade Australian tax obligations. | This alert applies to Liechtenstein-based arrangements generally marketed to wealthy individuals that exhibit some or all of the following features: 1. An Australian resident taxpayer establishes a Liechtenstein legal structure (the structure), or uses an existing structure, usually with the assistance of a promoter. The promoter may provide a 'paper trail' of documents that do not reflect the substance of these transactions and the taxpayer's interest in, or involvement with, the structure. 2. The structure involved will typically include: a. An Establishment (Anstalt), b. A Foundation (Stiftung), and/or c. Other legal structures, such as Liechtenstein corporations 3. Under the by-laws and other constituent documents (such as agency agreements), the promoter operates the structure on behalf of the taxpayer and acts as the structure's representative. 4. The taxpayer directly or indirectly transfers assets to the structure, although such transfers may be revocable by the taxpayer. The assets may include cash and investments in term deposits, bonds or equities, which may themselves consist of undisclosed income or gains, and the actual transfer of the assets may give rise to undisclosed income or gains. 5. The structure then uses the assets to generate passive income, which is retained by the structure. The taxpayer and/or their associates ultimately reap the economic benefits from the structure, often in a disguised form. 6. The structure may be used as a holding company for other entities in which the taxpayer has an interest. 7. The taxpayer does not disclose their involvement with the structure and does not report for Australian tax purposes the income or gains generated by the structure from the use of the assets or when they access that income. 8. The documentation supporting the above transactions may be absent, inconsistent, incomplete or contain false information. In addition, such documents may not disclose the taxpayer's interest in, or involvement with, the structure. In many cases, the documentation lodged with the relevant authorities does not accurately reflect the involvement of the taxpayer with the structure (e.g. control, ownership or beneficial interest). | 1. An Australian resident taxpayer establishes a Liechtenstein legal structure (the structure), or uses an existing structure, usually with the assistance of a promoter. The promoter may provide a 'paper trail' of documents that do not reflect the substance of these transactions and the taxpayer's interest in, or involvement with, the structure. 2. The structure involved will typically include: a. An Establishment (Anstalt), b. A Foundation (Stiftung), and/or c. Other legal structures, such as Liechtenstein corporations 3. Under the by-laws and other constituent documents (such as agency agreements), the promoter operates the structure on behalf of the taxpayer and acts as the structure's representative. 4. The taxpayer directly or indirectly transfers assets to the structure, although such transfers may be revocable by the taxpayer. The assets may include cash and investments in term deposits, bonds or equities, which may themselves consist of undisclosed income or gains, and the actual transfer of the assets may give rise to undisclosed income or gains. 5. The structure then uses the assets to generate passive income, which is retained by the structure. The taxpayer and/or their associates ultimately reap the economic benefits from the structure, often in a disguised form. 6. The structure may be used as a holding company for other entities in which the taxpayer has an interest. 7. The taxpayer does not disclose their involvement with the structure and does not report for Australian tax purposes the income or gains generated by the structure from the use of the assets or when they access that income. 8. The documentation supporting the above transactions may be absent, inconsistent, incomplete or contain false information. In addition, such documents may not disclose the taxpayer's interest in, or involvement with, the structure. In many cases, the documentation lodged with the relevant authorities does not accurately reflect the involvement of the taxpayer with the structure (e.g. control, ownership or beneficial interest). | a. An Establishment (Anstalt), b. A Foundation (Stiftung), and/or c. Other legal structures, such as Liechtenstein corporations | Australian residents have tax obligations in respect of their world wide income. This covers income from both Australian and foreign sources and includes income held in offshore structures. | In particular, the Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: a) Such an arrangement or certain steps within it may be a sham; b) Any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3 of the ITAA 1997 c) Any of the transactions may be subject to Division 13 of the ITAA 1936; d) Any entity within the structure may be a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); e) Any entity within the structure, the promoter or other persons involved with the operation of the structure, its management and administration may be acting as: i. agents for the taxpayer as principal in relation to the activities of the structure ii. trustees (whether under an express, constructive, implied or resulting trust) for the taxpayer as beneficiary in relation to the activities of the structure; f) Income from the structure may be assessable to the taxpayer and their associates under the trust income provisions in Division 6 of the ITAA 1936; g) The income of the structure may be attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; h) The income of the structure may be assessable to the taxpayer under another provision of the tax law; i) The general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i. The arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. It appears that the dominant purpose of entering into the arrangement is to obtain one or more tax benefits. | a) Such an arrangement or certain steps within it may be a sham; b) Any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3 of the ITAA 1997 c) Any of the transactions may be subject to Division 13 of the ITAA 1936; d) Any entity within the structure may be a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); e) Any entity within the structure, the promoter or other persons involved with the operation of the structure, its management and administration may be acting as: i. agents for the taxpayer as principal in relation to the activities of the structure ii. trustees (whether under an express, constructive, implied or resulting trust) for the taxpayer as beneficiary in relation to the activities of the structure; f) Income from the structure may be assessable to the taxpayer and their associates under the trust income provisions in Division 6 of the ITAA 1936; g) The income of the structure may be attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; h) The income of the structure may be assessable to the taxpayer under another provision of the tax law; i) The general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i. The arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. It appears that the dominant purpose of entering into the arrangement is to obtain one or more tax benefits. | i. agents for the taxpayer as principal in relation to the activities of the structure ii. trustees (whether under an express, constructive, implied or resulting trust) for the taxpayer as beneficiary in relation to the activities of the structure; | i. The arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. It appears that the dominant purpose of entering into the arrangement is to obtain one or more tax benefits. | Hiding assets or income, including by the use of legal structures in Lichtenstein, in an attempt to avoid or evade these tax obligations may attract serious penalties including criminal sanctions or confiscation of criminal assets. Note 1: Up to 50% penalties can apply to underpaid tax where Part IVA is applied. Base penalties for intentional disregard for the tax law start at 75% of the tax unpaid. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office Voluntary disclosures before a review is commenced can be made under the Offshore Voluntary Disclosure Initiative and may receive a reduced shortfall penalty. Phone us on 1300 132 346 or complete the Offshore voluntary disclosure statement (NAT 71149). For more information, visit www.ato.gov.au. Note 2: In appropriate cases possible sanctions under criminal law may also apply. Where taxpayers make a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings Note 3: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24. | Note 1: Up to 50% penalties can apply to underpaid tax where Part IVA is applied. Base penalties for intentional disregard for the tax law start at 75% of the tax unpaid. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office Voluntary disclosures before a review is commenced can be made under the Offshore Voluntary Disclosure Initiative and may receive a reduced shortfall penalty. Phone us on 1300 132 346 or complete the Offshore voluntary disclosure statement (NAT 71149). For more information, visit www.ato.gov.au. Note 2: In appropriate cases possible sanctions under criminal law may also apply. Where taxpayers make a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings Note 3: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24. | • the case does not exhibit a significant degree of criminality • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings | The Tax Office has reviewed this arrangement and has determined that it is not effective because of some or all of the features set out above.",,,,,PS LA 2007/7 - The use of the Commissioner's power to make default assessments of taxable income in respect of attributable income | PS LA 2007/24 - Making default assessments: secton 167 of the Income Tax Assessment Act 1936 and other similar provisions | Part 3-1 | Subsection 6(1) | Division 6 | Division 6AAA | Part X | Part IVA | Section 167 | TA 2005/5 | TA 2005/6 | TA 2005/7 | TA 2005/8,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20082/NAT/ATO/00001,
TA 2008/3,Uncommercial use of certain trusts,26 March 2008,Current,,"The alert applies to arrangements which have some or all of the following features. 1. The taxpayer arranges for a trust to be established. The trustee of the trust is effectively controlled by the taxpayer and/or the taxpayer's associates. Typically, those associates are members of the taxpayer's family, some or all of whom bear a rate of tax which is lower than that of the taxpayer. 2. The taxpayer and his or her associates are beneficiaries of the trust or may become beneficiaries at a future date. The trust deed confers, or can confer in the future, interests or entitlements upon the taxpayer's associates for less-than-market-value consideration. It may achieve this in one of two ways. 3. First, the deed may provide the taxpayer with an entitlement to income or capital which appears fixed, but which can be defeated by the trustee exercising a discretion to distribute income and/or capital gains to the other beneficiaries. For that reason, the trust may be described as a 'hybrid trust' or 'hybrid discretionary trust'. 4. Alternatively, the trust deed may provide for, or enable, the issue of units or other interests to the taxpayer's associates for no consideration, or for consideration which falls short of the market value of such interests at the time of issue. 5. A taxpayer borrows money, at interest, from a financial institution. They use the borrowed funds to subscribe for an interest, such as units, in the trust. Other funds may also be subscribed to the trust, which have not been borrowed. 6. The trustee uses the funds subscribed by the taxpayer to purchase income producing assets (e.g. rental property). The assets may be used as security for the taxpayer's borrowings, even though the borrowings are in the taxpayer's own name. 7. The trustee earns income from the assets (e.g. rent) and pays associated expenses. 8. The taxpayer includes his or her share of the trust's net income, if any, in his or her assessable income. 9. Beneficiaries other than the taxpayer may, or may not, be entitled to trust income derived over the life of the investment. Where they are, the taxpayer's proportionate share of that income may be smaller than the proportion of the trust's capital which they funded using the borrowed money. In effect, this means that a proportion of the borrowed money is used to fund the production of income for other beneficiaries. 10. In the early years of the arrangement, the taxpayer's investment is negatively geared, since interest and other costs associated with the borrowing exceed the taxpayer's share of the trust's net income, if any. The taxpayer purports to deduct this excess from their other assessable income. 11. Having regard to the circumstances, it may be expected that the taxpayer's interest in the trust will be brought to an end before their costs of investment have been recouped. This may occur, either by: (a) the trustee exercising a discretion which effectively defeats the taxpayer's right to a share of the income of the trust; and/or (b) the issue of further interests in the trust to other beneficiaries; and/or (c) the redemption or extinguishment of the taxpayer's interest in the trust 12. Typically, the deed purports to deny the taxpayer any interest in capital gains of the trust, or the proportionate share of capital gains to which the taxpayer is entitled is smaller than the proportion of the trust's capital which they funded using the borrowed money. This is achieved by: (a) preventing or restricting the distribution of capital gains to the taxpayer; and/or (b) enabling the taxpayer's interest in the trust to be redeemed at face value, or face value, adjusted for inflation. 13. These restrictions may result in the taxpayer being unable to recoup their costs of investment. When the assets are sold, it may be expected that any capital gain will instead be distributed to one or more of the trust's other beneficiaries, who may have a lower tax rate. 14. Alternatively, the taxpayer's interest in the trust may be limited to capital gains made by the trustee. In such a case, income of a revenue nature may be distributed to the trust's other beneficiaries, who may have a lower tax rate. 15. The basic structure of the arrangement can be summarised diagrammatically as follows: | 1. The taxpayer arranges for a trust to be established. The trustee of the trust is effectively controlled by the taxpayer and/or the taxpayer's associates. Typically, those associates are members of the taxpayer's family, some or all of whom bear a rate of tax which is lower than that of the taxpayer. 2. The taxpayer and his or her associates are beneficiaries of the trust or may become beneficiaries at a future date. The trust deed confers, or can confer in the future, interests or entitlements upon the taxpayer's associates for less-than-market-value consideration. It may achieve this in one of two ways. 3. First, the deed may provide the taxpayer with an entitlement to income or capital which appears fixed, but which can be defeated by the trustee exercising a discretion to distribute income and/or capital gains to the other beneficiaries. For that reason, the trust may be described as a 'hybrid trust' or 'hybrid discretionary trust'. 4. Alternatively, the trust deed may provide for, or enable, the issue of units or other interests to the taxpayer's associates for no consideration, or for consideration which falls short of the market value of such interests at the time of issue. 5. A taxpayer borrows money, at interest, from a financial institution. They use the borrowed funds to subscribe for an interest, such as units, in the trust. Other funds may also be subscribed to the trust, which have not been borrowed. 6. The trustee uses the funds subscribed by the taxpayer to purchase income producing assets (e.g. rental property). The assets may be used as security for the taxpayer's borrowings, even though the borrowings are in the taxpayer's own name. 7. The trustee earns income from the assets (e.g. rent) and pays associated expenses. 8. The taxpayer includes his or her share of the trust's net income, if any, in his or her assessable income. 9. Beneficiaries other than the taxpayer may, or may not, be entitled to trust income derived over the life of the investment. Where they are, the taxpayer's proportionate share of that income may be smaller than the proportion of the trust's capital which they funded using the borrowed money. In effect, this means that a proportion of the borrowed money is used to fund the production of income for other beneficiaries. 10. In the early years of the arrangement, the taxpayer's investment is negatively geared, since interest and other costs associated with the borrowing exceed the taxpayer's share of the trust's net income, if any. The taxpayer purports to deduct this excess from their other assessable income. 11. Having regard to the circumstances, it may be expected that the taxpayer's interest in the trust will be brought to an end before their costs of investment have been recouped. This may occur, either by: (a) the trustee exercising a discretion which effectively defeats the taxpayer's right to a share of the income of the trust; and/or (b) the issue of further interests in the trust to other beneficiaries; and/or (c) the redemption or extinguishment of the taxpayer's interest in the trust 12. Typically, the deed purports to deny the taxpayer any interest in capital gains of the trust, or the proportionate share of capital gains to which the taxpayer is entitled is smaller than the proportion of the trust's capital which they funded using the borrowed money. This is achieved by: (a) preventing or restricting the distribution of capital gains to the taxpayer; and/or (b) enabling the taxpayer's interest in the trust to be redeemed at face value, or face value, adjusted for inflation. 13. These restrictions may result in the taxpayer being unable to recoup their costs of investment. When the assets are sold, it may be expected that any capital gain will instead be distributed to one or more of the trust's other beneficiaries, who may have a lower tax rate. 14. Alternatively, the taxpayer's interest in the trust may be limited to capital gains made by the trustee. In such a case, income of a revenue nature may be distributed to the trust's other beneficiaries, who may have a lower tax rate. 15. The basic structure of the arrangement can be summarised diagrammatically as follows: | (a) the trustee exercising a discretion which effectively defeats the taxpayer's right to a share of the income of the trust; and/or (b) the issue of further interests in the trust to other beneficiaries; and/or (c) the redemption or extinguishment of the taxpayer's interest in the trust | (a) preventing or restricting the distribution of capital gains to the taxpayer; and/or (b) enabling the taxpayer's interest in the trust to be redeemed at face value, or face value, adjusted for inflation. | FEATURES WHICH CONCERN US | The Tax Office considers that the arrangement outlined above may give rise to taxation issues that include: 1. whether, and the extent to which, the taxpayer's borrowing costs are deductible under section 8-1 or section 25-25 of the Income Tax Assessment Act 1997 (ITAA 1997); 2. whether a capital gain could arise under the capital gains tax provisions in Part 3-1 of the ITAA 1997 when trust interests are redeemed or new interests are issued; 3. whether the taxpayer has 'created' a trust in which the taxpayer or their children have an interest, such that the trust may be subject to section 102 of the Income Tax Assessment Act 1936 (ITAA 1936); and 4. whether the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to the arrangement, on the basis that its dominant purpose is to enable the taxpayer to obtain a tax benefit. | 1. whether, and the extent to which, the taxpayer's borrowing costs are deductible under section 8-1 or section 25-25 of the Income Tax Assessment Act 1997 (ITAA 1997); 2. whether a capital gain could arise under the capital gains tax provisions in Part 3-1 of the ITAA 1997 when trust interests are redeemed or new interests are issued; 3. whether the taxpayer has 'created' a trust in which the taxpayer or their children have an interest, such that the trust may be subject to section 102 of the Income Tax Assessment Act 1936 (ITAA 1936); and 4. whether the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to the arrangement, on the basis that its dominant purpose is to enable the taxpayer to obtain a tax benefit. | The Australian Taxation Office is examining these arrangements . | Date of Issue: 26 March 2008 | Date of Effect: 26 March 2008 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: hybrid trust unit trust trust distributions interest deductibility rental expenses capital gains | Legislative References: Income Tax Assessment Act 1936 Part IVA Income Tax Assessment Act 1997 Section 8-1 Section 25-25 Part 3-1 | Related Taxpayer Alerts: | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical & Case Leadership Phone: (02) 6216 2710",,,,,TD 2009/17 | PS LA 2005/13 - Taxpayer Alerts | Part IVA | Section 8-1 | Section 25-25 | Part 3-1 | TA 2001/1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20083/NAT/ATO/00001,"The Taxation Office view on the major issue in this arrangement is set out in Taxation Determination TD 2009/17 | This Taxpayer Alert describes a non-arm's length arrangement under which a taxpayer uses borrowed funds to acquire an interest, such as units, in a certain type of trust, which uses the funds to purchase income-producing property. The arrangement seeks to provide income tax deductions to the taxpayer for all of their interest payments and other borrowing costs. The arrangement does not provide a sufficient connection between the expenditure and the production of future income and/or capital gains, which may be distributed to other beneficiaries of the trust, who may have a lower tax rate."
TA 2008/4,Self-managed superannuation funds deriving income from certain uncommercial trusts,26 March 2008,Current,,"The alert applies to arrangements which have some or all of the following features. 1. A trust is established which is controlled by an individual or a family group. 2. An SMSF is or becomes a beneficiary of the trust. Alternatively, the SMSF holds or obtains an indirect interest in the trust, through one or more interposed entities. The trust may also have other beneficiaries, who are associated with or related to the individual or family group. 3. The income derived directly or indirectly by the SMSF from the trust is disproportionate to its investment in the trust. As such, the SMSF derives more income from the trust than it might be expected to derive from an ordinary commercial arrangement. The SMSF may consider that the trust income is subject to the same concessional rate of tax as the SMSF's other income. This is not necessarily correct. The arrangement may be achieved in a number of ways. 4. The trust deed may provide for: (a) entitlements to income which appear to be fixed, but which can be defeated by the trustee exercising a discretion to distribute income and/or capital gains to the SMSF (whether directly or indirectly). For that reason, the trust may be described as a 'hybrid trust' or 'hybrid discretionary trust' (b) the issue of units or other interests to the SMSF (or to another entity in which the SMSF holds an interest) for no consideration, or for consideration which falls short of the market value of such interests at the time of issue (c) the redemption of trust interests held by the individual or other entities for below market value or at face value. As such, the SMSF may effectively obtain a disproportionate share of the trust's income which is not commensurate with its investment. 5. The trust deed may also purport to deny the individual or other family members any interest in capital gains of the trust. Alternatively, the capital gain to which the SMSF is entitled may be disproportionately large, in comparison to the amount of trust capital which the SMSF has funded. The deed may achieve this by preventing or restricting the distribution of capital gains to the individual or other family member, or by enabling the individual or family member's interest in the trust to be redeemed at face value, or face value, adjusted for inflation. 6. As beneficiaries of the SMSF, the individual or family members may ultimately benefit from the income and capital gains distributed to the SMSF. | 1. A trust is established which is controlled by an individual or a family group. 2. An SMSF is or becomes a beneficiary of the trust. Alternatively, the SMSF holds or obtains an indirect interest in the trust, through one or more interposed entities. The trust may also have other beneficiaries, who are associated with or related to the individual or family group. 3. The income derived directly or indirectly by the SMSF from the trust is disproportionate to its investment in the trust. As such, the SMSF derives more income from the trust than it might be expected to derive from an ordinary commercial arrangement. The SMSF may consider that the trust income is subject to the same concessional rate of tax as the SMSF's other income. This is not necessarily correct. The arrangement may be achieved in a number of ways. 4. The trust deed may provide for: (a) entitlements to income which appear to be fixed, but which can be defeated by the trustee exercising a discretion to distribute income and/or capital gains to the SMSF (whether directly or indirectly). For that reason, the trust may be described as a 'hybrid trust' or 'hybrid discretionary trust' (b) the issue of units or other interests to the SMSF (or to another entity in which the SMSF holds an interest) for no consideration, or for consideration which falls short of the market value of such interests at the time of issue (c) the redemption of trust interests held by the individual or other entities for below market value or at face value. As such, the SMSF may effectively obtain a disproportionate share of the trust's income which is not commensurate with its investment. 5. The trust deed may also purport to deny the individual or other family members any interest in capital gains of the trust. Alternatively, the capital gain to which the SMSF is entitled may be disproportionately large, in comparison to the amount of trust capital which the SMSF has funded. The deed may achieve this by preventing or restricting the distribution of capital gains to the individual or other family member, or by enabling the individual or family member's interest in the trust to be redeemed at face value, or face value, adjusted for inflation. 6. As beneficiaries of the SMSF, the individual or family members may ultimately benefit from the income and capital gains distributed to the SMSF. | (a) entitlements to income which appear to be fixed, but which can be defeated by the trustee exercising a discretion to distribute income and/or capital gains to the SMSF (whether directly or indirectly). For that reason, the trust may be described as a 'hybrid trust' or 'hybrid discretionary trust' (b) the issue of units or other interests to the SMSF (or to another entity in which the SMSF holds an interest) for no consideration, or for consideration which falls short of the market value of such interests at the time of issue (c) the redemption of trust interests held by the individual or other entities for below market value or at face value. As such, the SMSF may effectively obtain a disproportionate share of the trust's income which is not commensurate with its investment. | FEATURES WHICH CONCERN US | The Tax Office considers that the arrangement outlined above may give rise to taxation issues that include whether: 1. income derived by the SMSF from the trust is 'non-arm's length income' for the purposes of section 295-550 of the ITAA 1997, which is taxed at a higher rate than other income of the SMSF; 2. other taxation consequences arise for the individual or other family members as discussed in Taxpayer Alert TA 2008/3. | 1. income derived by the SMSF from the trust is 'non-arm's length income' for the purposes of section 295-550 of the ITAA 1997, which is taxed at a higher rate than other income of the SMSF; 2. other taxation consequences arise for the individual or other family members as discussed in Taxpayer Alert TA 2008/3. | Entities considering entering into the arrangement outlined above should also consider the requirements of the Superannuation Industry (Supervision) Act 1993. | The Australian Taxation Office is examining these arrangements . | Date of Issue: 26 March 2008 | Date of Effect: 26 March 2008 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: hybrid trust self-managed superannuation fund unit trust trust distributions capital gains non-arm's length income | Legislative References: Income Tax Assessment Act 1997 Section 295-550 Part 3-1 Superannuation Industry (Supervision) Act 1993 | Related Taxpayer Alerts: | Contact Officer: Stuart Forsyth Business Line: Superannuation Phone: (07) 3149 5504",,,,,TR 2006/7 | PS LA 2005/13 - Taxpayer Alerts | Section 295-550 | Part 3-1 | Superannuation Industry (Supervision) Act 1993 | TA 2008/3,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20084/NAT/ATO/00001,"The Taxation Office view on the major issue in this arrangement is set out in Taxation Ruling TR 2006/7 | This Taxpayer Alert describes a non-arm's length arrangement under which a self-managed superannuation fund (SMSF) derives income through a direct or indirect interest in a closely-held trust. The arrangement may be of the type of trust described in Taxpayer Alert TA 2008/3, where an individual or another entity borrows funds to invest in a trust and seeks a tax deduction for its interest costs. This Alert should be read in conjunction with Taxpayer Alert TA 2008/3."
TA 2008/5,Certain borrowings by self managed superannuation funds,4 April 2008,Current,,"The Alert applies to arrangements which have the following features: 1. The trustee of the SMSF (""the trustee"") borrows money to acquire an asset. 2. The asset acquired (or any replacement asset) is held on trust so that the trustee acquires a beneficial interest in it. 3. The legal interest in the asset (or any replacement) is held by the trust as security for the borrowed money. 4. The trustee has the right to acquire legal ownership of the asset (or any replacement) by making one or more payments after acquiring the beneficial interest. 5. The borrowing is of a limited-recourse nature, noting particularly that any recourse that the lender has under the arrangement against the trustee must be limited to rights relating to the asset acquired (or any replacement). In other words, the lender is able to recover monies where there is a default on the borrowing by repossessing or disposing of the asset acquired (or any replacement), but cannot recover such monies through recourse to the SMSF's other assets. 6. The arrangement has one or more of the following features: (a) The interest rate for the borrowing is zero or less than a commercial rate, particularly where the lender is a related party; (b) The interest rate for the borrowing exceeds a commercial rate, particularly where the lender is a related party; (c) Interest on the borrowing is able to be capitalised; (d) A personal guarantee for the borrowing is given by a third party, particularly where the guarantee is given by a member or a related party of the SMSF; (e) The asset acquired (or any replacement) is one that a trustee is prohibited from acquiring under the SIS Act or any other law, or under the SMSF's governing rules (for example, acquiring residential property, which is not business real property, from a related party). | 1. The trustee of the SMSF (""the trustee"") borrows money to acquire an asset. 2. The asset acquired (or any replacement asset) is held on trust so that the trustee acquires a beneficial interest in it. 3. The legal interest in the asset (or any replacement) is held by the trust as security for the borrowed money. 4. The trustee has the right to acquire legal ownership of the asset (or any replacement) by making one or more payments after acquiring the beneficial interest. 5. The borrowing is of a limited-recourse nature, noting particularly that any recourse that the lender has under the arrangement against the trustee must be limited to rights relating to the asset acquired (or any replacement). In other words, the lender is able to recover monies where there is a default on the borrowing by repossessing or disposing of the asset acquired (or any replacement), but cannot recover such monies through recourse to the SMSF's other assets. 6. The arrangement has one or more of the following features: (a) The interest rate for the borrowing is zero or less than a commercial rate, particularly where the lender is a related party; (b) The interest rate for the borrowing exceeds a commercial rate, particularly where the lender is a related party; (c) Interest on the borrowing is able to be capitalised; (d) A personal guarantee for the borrowing is given by a third party, particularly where the guarantee is given by a member or a related party of the SMSF; (e) The asset acquired (or any replacement) is one that a trustee is prohibited from acquiring under the SIS Act or any other law, or under the SMSF's governing rules (for example, acquiring residential property, which is not business real property, from a related party). | (a) The interest rate for the borrowing is zero or less than a commercial rate, particularly where the lender is a related party; (b) The interest rate for the borrowing exceeds a commercial rate, particularly where the lender is a related party; (c) Interest on the borrowing is able to be capitalised; (d) A personal guarantee for the borrowing is given by a third party, particularly where the guarantee is given by a member or a related party of the SMSF; (e) The asset acquired (or any replacement) is one that a trustee is prohibited from acquiring under the SIS Act or any other law, or under the SMSF's governing rules (for example, acquiring residential property, which is not business real property, from a related party). | FEATURES WHICH CONCERN US | The Tax Office considers that arrangements which exhibit one or more of the features outlined in paragraph 6 above may give rise to taxation and superannuation regulatory issues, including whether: 1. monies advanced by a member or related party at zero or less than a commercial rate of interest could be characterised as a contribution to the SMSF. This may result in the trustee/member having to pay excess non-concessional contributions tax under Division 292 of the Income Tax Assessment Act 1997 ; 2. monies advanced by a member or related party at greater than a commercial interest rate of interest may result in: a) a breach of the sole purpose test outlined in section 62 of the SIS Act, on the basis that the excessive interest rate may mean that the SMSF is not being maintained solely for the purpose of providing superannuation benefits, and/or b) the trustee breaching paragraph 65(1)(b) of the SIS Act, which prohibits the trustee from giving financial assistance to a member of the SMSF or to a relative of such a member using the resources of the SMSF; 3. interest capitalised may result in the arrangement failing to meet the requirement that the money borrowed is or has been applied for the acquisition of an asset under paragraph 67(4A)(a) of the SIS Act; 4. a personal guarantee of the type outlined in paragraph 6 (d) above may result in recourse being made to the assets of the SMSF other than the asset acquired (or any replacement) in the event that the guarantee is enforced against the trustee as the principal debtor, contrary to the intent that the exception in subsection 67(4A) of the SIS Act only applies to limited recourse borrowings; and 5. an asset of the type outlined in paragraph 6 (e) may result in breaches of the SIS Act or SIS Regulations (for example, intentionally acquiring an asset from a related party, which breaches subsection 66(1) of the SIS Act). | 1. monies advanced by a member or related party at zero or less than a commercial rate of interest could be characterised as a contribution to the SMSF. This may result in the trustee/member having to pay excess non-concessional contributions tax under Division 292 of the Income Tax Assessment Act 1997 ; 2. monies advanced by a member or related party at greater than a commercial interest rate of interest may result in: a) a breach of the sole purpose test outlined in section 62 of the SIS Act, on the basis that the excessive interest rate may mean that the SMSF is not being maintained solely for the purpose of providing superannuation benefits, and/or b) the trustee breaching paragraph 65(1)(b) of the SIS Act, which prohibits the trustee from giving financial assistance to a member of the SMSF or to a relative of such a member using the resources of the SMSF; 3. interest capitalised may result in the arrangement failing to meet the requirement that the money borrowed is or has been applied for the acquisition of an asset under paragraph 67(4A)(a) of the SIS Act; 4. a personal guarantee of the type outlined in paragraph 6 (d) above may result in recourse being made to the assets of the SMSF other than the asset acquired (or any replacement) in the event that the guarantee is enforced against the trustee as the principal debtor, contrary to the intent that the exception in subsection 67(4A) of the SIS Act only applies to limited recourse borrowings; and 5. an asset of the type outlined in paragraph 6 (e) may result in breaches of the SIS Act or SIS Regulations (for example, intentionally acquiring an asset from a related party, which breaches subsection 66(1) of the SIS Act). | a) a breach of the sole purpose test outlined in section 62 of the SIS Act, on the basis that the excessive interest rate may mean that the SMSF is not being maintained solely for the purpose of providing superannuation benefits, and/or b) the trustee breaching paragraph 65(1)(b) of the SIS Act, which prohibits the trustee from giving financial assistance to a member of the SMSF or to a relative of such a member using the resources of the SMSF; | Trustees are also reminded that existing fund assets cannot be placed into a limited recourse borrowing without breaching the SIS regulatory requirements. | The Australian Taxation Office is examining these arrangements. | For further information on the Tax Office's current views regarding the exception provided to certain limited-recourse borrowings under subsection 67(4A) of the SIS Act refer to Instalment warrants and super funds - questions and answers . | Date of Issue: 4 April 2008 | Date of Effect: 4 April 2008 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: self managed superannuation fund sole purpose personal guarantees limited recourse borrowings financial assistance borrowing instalment warrants | Legislative References: Superannuation Industry (Supervision) Act 1993 62 65(1)(b) 66(1) 67(4A) 67(4A)(a) Superannuation Industry (Supervision) Regulations 1994 Income Tax Assessment Act 1997 Division 292 | Related Taxpayer Alerts: | Contact Officer: Stuart Forsyth Business Line: Superannuation Phone: (07) 3149 5504",,,,,PS LA 2005/13 - Taxpayer Alerts | 62 | 65(1)(b) | 66(1) | Superannuation Industry (Supervision) Regulations 1994 | Division 292 | None,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20085/NAT/ATO/00001,"This Taxpayer Alert is concerned with arrangements under which the trustee of a self managed superannuation fund (SMSF) enters into certain limited-recourse borrowings, which may not meet the conditions in subsection 67(4A) and/or breach other provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act), as well as related superannuation rules. | This Taxpayer Alert does not deal with taxation issues other than those relating to the application of the superannuation law."
TA 2008/6,Claiming tax deductions for debts from a previous tax planning scheme that are forgiven or where repayments are refunded,10 April 2008,Current,,"The alert applies to arrangements having the following features. | 1. The taxpayer has a debt from participating in a previous tax planning scheme. | 2. An entity associated with promotion of the previous tax planning scheme (the other entity) approaches the taxpayer with an offer to settle the outstanding debt on that scheme, on the basis of generating further tax deductions above the [net] amount repaid. | 3. The other entity proposes an arrangement whereby the taxpayer pays either: (a) an amount less than the full amount of the outstanding debt and the other entity offers to provide documents that incorrectly evidence the payment of the full amount. This may involve the fabrication of documents that purport to show the payment of the full amount by the taxpayer; or (b) the full amount of the outstanding debt and the other entity offers to provide supporting documentation to substantiate this payment, but also to arrange a covert refund of the majority of the amount paid to the taxpayer or their associates. This may involve the use of a round robin payment arrangement to return the majority of the amount paid by the taxpayer back to the taxpayer or their associates. | (a) an amount less than the full amount of the outstanding debt and the other entity offers to provide documents that incorrectly evidence the payment of the full amount. This may involve the fabrication of documents that purport to show the payment of the full amount by the taxpayer; or (b) the full amount of the outstanding debt and the other entity offers to provide supporting documentation to substantiate this payment, but also to arrange a covert refund of the majority of the amount paid to the taxpayer or their associates. This may involve the use of a round robin payment arrangement to return the majority of the amount paid by the taxpayer back to the taxpayer or their associates. | 4. The basic features of this arrangement can be summarised diagrammatically as follows: Alternatively, the arrangement may constitute a round robin, such as: | Alternatively, the arrangement may constitute a round robin, such as: | FEATURES ABOUT WHICH THE TAX OFFICE IS CONCERNED | The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: (a) such an arrangement or certain steps within it may be a sham; (b) either the outstanding debt or the [net] amount actually repaid under this scheme may be deductible under section 8-1 the Income Tax Assessment Act 1997 ; (c) the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement, on the basis that its dominant purpose is to enable the taxpayer to obtain a tax benefit; (d) any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | (a) such an arrangement or certain steps within it may be a sham; (b) either the outstanding debt or the [net] amount actually repaid under this scheme may be deductible under section 8-1 the Income Tax Assessment Act 1997 ; (c) the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement, on the basis that its dominant purpose is to enable the taxpayer to obtain a tax benefit; (d) any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | The Australian Taxation Office is examining these arrangements. | The Tax Office will consider the deductibility of each settlement amount on a case by case basis taking into account the overall circumstances. Deductions, where allowable, will be limited to the amounts which have actually been incurred. Note 1: Penalties of up to 50 % of the tax avoided can apply where Part IVA is applied. Base penalties for intentional disregard of the tax law are imposed at 75 % of the tax shortfall. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Note 2: In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer ; • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter; and • the taxpayer co-operates with the investigation and consequential proceedings . Note 3: Penalties of up to 5, penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | • the case does not exhibit a significant degree of criminality by the taxpayer ; • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter; and • the taxpayer co-operates with the investigation and consequential proceedings . | Date of amendment Comment 19 January 2024 Updated ATO tip-off hotline number | Date of Issue: 10 April 2008 | Date of Effect: 10 April 2008 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: Tax avoidance Tax evasion | Legislative References: Income Tax Assessment Act 1997 Section 8-1 Income Tax Assessment Act 1936 Part IVA Taxation Administration Act 1953 Division 290 of Schedule 1 | Related Taxpayer Alerts: | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical & Case Leadership Phone: (02) 6216 2710",,,,,PS LA 2005/13 - Taxpayer Alerts | Section 8-1 | Part IVA | Division 290 of Schedule 1 | None.,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20086/NAT/ATO/00001,This Taxpayer Alert describes arrangements whereby taxpayers involved in a previous tax avoidance scheme enter into an arrangement under which they purport to be able to claim a tax deduction for debts relating to that scheme that have been forgiven or where repayments of the debt are refunded.
TA 2008/7,Application of Part IVA of the Income Tax Assessment Act 1936 to 'wash sale' arrangements,18 April 2008,Current,,"2. The type of wash sale arrangement this alert covers is where a taxpayer disposes of, or otherwise deals with a capital gains tax (CGT) asset to generate a capital or revenue loss, but where in substance, there is no significant change in the taxpayer's economic exposure in the asset. This may occur where the interest in the asset is in some way reinstated by the taxpayer, in order to apply a resulting capital loss or allowable deduction against a capital gain or assessable income already derived or expected to be derived. | 3. Reinstatement of the taxpayer's interest is commonly achieved by a taxpayer selling a CGT asset and creating a trust over the asset or transferring an asset to a trust. We are concerned where this is done with the sole or dominant purpose of generating a capital or revenue loss to offset against a capital gain or assessable income when in substance there is an intention to acquire the same or substantially the same asset or the taxpayer still benefits from the asset. | 4. Examples of mechanisms to carry out wash sale arrangements covered by this Taxpayer Alert and where Part IVA might be relevant are those discussed in paragraph 4 of TR 2008/1 which sets out the ATO view in relation to wash sales. These examples apply where the taxpayer disposes of, or otherwise deals with, an asset and there is an arrangement to acquire the same or substantially the same asset, or otherwise continue to benefit from the asset.","This example corresponds with Example 2 in TR 2008/1. | Step 1 | 1. Kelly maintains a large share portfolio. She sells a parcel of Alpha shares from her portfolio on 20 March 2007 and makes a capital gain of $62,000 in the year ended 30 June 2007. | 1. Kelly maintains a large share portfolio. She sells a parcel of Alpha shares from her portfolio on 20 March 2007 and makes a capital gain of $62,000 in the year ended 30 June 2007. | Step 2 | 2. On 5 June 2007, Kelly receives a financial booklet discussing various end of year income tax saving strategies. As a result of what she reads, she reviews her share portfolio and notes that her shares in Echo Ltd (Echo) are currently trading at $1.20 per share. Kelly's reduced cost base for her Echo shares is $2.42 per share. Acting on one of the strategies outlined in the booklet she devises a plan which would allow her to crystallise the unrealised loss and maintain her interest in Echo. In view of this she contacts Bruce, her broker, on the same day to obtain information on the market and the current expectations as to the price of the Echo shares. Bruce assures her that there have been no relevant market announcements and that he expects, based on the information available to him, that there will be no significant movements in the price of the Echo shares over the next couple of days. | 2. On 5 June 2007, Kelly receives a financial booklet discussing various end of year income tax saving strategies. As a result of what she reads, she reviews her share portfolio and notes that her shares in Echo Ltd (Echo) are currently trading at $1.20 per share. Kelly's reduced cost base for her Echo shares is $2.42 per share. Acting on one of the strategies outlined in the booklet she devises a plan which would allow her to crystallise the unrealised loss and maintain her interest in Echo. In view of this she contacts Bruce, her broker, on the same day to obtain information on the market and the current expectations as to the price of the Echo shares. Bruce assures her that there have been no relevant market announcements and that he expects, based on the information available to him, that there will be no significant movements in the price of the Echo shares over the next couple of days. | Step 3 | 3. Acting on Bruce's advice she places with him a sell order for 50,000 Echo shares at $1.20 per share. 4. Kelly's capital proceeds from the sale transaction are $60,000, and her reduced cost base is $122,000 (including the $1,000 transaction costs see Step 4), giving her a capital loss of $62,000. | 3. Acting on Bruce's advice she places with him a sell order for 50,000 Echo shares at $1.20 per share. 4. Kelly's capital proceeds from the sale transaction are $60,000, and her reduced cost base is $122,000 (including the $1,000 transaction costs see Step 4), giving her a capital loss of $62,000. | Step 4 | 5. The next day (6 June 2007), Kelly instructs Bruce to buy 50,000 Echo shares. The price of the stock has now moved up to $1.21 per share. 6. Bruce charges Kelly $1,000 for transaction costs associated with the sell and buy orders. | 5. The next day (6 June 2007), Kelly instructs Bruce to buy 50,000 Echo shares. The price of the stock has now moved up to $1.21 per share. 6. Bruce charges Kelly $1,000 for transaction costs associated with the sell and buy orders. | Outcome | 7. Kelly offsets the $62,000 capital loss against the $62,000 capital gain when preparing her income tax return for the year ended 30 June 2007. 8. The scheme, for the purposes of subsection 177A(1), includes all the steps leading to, the entering into and the implementation of the planned sell and buy transactions, the incurrence of a $62,000 capital loss and the offsetting of that capital loss against the $62,000 capital gain by Kelly. The facts surrounding the entry into the scheme, including the adoption of the strategy in the financial booklet and the advice received on the expectations as to price, suggest that Kelly planned to purchase back the same number of Echo shares shortly after she sold them. Accordingly, the disposal and acquisition of the shares 24 hours later constitute a scheme within the meaning of subsection 177A(1). 9. Upon weighing up the eight factors in section 177D (ITAA 1936) (see example 2 in TR 2008/1 for the full analysis), it would be concluded that the dominant purpose of Kelly in entering into and carrying out the scheme was to obtain a tax benefit in the form of a capital loss. In particular the manner, form and substance, timing, tax effects and financial consequences for Kelly arising from the scheme support this conclusion. Accordingly, the Commissioner may make a determination under section 177F to cancel the tax benefit. | 7. Kelly offsets the $62,000 capital loss against the $62,000 capital gain when preparing her income tax return for the year ended 30 June 2007. 8. The scheme, for the purposes of subsection 177A(1), includes all the steps leading to, the entering into and the implementation of the planned sell and buy transactions, the incurrence of a $62,000 capital loss and the offsetting of that capital loss against the $62,000 capital gain by Kelly. The facts surrounding the entry into the scheme, including the adoption of the strategy in the financial booklet and the advice received on the expectations as to price, suggest that Kelly planned to purchase back the same number of Echo shares shortly after she sold them. Accordingly, the disposal and acquisition of the shares 24 hours later constitute a scheme within the meaning of subsection 177A(1). 9. Upon weighing up the eight factors in section 177D (ITAA 1936) (see example 2 in TR 2008/1 for the full analysis), it would be concluded that the dominant purpose of Kelly in entering into and carrying out the scheme was to obtain a tax benefit in the form of a capital loss. In particular the manner, form and substance, timing, tax effects and financial consequences for Kelly arising from the scheme support this conclusion. Accordingly, the Commissioner may make a determination under section 177F to cancel the tax benefit. | FEATURES WHICH CONCERN US | 5. Depending upon the individual facts and circumstances, the Tax Office considers that wash sale arrangements that have the above features may give rise to taxation issues including whether: 1. the general anti-avoidance provisions in Part IVA of the ITAA 1936 should be applied to cancel all or part of a relevant capital loss or allowable deduction from the wash sale arrangement where the taxpayer disposes of the assets with every intention of acquiring the same or substantially the same assets, or otherwise continue to benefit from the asset. 2. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | 1. the general anti-avoidance provisions in Part IVA of the ITAA 1936 should be applied to cancel all or part of a relevant capital loss or allowable deduction from the wash sale arrangement where the taxpayer disposes of the assets with every intention of acquiring the same or substantially the same assets, or otherwise continue to benefit from the asset. 2. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | The Australian Taxation Office has examined these wash sale arrangements and a view as to the application of Part IVA has been provided in TR 2008/1 . Note 1: Penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed . | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 20 February 2024 Updated ATO tip-off hotline number | Date of Issue: 18 April 2008 | Date of Effect: 18 April 2008 | Related Rulings/Determinations: TR 2008/1 TD 2004/13 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: Aggressive tax planning Wash sales Capital gain tax Capital losses Deductions Arrangement Promoters | Legislative References: Income Tax Assessment Act 1936 Part IVA Taxation Administration Act 1953 Schedule 1 Div 290 | Contact Officer: Deborah Vegar Business Line: Law & Practice Section: Tax Counsel Network Phone: (02) 9374 2872",,,,TR 2008/1 | TD 2004/13 | PS LA 2005/13 - Taxpayer Alerts | Part IVA | Schedule 1 Div 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20087/NAT/ATO/00001,"The ATO view on the arrangement described in TA 2008/7 is set out in TR 2008/1 . This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | 1. This Taxpayer Alert describes an arrangement called a 'wash sale' where an asset is disposed of, but there is no substantial change in economic interest in the asset."
TA 2008/8,Australian resident entities creating false deductions and/or concealing income through arrangements with promoters based in Vanuatu.,7 May 2008,Current,,"The Tax Office is investigating arrangements covered by this alert as part of the whole of government Project Wickenby. These arrangements may involve some or all of the following steps: 1. An Australian resident taxpayer (the taxpayer) enters into an arrangement with a promoter located overseas which may involve a claim for deductions in relation to services purportedly provided or otherwise justify a flow of funds to entities located overseas. 2. The promoter or its associates then transfers the funds back to the taxpayer through the use of purported loan arrangements, or through the use of debit or credit cards; 3. The taxpayer may seek further deductions in respect of interest on the purported loan used to effectively repatriate the funds; 4. Alternatively, the foreign company may transfer the funds to a separate asset-holding structure (the structure) established in Vanuatu and controlled by the taxpayer or its associates. These funds are used to acquire assets to generate passive income, which is retained by the structure. The taxpayer and/or their associates ultimately reap the economic benefits for the structure, often in a disguised form; 5. The structure may also be used as a standalone arrangement to enable the taxpayer to hold assets offshore and conceal the income that is generated. | 1. An Australian resident taxpayer (the taxpayer) enters into an arrangement with a promoter located overseas which may involve a claim for deductions in relation to services purportedly provided or otherwise justify a flow of funds to entities located overseas. 2. The promoter or its associates then transfers the funds back to the taxpayer through the use of purported loan arrangements, or through the use of debit or credit cards; 3. The taxpayer may seek further deductions in respect of interest on the purported loan used to effectively repatriate the funds; 4. Alternatively, the foreign company may transfer the funds to a separate asset-holding structure (the structure) established in Vanuatu and controlled by the taxpayer or its associates. These funds are used to acquire assets to generate passive income, which is retained by the structure. The taxpayer and/or their associates ultimately reap the economic benefits for the structure, often in a disguised form; 5. The structure may also be used as a standalone arrangement to enable the taxpayer to hold assets offshore and conceal the income that is generated. | The above transactions may not take place as claimed or documentation supporting them may be absent, inconsistent, incomplete or contain false information. | In addition, although claimed to take place in Vanuatu, some steps in the chain of transactions may occur in other countries to further conceal the true nature of the transactions. | FEATURES THAT CONCERN US | Australian residents have tax obligations in respect of their worldwide income. This covers income from both Australian and foreign sources and includes income held in offshore structures. | In particular, the Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: a. Such an arrangement or certain steps within it may be a sham; b. Any deduction for the expenses purportedly incurred under this arrangement is allowable under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) c. Any funds received as purported loans constitute deemed dividends for the purposes of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936); d. Any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3-1 of the ITAA 1997; e. Any of the transactions may be subject to Division 13 of the ITAA 1936; f. Any entity within the structure may be a resident of Australia under subsection 6(1) of the ITAA 1936; g. Any entity within any established structures, the promoter or other persons involved with the operation, management or administration of any such structures may be acting as trustees (whether under an express, constructive, implied or resulting trust) for the Australian entity as beneficiary in relation to the activities of the structure; h. Income from the structure may be assessable to the taxpayer and their associates under the trust income provisions in Division 6 of the ITAA 1936; i. Any of the transactions may be subject to the General Value Shifting Regime in Part 3-95 of the ITAA 1997; j. The income of the structure may be attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; k. The income of the structure may be assessable to the taxpayer under another provision of the tax law; l. The general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: a. The arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and b. It appears that the dominant purpose of entering into the arrangement is to obtain one or more tax benefits; m. Any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. n. any criminal offences have been committed in relation to the arrangement. | a. Such an arrangement or certain steps within it may be a sham; b. Any deduction for the expenses purportedly incurred under this arrangement is allowable under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) c. Any funds received as purported loans constitute deemed dividends for the purposes of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936); d. Any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3-1 of the ITAA 1997; e. Any of the transactions may be subject to Division 13 of the ITAA 1936; f. Any entity within the structure may be a resident of Australia under subsection 6(1) of the ITAA 1936; g. Any entity within any established structures, the promoter or other persons involved with the operation, management or administration of any such structures may be acting as trustees (whether under an express, constructive, implied or resulting trust) for the Australian entity as beneficiary in relation to the activities of the structure; h. Income from the structure may be assessable to the taxpayer and their associates under the trust income provisions in Division 6 of the ITAA 1936; i. Any of the transactions may be subject to the General Value Shifting Regime in Part 3-95 of the ITAA 1997; j. The income of the structure may be attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; k. The income of the structure may be assessable to the taxpayer under another provision of the tax law; l. The general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: a. The arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and b. It appears that the dominant purpose of entering into the arrangement is to obtain one or more tax benefits; m. Any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. n. any criminal offences have been committed in relation to the arrangement. | a. The arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and b. It appears that the dominant purpose of entering into the arrangement is to obtain one or more tax benefits; | Falsifying information in an attempt to inflate deductions or to disguise asset holding or offshore income, including through arrangements based in Vanuatu, in an attempt to avoid or evade these tax obligations may attract serious penalties including criminal sanctions or confiscation of criminal assets. | The Tax Office has reviewed this arrangement and has determined that it is not effective because of some or all of the features set out above. Note 1: Up to 50% penalties can apply to underpaid tax where Part IVA is applied. Base penalties for intentional disregard for the tax law start at 75% of the tax unpaid. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office Voluntary disclosures before a review is commenced can be made under the Offshore Voluntary Disclosure Initiative and may receive a reduced shortfall penalty. More information on voluntary disclosures is available on our website ato.gov.au and search for Voluntary disclosures or phone 13 28 69. Note 2: In appropriate cases possible sanctions under criminal law may also apply. Where taxpayers make a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings Note 3: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24. Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 5: The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. | • the case does not exhibit a significant degree of criminality • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings | Date of amendment Comment 20 February 2024 Updated Voluntary disclosure information | Date of Issue: 7 May 2008 | Date of Effect: 7 May 2008 | Related Practice Statements: PS LA 2007/7 PS LA 2007/24 | Other References: Tax Havens and Tax Administration, NAT 10567 | Subject References: Tax havens | Legislative References: Income Tax Assessment Act 1936 Subsection 6(1) Division 6 Division 6AAA Division 7A Division 13 of Part III Part X Part XI Part IVA Section 167 Income Tax Assessment Act 1997 Section 8-1 Part 3-1 Part 3-95 Taxation Administration Act 1953 Division 290 | Related Taxpayer Alerts: | Contact Officer: Michael O'Neill Business Line: Serious Non-Compliance Section: Wickenby Phone: 02 9374 2538",,,,,PS LA 2007/7 | PS LA 2007/24 | Subsection 6(1) | Division 6 | Division 6AAA | Division 7A | Part X | Part IVA | Section 167 | Section 8-1 | Part 3-1 | Part 3-95 | Division 290 | TA 2005/5 | TA 2005/6 | TA 2005/7 | TA 2005/8 | TA 2008/2,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20088/NAT/ATO/00001,"This Taxpayer Alert describes arrangements through which Australian resident entities, with the help of a promoter in Vanuatu, seek deductions for artificially created expenses and/or establish structures that enable the concealment of income to attempt to avoid or evade Australian tax."
TA 2008/9,Private company loan arrangement to obtain tax-free distributions and avoid deemed dividends,23 May 2008,Current,,"The alert applies to arrangements having the following relevant features: 1. During a financial year the private company (the company) advances, loans or otherwise credits amounts to a shareholder that are treated as a debt owing to the company. 2. At the end of the financial year, the company makes a further loan by drawing a cheque in favour of the shareholder in the amount of the shareholder's previous debt to the company, including interest accrued. 3. The shareholder endorses the cheque in favour of a financial entity associated with the promoter of the arrangement. 4. The financial entity endorses the cheque in favour of the company. 5. The company ensures the cheque remains in 'safekeeping' for 5 years, although it is not presented or banked for payment. 6. The company treats the cheque as payment of the shareholder's debt to it, despite the cheque never having been presented or banked for payment. 7. The promoter entity advises the shareholder and the company that three conditions must be attached to the cheque, being that: i. the cheque will not be presented and banked for payment, and ii. the cheque will not form the basis of a claim or marked for payment, and iii. the cheque will be retained after it becomes stale. 8. Due to the deferral of tax for each year, the shareholder and the company enter into a subsequent arrangement the following year, with an ever-increasing amount of tax involved. | 1. During a financial year the private company (the company) advances, loans or otherwise credits amounts to a shareholder that are treated as a debt owing to the company. 2. At the end of the financial year, the company makes a further loan by drawing a cheque in favour of the shareholder in the amount of the shareholder's previous debt to the company, including interest accrued. 3. The shareholder endorses the cheque in favour of a financial entity associated with the promoter of the arrangement. 4. The financial entity endorses the cheque in favour of the company. 5. The company ensures the cheque remains in 'safekeeping' for 5 years, although it is not presented or banked for payment. 6. The company treats the cheque as payment of the shareholder's debt to it, despite the cheque never having been presented or banked for payment. 7. The promoter entity advises the shareholder and the company that three conditions must be attached to the cheque, being that: i. the cheque will not be presented and banked for payment, and ii. the cheque will not form the basis of a claim or marked for payment, and iii. the cheque will be retained after it becomes stale. 8. Due to the deferral of tax for each year, the shareholder and the company enter into a subsequent arrangement the following year, with an ever-increasing amount of tax involved. | i. the cheque will not be presented and banked for payment, and ii. the cheque will not form the basis of a claim or marked for payment, and iii. the cheque will be retained after it becomes stale. | Diagram of typical arrangement | FEATURES WHICH CONCERN US | The Tax Office considers that an arrangement of this type gives rise to the following taxation issues that include whether: 1. such an arrangement or certain steps in it may be a sham. 2. the delivery of the endorsed cheque to the private company amounts to or gives rise to a repayment of the shareholder's debt to the private company. 3. section 109R (2) ITAA 1936 operates to disregard the repayment, which pursuant to the terms of the arrangement precedes a further loan of a similar or larger amount. 4. the general anti-avoidance provisions contained in Part IVA ITAA 1936 apply to include the amount of the distributions from the private company in the assessable income of the shareholder. 5. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | 1. such an arrangement or certain steps in it may be a sham. 2. the delivery of the endorsed cheque to the private company amounts to or gives rise to a repayment of the shareholder's debt to the private company. 3. section 109R (2) ITAA 1936 operates to disregard the repayment, which pursuant to the terms of the arrangement precedes a further loan of a similar or larger amount. 4. the general anti-avoidance provisions contained in Part IVA ITAA 1936 apply to include the amount of the distributions from the private company in the assessable income of the shareholder. 5. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | The Tax Office has reviewed this arrangement in several cases and has determined that it is not effective because of some or all of the features set out above. Note 1: Penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 23 May 2008 | Date of Effect: 23 May 2008 | Related Practice Statements: PS LA 2005/13 | Subject References: Arrangement Negotiable instrument Deemed Dividend Avoidance | Legislative References: Income Tax Assessment Act 1936 Section 109C Section 109D Section 109R Section 44 Part IVA Taxation Administration Act 1953 Division 290 | Related Taxpayer Alerts: | Contact Officer: Gary Hammersley Business Line: Aggressive Tax Planning Phone: 08 9268 5691",,,,,PS LA 2005/13 | Section 109C | Section 109D | Section 109R | Section 44 | Part IVA | Division 290 | TA 2007/5,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20089/NAT/ATO/00001,"From 1 July 2009 sub section 109R(2) of the ITAA 1936 provides for a repayment of a loan not to be taken into account if a taxpayer obtained a loan of a similar or larger amount from the private company in order to make the repayment. This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | This Taxpayer Alert describes an arrangement whereby a shareholder purports to make a repayment of a shareholder loan from a private company via a round robin of endorsed cheques so as to avoid the operation of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936)."
TA 2008/10,Purported prepayment of service fees designed to postpone tax liability,23 May 2008,Current,,"The alert applies to arrangements having the following features: 1. A trading entity purportedly borrows funds from a financial entity that is associated with the promoter of the arrangement. 2. These funds are purportedly used by the trading entity to prepay for services to be provided by a service entity. 3. The purported borrowing and the purported prepayment are made as follows: i. A cheque is drawn in favour of the trading entity by a financial entity associated with the promoter. ii. The cheque is endorsed by the trading entity in favour of the service entity. iii. The service entity further endorses the cheque in favour of the original drawer, the financial entity, for the purported purpose of a 'deposit' with that financial entity. iv. The cheque is to be held by the financial entity well after it becomes a stale instrument, but is never presented or banked for payment. 4. The promoter entity advises the trading entity that three conditions must be attached to the cheque, being that: i. the cheque will not be presented and banked for payment, ii. the cheque will not form the basis of a claim or marked for payment, and iii. the cheque will be retained after it becomes stale. 5. In some cases, the services may not actually be provided by the service entity in the following income year. 6. The trading entity claims a deduction for the amount of the cheque in the first year. 7. The service entity declares the assessable income in the later year. 8. Due to the deferral of tax for each year, the trading entity enters into a subsequent arrangement the following year, with an ever-increasing amount of tax involved. | 1. A trading entity purportedly borrows funds from a financial entity that is associated with the promoter of the arrangement. 2. These funds are purportedly used by the trading entity to prepay for services to be provided by a service entity. 3. The purported borrowing and the purported prepayment are made as follows: i. A cheque is drawn in favour of the trading entity by a financial entity associated with the promoter. ii. The cheque is endorsed by the trading entity in favour of the service entity. iii. The service entity further endorses the cheque in favour of the original drawer, the financial entity, for the purported purpose of a 'deposit' with that financial entity. iv. The cheque is to be held by the financial entity well after it becomes a stale instrument, but is never presented or banked for payment. 4. The promoter entity advises the trading entity that three conditions must be attached to the cheque, being that: i. the cheque will not be presented and banked for payment, ii. the cheque will not form the basis of a claim or marked for payment, and iii. the cheque will be retained after it becomes stale. 5. In some cases, the services may not actually be provided by the service entity in the following income year. 6. The trading entity claims a deduction for the amount of the cheque in the first year. 7. The service entity declares the assessable income in the later year. 8. Due to the deferral of tax for each year, the trading entity enters into a subsequent arrangement the following year, with an ever-increasing amount of tax involved. | i. A cheque is drawn in favour of the trading entity by a financial entity associated with the promoter. ii. The cheque is endorsed by the trading entity in favour of the service entity. iii. The service entity further endorses the cheque in favour of the original drawer, the financial entity, for the purported purpose of a 'deposit' with that financial entity. iv. The cheque is to be held by the financial entity well after it becomes a stale instrument, but is never presented or banked for payment. | i. the cheque will not be presented and banked for payment, ii. the cheque will not form the basis of a claim or marked for payment, and iii. the cheque will be retained after it becomes stale. | Diagram of typical arrangement | FEATURES WHICH CONCERN US | The Tax Office considers that an arrangement of this type gives rise to the following taxation issues that include whether: 1. such an arrangement or certain steps in it may be a sham. 2. the Trading Entity is entitled to a deduction under section 8-1 Income Tax Assessment Act 1997 (ITAA 1997) and in particular, whether the amount purportedly paid to the service entity: i. constituted a loss or outgoing; ii. was to any extent incurred in gaining or producing the trading entity's assessable income; and iii. was to any extent necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. 3. section 82KK Income Tax Assessment Act 1936 (ITAA 1936) applies so that the deduction is not allowable until the services for which it was purportedly incurred are provided by the service entity. 4. the general anti-avoidance rules contained in Part IVA ITAA 1936 operate to disallow the deduction until the services for which it was purportedly incurred are provided by the service entity. 5. any entity involved in the marketing of such an arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | 1. such an arrangement or certain steps in it may be a sham. 2. the Trading Entity is entitled to a deduction under section 8-1 Income Tax Assessment Act 1997 (ITAA 1997) and in particular, whether the amount purportedly paid to the service entity: i. constituted a loss or outgoing; ii. was to any extent incurred in gaining or producing the trading entity's assessable income; and iii. was to any extent necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. 3. section 82KK Income Tax Assessment Act 1936 (ITAA 1936) applies so that the deduction is not allowable until the services for which it was purportedly incurred are provided by the service entity. 4. the general anti-avoidance rules contained in Part IVA ITAA 1936 operate to disallow the deduction until the services for which it was purportedly incurred are provided by the service entity. 5. any entity involved in the marketing of such an arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | i. constituted a loss or outgoing; ii. was to any extent incurred in gaining or producing the trading entity's assessable income; and iii. was to any extent necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. | The Tax Office has reviewed this arrangement in several cases and has determined that it is not effective because of some or all of the features set out above. Note 1: Penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 23 May 2008 | Date of Effect: 23 May 2008 | Related Practice Statements: PS LA 2005/13 | Subject References: Arrangement Associate Prepayment Endorsed cheque | Legislative References: Income Tax Assessment Act 1936 Section 82KK Part IVA Income Tax Assessment Act 1997 Section 8-1 Taxation Administration Act 1953 Division 290 | Contact Officer: Gary Hammersley Business Line: Aggressive Tax Planning Phone: 08 9268 5691",,,,,PS LA 2005/13 | Section 82KK | Part IVA | Section 8-1 | Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200810/NAT/ATO/00001,This Taxpayer Alert describes an arrangement for the prepayment of service fees from a trading entity to an associated service entity in which the dominant purpose of the arrangement was to secure a deduction in the year of alleged payment rather than in the year any services were provided.
TA 2008/11,Land Impairment Trust Arrangement,6 June 2008,Current,,"The alert applies to arrangements having the following features. 1. A forestry MIS arrangement is associated with a land trust arrangement. 2. A land company within the group owns (or acquires) the land and grants a head-lease to the responsible entity (also within the group) for the land to be used in the forestry MIS. 3. The responsible entity grants a sub-lease over the land to the investors in the forestry MIS. 4. The fees payable under both the head-lease and sub-lease are usually set as a proportion of the value of distributions to be made at the end of the MIS arrangements, payable from the harvest proceeds. 5. As soon as the forestry MIS arrangement begins, the land is immediately sold by the land company to a land trust which sits outside the group. 6. This sale is said to give rise to a loss as the value of the land is impaired by the lease fees payable being lower than market value for the duration of the lease (usually more than 10 years). 7. The trustee for the land trust may be a member of the group or an associate of such a member. 8. Entities that are members of the group may hold some of the units in the land trust, frequently up to 20%. 9. The unit-holders in the land trust usually also include some or all of the investors in the forestry MIS and associates of members of the group, such as employees. 10. There may also be an option for the land company to re-acquire the land from the land trust. 11. The basic structure of the arrangement can be summarised diagrammatically as follows: | 1. A forestry MIS arrangement is associated with a land trust arrangement. 2. A land company within the group owns (or acquires) the land and grants a head-lease to the responsible entity (also within the group) for the land to be used in the forestry MIS. 3. The responsible entity grants a sub-lease over the land to the investors in the forestry MIS. 4. The fees payable under both the head-lease and sub-lease are usually set as a proportion of the value of distributions to be made at the end of the MIS arrangements, payable from the harvest proceeds. 5. As soon as the forestry MIS arrangement begins, the land is immediately sold by the land company to a land trust which sits outside the group. 6. This sale is said to give rise to a loss as the value of the land is impaired by the lease fees payable being lower than market value for the duration of the lease (usually more than 10 years). 7. The trustee for the land trust may be a member of the group or an associate of such a member. 8. Entities that are members of the group may hold some of the units in the land trust, frequently up to 20%. 9. The unit-holders in the land trust usually also include some or all of the investors in the forestry MIS and associates of members of the group, such as employees. 10. There may also be an option for the land company to re-acquire the land from the land trust. 11. The basic structure of the arrangement can be summarised diagrammatically as follows: | FEATURES WHICH CONCERN US | Depending upon the individual facts and circumstances, the Tax Office considers that arrangements that have the above features may give rise to taxation issues including whether: (a) the sale of land by the land company to the land trust is at an impaired value and, if so, whether it gives rise to a revenue or capital loss (b) the distributions from the land trust to unit holders (these may include growers, the forestry manager or other entities) should have a capital or revenue character (c) the proceeds from disposal of the units in the land trust by unit-holders should have a capital or revenue character (d) the forestry MIS arrangement will meet the requirements of Division 394 of the Income Tax Assessment Act 1997 (particularly the 70% direct forestry expenditure test) (e) the potential application of the general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 to cancel a tax benefit arising from a scheme involving some or all of the transactions in this arrangement, and (f) whether any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | (a) the sale of land by the land company to the land trust is at an impaired value and, if so, whether it gives rise to a revenue or capital loss (b) the distributions from the land trust to unit holders (these may include growers, the forestry manager or other entities) should have a capital or revenue character (c) the proceeds from disposal of the units in the land trust by unit-holders should have a capital or revenue character (d) the forestry MIS arrangement will meet the requirements of Division 394 of the Income Tax Assessment Act 1997 (particularly the 70% direct forestry expenditure test) (e) the potential application of the general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 to cancel a tax benefit arising from a scheme involving some or all of the transactions in this arrangement, and (f) whether any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | The Australian Taxation Office is examining these arrangements. Note 1: Where a taxpayer is an entity covered by the defined class of entities in a current forestry MIS product ruling then the tax implications outlined in the ruling will apply, provided that the forestry MIS arrangement is implemented in accordance with that ruling. Specifically, that entity's entitlement to deductions under section 8-1 of the Income Tax Assessment Act 1997 will not be affected by their entry into the land trust arrangement. However, the taxation consequences of distributions from these land trust arrangements are not covered by such product rulings. Note 2: Penalties of up to 50% of the tax avoided can apply where Part IVA of the Income Tax Assessment Act 1936 is applied. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 20 February 2024 Updated ATO tip-off hotline numbers | Date of Issue: 6 June 2008 | Date of Effect: 6 June 2008 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: forestry managed investment schemes managed investment schemes land impairment land impairment trust valuation of land direct forestry expenditure Division 394 deduction forestry deductions | Legislative References: Income Tax Assessment Act 1997 Division 394 Section 8-1 Income Tax Assessment Act 1936 Part IVA Taxation Administration Act 1953 Division 290 of Schedule 1 | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical & Case Leadership Phone: (02) 6216 2710",,,,,PS LA 2005/13 - Taxpayer Alerts | Division 394 | Section 8-1 | Part IVA | Division 290 of Schedule 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200811/NAT/ATO/00001,This Taxpayer Alert describes land impairment trust arrangements associated with forestry managed investment schemes (MIS). These arrangements involve the sale of land at an impaired value by a member of a group of entities that are treated as a consolidated group for income tax purposes (the group).
TA 2008/12,Non-cash contributions to superannuation funds,13 June 2008,Current,,"The Alert applies to arrangements which have one or more of the following features: 1. A person makes an in specie contribution to the fund and the fund does not recognise and record the contribution at the true market value of the asset in its accounts. 2. A person (e.g. an employer of members of the fund) pays expenses on behalf of the fund and does not subsequently seek reimbursement from the fund. Alternatively, the fund pays the expense but seeks reimbursement from another person (e.g. an employer of members of the fund). 3. A person, usually a member of the fund or their associate, makes improvements to an asset of the fund to increase the asset's value without seeking reimbursement from the fund. For example, the fund owns real property and a member pays the cost of improvements to that property. 4. A person, usually a member of the fund or their associate, together with the trustee of the fund owns all of the units in a non-leveraged unit trust or shares in a company and further units or shares are issued or the rights attached to the units or shares are altered so that the value of the units or shares owned by the fund is increased. | 1. A person makes an in specie contribution to the fund and the fund does not recognise and record the contribution at the true market value of the asset in its accounts. 2. A person (e.g. an employer of members of the fund) pays expenses on behalf of the fund and does not subsequently seek reimbursement from the fund. Alternatively, the fund pays the expense but seeks reimbursement from another person (e.g. an employer of members of the fund). 3. A person, usually a member of the fund or their associate, makes improvements to an asset of the fund to increase the asset's value without seeking reimbursement from the fund. For example, the fund owns real property and a member pays the cost of improvements to that property. 4. A person, usually a member of the fund or their associate, together with the trustee of the fund owns all of the units in a non-leveraged unit trust or shares in a company and further units or shares are issued or the rights attached to the units or shares are altered so that the value of the units or shares owned by the fund is increased. | FEATURES WHICH CONCERN US | The Tax Office considers that arrangements which exhibit one or more of the features outlined above may give rise to taxation and superannuation regulatory issues, including whether: 1. the trustee of the fund has properly recognised that the arrangement involves a contribution to the fund that must be allocated to a member and reported for the purposes of the excess contributions taxes under Division 292 of the Income Tax Assessment Act 1997 (ITAA 1997) at its market value; 2. the contributor is subject to the correct amount of tax (whether that is as a result of the application of the ordinary income, trading stock or capital gains tax provisions of the ITAA 1997) when an asset is contributed to the fund; 3. the general value shifting regime in Division 725 of the ITAA 1997 applies when rights in respect of particular investments by the fund are varied and value shifting occurs; and 4. the exclusion of superannuation contributions from fringe benefits tax properly applies if the contribution is for the benefit of an employee. | 1. the trustee of the fund has properly recognised that the arrangement involves a contribution to the fund that must be allocated to a member and reported for the purposes of the excess contributions taxes under Division 292 of the Income Tax Assessment Act 1997 (ITAA 1997) at its market value; 2. the contributor is subject to the correct amount of tax (whether that is as a result of the application of the ordinary income, trading stock or capital gains tax provisions of the ITAA 1997) when an asset is contributed to the fund; 3. the general value shifting regime in Division 725 of the ITAA 1997 applies when rights in respect of particular investments by the fund are varied and value shifting occurs; and 4. the exclusion of superannuation contributions from fringe benefits tax properly applies if the contribution is for the benefit of an employee. | Trustees are also reminded that when assets other than cash are transferred to a superannuation fund they must take any steps necessary to ensure the fund's ownership of the assets is recognised. Trustees should also ensure that they have not breached the regulatory provisions of the Superannuation Industry (Supervision) Act 1993 (the SIS Act). | Trustees should also note that some of these arrangements may subsequently lead to the derivation of non-arm's length income under Division 295 of the ITAA 1997. | The Tax Office is examining these arrangements and will issue further guidance about the above issues. The Tax Office will also work with auditors of self-managed superannuation funds to determine the circumstances when these arrangements may result in breaches of the regulatory provisions of the SIS Act that must be reported to the Tax Office . | Date of Issue: 13 June 2008 | Date of Effect: 13 June 2008 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: self-managed superannuation fund superannuation contribution in specie contribution capital gains tax fringe benefits tax general value shifting regime non-arm's length income | Legislative References: Income Tax Assessment Act 1997 Div 292 Div 295 Div 725 Superannuation Industry (Supervision) Act 1993 | Contact Officer: Stuart Forsyth Business Line: Superannuation Phone: (07) 3149 5504",,,,,TR 2010/1 | PS LA 2005/13 - Taxpayer Alerts | Div 292 | Div 295 | Div 725 | Superannuation Industry (Supervision) Act 1993,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200812/NAT/ATO/00001,"This Taxpayer Alert is concerned with arrangements that have features which are designed to allow a member of a superannuation fund to circumvent the new superannuation contributions limits that came into effect from 1 July 2007. The arrangements will mainly involve self-managed superannuation funds, but need not be limited to them."
TA 2008/13,Employee Savings Plans,25 June 2008,Current,,"The alert applies to arrangements having the following features: 1. Under a salary sacrifice arrangement an employee directs or requests that future salary or wages or bonus income otherwise payable by the employer to the employee be paid to a unit trust which is discretionary in nature. 2. An amount equivalent to the salary sacrificed is contributed to the trust and ordinarily held by the trustee as an unallocated capital contribution. 3. On receipt of the contribution or shortly thereafter, the trustee makes a loan to the employee. The loan amount is equal to the amount previously contributed to the trust. The loan is ordinarily interest free and of a limited recourse nature. 4. The employee uses the loan monies to purchase ordinary units in the unit trust. 5. As a unit holder in the trust the employee may be entitled to trust income and may be issued bonus units at the trustee's discretion. The value of the bonus units issued to the employee will typically equal the salary previously sacrificed by the employee. 6. The employee may have to satisfy minimum holding periods and/or employment related performance hurdles before the units can be redeemed. 7. When the holding period has expired and the performance hurdles are met, the employee may ask the trustee to redeem the employee's units. 8. Upon redemption, the trustee will: (a) calculate the value of the ordinary and bonus units issued to the employee; (b) offset that amount against the employee's outstanding loan balance; and (c) pay to the employee the balance of the proceeds. 9. The value of the bonus units will usually equal the outstanding loan balance, and therefore extinguish the loan. The employee will also redeem their ordinary units which will usually equal the previously sacrificed salary plus any capital appreciation. | 1. Under a salary sacrifice arrangement an employee directs or requests that future salary or wages or bonus income otherwise payable by the employer to the employee be paid to a unit trust which is discretionary in nature. 2. An amount equivalent to the salary sacrificed is contributed to the trust and ordinarily held by the trustee as an unallocated capital contribution. 3. On receipt of the contribution or shortly thereafter, the trustee makes a loan to the employee. The loan amount is equal to the amount previously contributed to the trust. The loan is ordinarily interest free and of a limited recourse nature. 4. The employee uses the loan monies to purchase ordinary units in the unit trust. 5. As a unit holder in the trust the employee may be entitled to trust income and may be issued bonus units at the trustee's discretion. The value of the bonus units issued to the employee will typically equal the salary previously sacrificed by the employee. 6. The employee may have to satisfy minimum holding periods and/or employment related performance hurdles before the units can be redeemed. 7. When the holding period has expired and the performance hurdles are met, the employee may ask the trustee to redeem the employee's units. 8. Upon redemption, the trustee will: (a) calculate the value of the ordinary and bonus units issued to the employee; (b) offset that amount against the employee's outstanding loan balance; and (c) pay to the employee the balance of the proceeds. 9. The value of the bonus units will usually equal the outstanding loan balance, and therefore extinguish the loan. The employee will also redeem their ordinary units which will usually equal the previously sacrificed salary plus any capital appreciation. | (a) calculate the value of the ordinary and bonus units issued to the employee; (b) offset that amount against the employee's outstanding loan balance; and (c) pay to the employee the balance of the proceeds. | Arrangements may also have additional features identified in Taxpayer Alert TA 2008/14. This Alert should be considered in conjunction with TA 2008/14. | DIAGRAM OF A TYPICAL ARRANGEMENT | FEATURES WHICH CONCERN US | The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: (a) the arrangement is a bona fide salary deferral arrangement; (b) the arrangement is an effective salary sacrifice arrangement and taxed as described in Taxation Ruling TR 2001/10; (c) subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) applies to include the deferred salary as assessable income of the employee; (d) the receipt of bonus units is in relation to employment and is a derivation of ordinary income by the employee; (e) the cash payment on redemption of the units by the employee is in relation to employment and is a derivation of ordinary income by the employee; (f) the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply; (g) the arrangement may result in the provision of fringe benefits for the purposes of the Fringe Benefits Tax Assessment Act 1986; (h) any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | (a) the arrangement is a bona fide salary deferral arrangement; (b) the arrangement is an effective salary sacrifice arrangement and taxed as described in Taxation Ruling TR 2001/10; (c) subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) applies to include the deferred salary as assessable income of the employee; (d) the receipt of bonus units is in relation to employment and is a derivation of ordinary income by the employee; (e) the cash payment on redemption of the units by the employee is in relation to employment and is a derivation of ordinary income by the employee; (f) the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply; (g) the arrangement may result in the provision of fringe benefits for the purposes of the Fringe Benefits Tax Assessment Act 1986; (h) any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | The Tax Office is currently reviewing these arrangements. Note 1: You may have already sought advice from the Tax Office in respect of your arrangement by way of a private ruling. If you have received a private ruling in respect of your arrangement, you can rely on that private ruling. A private ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the private ruling is later found to be incorrect. However, a private ruling only applies to the particular entity identified and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the private ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the Income Tax Assessment Act 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 25 June 2008 | Date of Effect: 25 June 2008 | Related Rulings/Determinations: TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements | Related Practice Statements: PS LA 2005/13 | Subject References: Arrangement Anti Avoidance Salary Sacrifice Unit Trust Bonus Units Employee bonuses Salary & wages income Fringe Benefits Tax Part IVA | Legislative References: Income Tax Assessment Act 1936 Part IVA Income Tax Assessment Act 1997 Section 6-5 Fringe Benefits Tax Assessment Act 1986 Section 136 Taxation Administration Act 1953 Division 290 | Related Taxpayer Alerts: | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical Case Leadership Phone: (02) 6216 2710",,,,,TD 2010/10 | TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements | PS LA 2005/13 | Part IVA | Section 6-5 | Section 136 | Division 290 | TA 2008/14,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200813/NAT/ATO/00001,"The ATO view on the arrangement described in TA 2008/13 is set out in TD 2010/10 . This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | This Taxpayer Alert describes arrangements involving employee benefit trust structures that attempt to convert salary or wages income into a capital gain."
TA 2008/14,Salary Deferral Arrangements,25 June 2008,Current,,"The alert applies to arrangements having the following features: 1. The employee and employer agree to defer the entitlement or payment of salary or wages income (or a bonus). Instead, the employer provides a loan to the employee, ordinarily of an amount equal in value to the income deferred. The loan may or may not be on arm's length terms. 2. The employee uses the loan to acquire an income producing asset. The asset may be shares in the employer or an associated entity of the employer. 3. The asset may be offered as security for the loans and may be held within a trust structure. 4. After a fixed period of time, the employer applies the deferred income to the outstanding value of the loan. 5. The application of the deferred income may occur after the employee has terminated employment with the employer. Note: Arrangements may also have additional features identified in Taxpayer Alert TA 2008/13. This Alert should be considered in conjunction with TA 2008/13. | 1. The employee and employer agree to defer the entitlement or payment of salary or wages income (or a bonus). Instead, the employer provides a loan to the employee, ordinarily of an amount equal in value to the income deferred. The loan may or may not be on arm's length terms. 2. The employee uses the loan to acquire an income producing asset. The asset may be shares in the employer or an associated entity of the employer. 3. The asset may be offered as security for the loans and may be held within a trust structure. 4. After a fixed period of time, the employer applies the deferred income to the outstanding value of the loan. 5. The application of the deferred income may occur after the employee has terminated employment with the employer. | DIAGRAM OF A TYPICAL ARRANGEMENT | FEATURES WHICH CONCERN US | The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: a. the arrangement is a bona fide salary deferral arrangement; b. the arrangement is an effective salary sacrifice arrangement and taxed as described in Taxation Ruling TR 2001/10; c. subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) applies to include the deferred salary as assessable income of the employee; d. Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) applies where the employee is a shareholder of a corporate employer such that the loan is included in assessable income of the shareholder as a deemed dividend; e. a payment or crediting of deferred income subsequent to termination of employment is an employment termination payment for the purposes of section 82-130 of ITAA 1997; f. the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the ITAA 1936 apply notwithstanding that the arrangement may be a bona fide salary deferral arrangement and/or an effective salary sacrifice arrangement as described in TR 2001/10; g. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | a. the arrangement is a bona fide salary deferral arrangement; b. the arrangement is an effective salary sacrifice arrangement and taxed as described in Taxation Ruling TR 2001/10; c. subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) applies to include the deferred salary as assessable income of the employee; d. Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) applies where the employee is a shareholder of a corporate employer such that the loan is included in assessable income of the shareholder as a deemed dividend; e. a payment or crediting of deferred income subsequent to termination of employment is an employment termination payment for the purposes of section 82-130 of ITAA 1997; f. the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the ITAA 1936 apply notwithstanding that the arrangement may be a bona fide salary deferral arrangement and/or an effective salary sacrifice arrangement as described in TR 2001/10; g. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953. | The Tax Office is currently reviewing these arrangements. Note 1: You may have already sought advice from the Tax Office in respect of your arrangement by way of a private ruling or class ruling. If you have received a private ruling or class ruling in respect of your arrangement, you can rely on that ruling. A private or class ruling is legally binding on the Commissioner who will be bound to act in the way set out in the ruling, even if the ruling is later found to be incorrect. However, a private ruling only applies to a particular entity identified and the particular scheme described in the ruling. Similarly, a class ruling only applies to a specified class of entities and the particular scheme described in the ruling. If there is a material difference between the scheme described in the ruling, and the scheme that was actually implemented, the ruling will not be legally binding on the Commissioner. Also, other entities cannot rely on a private ruling issued in respect of a different entity. Note 2: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the Income Tax Assessment Act 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 3: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 4: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 25 June 2008 | Date of Effect: 25 June 2008 | Related Rulings/Determinations: TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements | Subject References: Arrangement Anti Avoidance Salary Sacrifice Salary Deferral Employee bonuses Salary & wages income Fringe Benefits Tax Part IVA | Legislative References: Income Tax Assessment Act 1997 Section 6-5 Section 82-130 Income Tax Assessment Act 1936 Part IVA Division 7A Taxation Administration Act 1953 Division 290 | Related Taxpayer Alerts: | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical Case Leadership Phone: (02) 6216 2710",,,,,TD 2010/11 | TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements | Section 6-5 | Section 82-130 | Part IVA | Division 7A | Division 290 | TA 2008/13,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200814/NAT/ATO/00001,"The ATO view on the arrangement described in TA 2008/14 is set out in TD 2010/11 . This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | This Taxpayer Alert concerns arrangements where an employee defers salary and wage income. The purpose of the arrangements is to convert salary and wage income to a form that is taxed concessionally or not at all, for example, a capital gain, an employment termination payment or a loan."
TA 2008/15,Profit washing scheme using a trust and a loss entity,25 June 2008,Current,,"The alert applies to arrangements having some or all of the following features: | Arrangement 1 | 1. A trading entity (the 'taxpayer') derives income from a business that it carries on. The business is restructured into a hybrid trust (the 'new trust') which then derives the income. 2. The new trust has a number of classes of units. Each class of units has different rights attached. The taxpayer or associates hold units with income, capital and voting rights in the new trust (class A units). Another trust (the promoter trust) holds units in the new trust with income rights only (class B units). 3. The trustee of the new trust has discretion as to the distribution of the income to class A or class B income unit holders. 4. All the units in the promoter trust are held by a company with carry forward losses (the 'loss company'). 5. The new trust distributes a large proportion of the income to the class B unit holders. A smaller proportion may be distributed to the class A unit holders. 6. An amount, say 10% of the distribution to the class B unit holders, is paid in cash to the promoter trust. The balance of 90% is never paid and by agreement (usually verbal) between the parties is never intended to be paid. 7. The promoter trust then distributes all of the income distribution from the new trust to the loss company. The promoter claims that the loss company has carry forward losses that offset the distribution from the promoter trust. | 1. A trading entity (the 'taxpayer') derives income from a business that it carries on. The business is restructured into a hybrid trust (the 'new trust') which then derives the income. 2. The new trust has a number of classes of units. Each class of units has different rights attached. The taxpayer or associates hold units with income, capital and voting rights in the new trust (class A units). Another trust (the promoter trust) holds units in the new trust with income rights only (class B units). 3. The trustee of the new trust has discretion as to the distribution of the income to class A or class B income unit holders. 4. All the units in the promoter trust are held by a company with carry forward losses (the 'loss company'). 5. The new trust distributes a large proportion of the income to the class B unit holders. A smaller proportion may be distributed to the class A unit holders. 6. An amount, say 10% of the distribution to the class B unit holders, is paid in cash to the promoter trust. The balance of 90% is never paid and by agreement (usually verbal) between the parties is never intended to be paid. 7. The promoter trust then distributes all of the income distribution from the new trust to the loss company. The promoter claims that the loss company has carry forward losses that offset the distribution from the promoter trust. | Arrangement 2 | 8. In some arrangements a variation is used where the 90% balance of the distribution referred to in paragraph 6 above is actually paid but remains under the effective control of the taxpayer or associates through the use of a joint venture. 9. In these arrangements a joint venture is formed between the taxpayer or associates and the promoter trust. 10. By agreement the taxpayer or associates have effective control over the assets of the joint venture. 11. As described above in Arrangement 1 the new trust distributes the income to the promoter trust, however, pursuant to an agreement between the parties, the promoter trust then makes a capital contribution, say 90% of the distribution it receives from the new trust, to the joint venture thereby maintaining the effective control of the taxpayer or associates over those funds. In some cases the funds giving effect to the capital contribution by the promoter trust may be paid directly by the new trust to the joint venture. 12. The basic features of these arrangements can be summarised diagrammatically as follows: | 8. In some arrangements a variation is used where the 90% balance of the distribution referred to in paragraph 6 above is actually paid but remains under the effective control of the taxpayer or associates through the use of a joint venture. 9. In these arrangements a joint venture is formed between the taxpayer or associates and the promoter trust. 10. By agreement the taxpayer or associates have effective control over the assets of the joint venture. 11. As described above in Arrangement 1 the new trust distributes the income to the promoter trust, however, pursuant to an agreement between the parties, the promoter trust then makes a capital contribution, say 90% of the distribution it receives from the new trust, to the joint venture thereby maintaining the effective control of the taxpayer or associates over those funds. In some cases the funds giving effect to the capital contribution by the promoter trust may be paid directly by the new trust to the joint venture. 12. The basic features of these arrangements can be summarised diagrammatically as follows: | FEATURES WHICH CONCERN US | The Tax Office considers that an arrangement of the type described above gives rise to taxation issues that include whether: a. such an arrangement or certain steps within it are a sham; b. the right entities have been assessed in respect of any ordinary or statutory income; c. section 100A of the Income Tax Assessment Act 1936 (ITAA 1936) applies to the trust distributions made in connection with or as a result of reimbursement agreements; d. the loss company has available carry forward losses, and if so, whether those losses are deductible; e. any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3 of the Income Tax Assessment Act 1997 (ITAA 1997); f. the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the ITAA 1936 apply; and g. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | a. such an arrangement or certain steps within it are a sham; b. the right entities have been assessed in respect of any ordinary or statutory income; c. section 100A of the Income Tax Assessment Act 1936 (ITAA 1936) applies to the trust distributions made in connection with or as a result of reimbursement agreements; d. the loss company has available carry forward losses, and if so, whether those losses are deductible; e. any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3 of the Income Tax Assessment Act 1997 (ITAA 1997); f. the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the ITAA 1936 apply; and g. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The Tax Office view on the above arrangements is outlined in Taxation Determination TD 2005/34, which applies to assess the trustee of the new trust on the purported distribution. Note 1 : Base penalties of up to 50% of the tax avoided may be imposed where Part IVA applies. Base penalties for intentional disregard of the tax law are imposed at 75% of the tax avoided. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2 : In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings . Note 3 : Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 4 : A registered tax agent may have their registration cancelled or suspended by the Tax Agents' Board under section 251K of the Income Tax Assessment Act 1936 if they are guilty of misconduct as a tax agent or are not considered a fit and proper person to prepare income tax returns. A person under a sentence of imprisonment for a serious taxation offence is not a fit and proper person. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings . | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 25 June 2008 | Date of Effect: 25 June 2008 | Related Rulings/Determinations: TD 2005/34 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: Losses Hybrid trusts Trust distributions Liquidation | Legislative References: Income Tax Assessment Act 1936 Section 100A Part IVA Section 251K Section 251BC Income Tax Assessment Act 1997 Part 3 Division 165 Taxation Administration Act 1953 Division 290 of Schedule 1 | Related Taxpayer Alerts: | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical & Case Leadership Phone: (02) 6216 2710",,,,,TD 2005/34 | PS LA 2005/13 - Taxpayer Alerts | Section 100A | Part IVA | Division 165 | Division 290 of Schedule 1 | TA 2005/1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200815/NAT/ATO/00001,"This Taxpayer Alert describes arrangements where a taxpayer attempts to minimise tax liability by using tax losses in an unrelated entity. The business of the taxpayer is restructured so that the income of the business passes through a chain of trusts and on to a loss company. The income, less an amount for promoter fees, remains effectively under the control of the taxpayer, or associates. This Alert covers substantially the same arrangement as described in TA 2005/1 as well as highlighting additional features of concern. In TA 2005/1 we formed the view that arrangements of this type are not likely to be effective."
TA 2008/16,Liquidation of entities to avoid the payment of tax liability,25 June 2008,Current,,"The alert applies to arrangements having some or all of the following features: 1. A taxpayer is involved in a tax avoidance scheme that involves the creation or utilisation of various entities (for example arrangements of the type described in Taxpayer Alerts TA 2005/1 and TA 2008/15 and Taxation Determination TD 2005/34). 2. To avoid the adverse consequences arising from the application of the Tax Office view (for example, as outlined in TD 2005/34 in relation to the arrangement in TA 2005/1), the taxpayer, with the help of another entity (for example, a tax agent, a solicitor, a business recovery consultant, an insolvency administrator or a liquidator) engages in a set of transactions that lead to liquidation of one or more of the entities. This has the effect of defeating the creditors of those entities which include the Tax Office. The taxation liability remains, but due to the liquidation there is an inability to pay. In Phoenix arrangements a new entity is set up to carry on the original business. 3. These transactions will result in distributions to different parties, which may include the taxpayer or their associates. 4. The basic features of this arrangement can be summarised diagrammatically as follows: | 1. A taxpayer is involved in a tax avoidance scheme that involves the creation or utilisation of various entities (for example arrangements of the type described in Taxpayer Alerts TA 2005/1 and TA 2008/15 and Taxation Determination TD 2005/34). 2. To avoid the adverse consequences arising from the application of the Tax Office view (for example, as outlined in TD 2005/34 in relation to the arrangement in TA 2005/1), the taxpayer, with the help of another entity (for example, a tax agent, a solicitor, a business recovery consultant, an insolvency administrator or a liquidator) engages in a set of transactions that lead to liquidation of one or more of the entities. This has the effect of defeating the creditors of those entities which include the Tax Office. The taxation liability remains, but due to the liquidation there is an inability to pay. In Phoenix arrangements a new entity is set up to carry on the original business. 3. These transactions will result in distributions to different parties, which may include the taxpayer or their associates. 4. The basic features of this arrangement can be summarised diagrammatically as follows: | FEATURES WHICH CONCERN US | The Tax Office considers that an arrangement of the type described above gives rise to taxation issues that include whether: a. The surrounding circumstances, including the creation of a new entity and its subsequent liquidation, indicate that the previous tax avoidance scheme is a sham under general law; b. The correct taxpayers have been assessed in respect of ordinary or statutory income arising from this structure; c. Any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3 of the Income Tax Assessment Act 1997 (ITAA 1997); d. Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to cancel any tax benefits obtained under previous tax avoidance scheme, taking into account the liquidation as part of the scheme; and e. A registered tax agent involved in the arrangement may have their registration suspended or cancelled by the Tax Agents' Board under section 251K of the ITAA 1936. | a. The surrounding circumstances, including the creation of a new entity and its subsequent liquidation, indicate that the previous tax avoidance scheme is a sham under general law; b. The correct taxpayers have been assessed in respect of ordinary or statutory income arising from this structure; c. Any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3 of the Income Tax Assessment Act 1997 (ITAA 1997); d. Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to cancel any tax benefits obtained under previous tax avoidance scheme, taking into account the liquidation as part of the scheme; and e. A registered tax agent involved in the arrangement may have their registration suspended or cancelled by the Tax Agents' Board under section 251K of the ITAA 1936. | Liquidating an entity to secure an inability to pay future income tax liability may attract criminal sanctions under the Criminal Code including defraud contrary to s135.1 of the Criminal Code or conspiracy to defraud under s135.4 of the Criminal Code , or alternatively the Crimes (Taxation Offences) Act 1980 , including penalties of 1000 penalty units and/or 10 years imprisonment. | As the promotion of these types of arrangements is a serious matter, information on such activities will be referred to the Commonwealth Director of Public Prosecutions, the Australian Securities and Investment Commission and the Tax Agents' Board as appropriate for action. Note 1 : Base penalties of up to 50% of the tax avoided may be imposed where Part IVA applies. Base penalties for intentional disregard of the tax law are imposed at 75% of the tax avoided. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2 : In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings . Note 3 : Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 4 : Liquidating entities in order to avoid the payment of liabilities may contravene the Corporations Act 2001, which is administered by the Australian Securities and Investments Commission. The Tax Office will refer instances of such conduct to ASIC for their consideration of appropriate courses of action. Note 5 : A registered tax agent may have their registration cancelled or suspended by the Tax Agents' Board under section 251K of the Income Tax Assessment Act 1936 if they are guilty of misconduct as a tax agent or are not considered a fit and proper person to prepare income tax returns. A person under a sentence of imprisonment for a serious taxation offence is not a fit and proper person. Note 6 : The Commissioner may amend an assessment at any time where he is of the opinion there has been fraud or evasion. See Law Administration Practice Statement 2008/6. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings . | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 25 June 2008 | Date of Effect: 25 June 2008 | Related Rulings/Determinations: TD 2005/34 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: Losses Hybrid trusts Trust distributions Liquidation | Legislative References: Income Tax Assessment Act 1936 Section 100A Part IVA Section 251K Section 251BC Income Tax Assessment Act 1997 Part 3 Division 165 Taxation Administration Act 1953 Division 290 of Schedule 1 | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical & Case Leadership Phone: (02) 6216 2710",,,,,TD 2005/34 | PS LA 2005/13 - Taxpayer Alerts | Section 100A | Part IVA | Division 165 | Division 290 of Schedule 1,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200816/NAT/ATO/00001,This Taxpayer Alert describes arrangements whereby taxpayers involved in a previous tax avoidance scheme (for example such as those described in TD 2005/34 and TA 2008/15) enter into an arrangement to avoid the payment of the tax liability arising from that scheme by liquidating entities. | These arrangements include Phoenix arrangements where the business and assets are transferred to a new entity and then the existing entity is liquidated. This has the effect of defeating creditors of the original entity including the Tax Office.
TA 2008/17,Claims for GST refunds beyond four years arising from the reclassification of a previously taxable supply as GST free.,27 August 2008,Current,,"This alert applies to situations that exhibit some or all of the following features: 1. A taxpayer has paid GST on a supply that they considered at the time was a taxable supply but they now contend that the supply is in fact not a taxable supply. 2. The taxpayer at the time of making the supply issued tax invoices to the recipient who was registered for GST or required to be registered. 3. The taxpayer's notification is now seeking a refund of the GST purportedly overpaid in an earlier tax period where more than four years has elapsed since the end of that tax period. 4. Depending on whether or not the taxpayer reimburses the refund of the overpaid GST to the registered entity who was the recipient of the supply, there may be an unintended windfall gain to either the taxpayer who made the supply or to the recipient of the supply. 5. In some cases there are arrangements in place for the supplier and recipient of the supply to share a percentage of the refund sought from the Commissioner. | 1. A taxpayer has paid GST on a supply that they considered at the time was a taxable supply but they now contend that the supply is in fact not a taxable supply. 2. The taxpayer at the time of making the supply issued tax invoices to the recipient who was registered for GST or required to be registered. 3. The taxpayer's notification is now seeking a refund of the GST purportedly overpaid in an earlier tax period where more than four years has elapsed since the end of that tax period. 4. Depending on whether or not the taxpayer reimburses the refund of the overpaid GST to the registered entity who was the recipient of the supply, there may be an unintended windfall gain to either the taxpayer who made the supply or to the recipient of the supply. 5. In some cases there are arrangements in place for the supplier and recipient of the supply to share a percentage of the refund sought from the Commissioner. | FEATURES WHICH CONCERN US | The Tax Office considers that the situations outlined above gives rise to taxation issues that include whether in the particular circumstances: (a) the supply has in fact incorrectly been treated as a taxable supply. (b) the Commissioner in the particular circumstances is required under section 105-65 of Schedule 1 to the Tax Administration Act 1953 (TAA) to pay the refund. (c) it is appropriate in any particular case for the Commissioner to exercise his discretion contained in section 105-65 of Schedule 1 to the TAA where a supply, as between two registered entities or entities that are required to be registered, has been incorrectly treated as a taxable supply. (d) the time limits on refunds or credits contained in section 105-55 of schedule 1 to the TAA should apply to any of the tax periods in which a refund has been sought or are to be sought. (e) the Commissioner is precluded by the time limits contained in section 105-50 of Schedule 1 to the TAA from recovering from the recipient of the supply input tax credits previously claimed on the transactions that it is now contended gave rise to GST free supplies.. (f) A windfall gain not intended by the law will arise because of (i) the retention of the refund by the supplier, or (ii) the reimbursement by the supplier of the GST to the recipient. | (a) the supply has in fact incorrectly been treated as a taxable supply. (b) the Commissioner in the particular circumstances is required under section 105-65 of Schedule 1 to the Tax Administration Act 1953 (TAA) to pay the refund. (c) it is appropriate in any particular case for the Commissioner to exercise his discretion contained in section 105-65 of Schedule 1 to the TAA where a supply, as between two registered entities or entities that are required to be registered, has been incorrectly treated as a taxable supply. (d) the time limits on refunds or credits contained in section 105-55 of schedule 1 to the TAA should apply to any of the tax periods in which a refund has been sought or are to be sought. (e) the Commissioner is precluded by the time limits contained in section 105-50 of Schedule 1 to the TAA from recovering from the recipient of the supply input tax credits previously claimed on the transactions that it is now contended gave rise to GST free supplies.. (f) A windfall gain not intended by the law will arise because of (i) the retention of the refund by the supplier, or (ii) the reimbursement by the supplier of the GST to the recipient. | (i) the retention of the refund by the supplier, or (ii) the reimbursement by the supplier of the GST to the recipient. | The Tax Office is examining these arrangements and would not exercise the discretion in such circumstances where the taxpayer did not bear the economic burden of the GST. Note 1 : Section 105-65 of Schedule 1 to the Taxation Administration Act 1953 provides that the Commissioner need not give a refund to a taxpayer in certain situations. Under this section the Commissioner may deny you a refund where one of the following applies (i) the Commissioner is not satisfied that the taxpayer seeking the refund has reimbursed a corresponding amount to the recipient of the supply; (ii) the recipient is registered or required to be registered. In any circumstances where either of the conditions outlined above apply the Commissioner need not pay a refund. The Commissioner has a discretion to release the refund but may only consider it appropriate to do so in the situation outlined in this alert where he is satisfied that the refund does not create a windfall gain for either the supplier or recipient. Note 2 : In the recent Federal Court decision KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA 159 , the Court found that section 105-65 did not apply where there was no supply. Because the arrangements dealt with in this alert are cases where there is a supply, the KAP Motors decision has no application to them. Details of the Commissioner's response to the KAP Motors decision are at: http://law.ato.gov.au/atolaw/view.htm?DocID=LIT/ICD/NSD2070of2006/00001 | (i) the Commissioner is not satisfied that the taxpayer seeking the refund has reimbursed a corresponding amount to the recipient of the supply; (ii) the recipient is registered or required to be registered. | Date of Issue: 27 August 2008 | Date of Effect: 27 August 2008 | Related Practice Statements: PS LA 2002/12 - Refunds of GST PS LA 2005/13 - Taxpayer Alerts | Subject References: Goods and Services Tax GST-free GST refunds GST supply GST tax periods Taxable supply Tax invoices | Legislative References: Taxation Administration Act 1953 Division 105 | Contact Officer: Paul Tregillis Business Line: GST Section: GST Refund Project Phone: 03 92754739",,,,,MT 2010/1 | GSTR 1999/1 | [2008] FCA 159 | http://law.ato.gov.au/atolaw/view.htm?DocID=LIT/ICD/NSD2070of2006/00001 | PS LA 2002/12 - Refunds of GST | PS LA 2005/13 - Taxpayer Alerts | Division 105,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200817/NAT/ATO/00001,The ATO view on this arrangement is set out in Miscellaneous Taxation Ruling MT 2010/1 | This Taxpayer Alert describes a situation where a taxpayer seeks to claim a refund four years or more after the end of a tax period on the basis that they incorrectly classified a supply as a taxable supply and they now contend it is GST free. In this situation the Commissioner may not be able to recover the input tax credits previously claimed on what are contended to be incorrectly classified supplies. This could lead to a situation where either the supplier or the recipient of the supply obtains a windfall gain.
TA 2008/18,Arrangements to shift foreign business losses into Australian branches or resident entities,13 November 2008,Current,,"The alert applies to arrangements having some or all of the following features. | Arrangement 1 | 1. A foreign resident entity has a branch in Australia which has assessable income for the relevant income year. | 2. The foreign resident entity has: a. accumulated losses, b. assets with embedded, but not yet realised, losses (""loss assets"", for example, a book of [bad] debts), or c. a liability to pay a third party (the ""third party liability""). | a. accumulated losses, b. assets with embedded, but not yet realised, losses (""loss assets"", for example, a book of [bad] debts), or c. a liability to pay a third party (the ""third party liability""). | 3. The foreign resident entity arranges to inappropriately attribute to the Australian branch: a. some or all of the losses from foreign operations, b. loss assets at an inflated price (i.e. by not properly accounting for the decrease in value arising from the embedded losses when it is attributed to the Australian branch), or c. the third party liability without attributing to the branch adequate compensation for the value of the liability assumed by the branch. Note: This is likely to involve either an international agreement between related parties that are not dealing at arm's length or profits and circumstances that would not reasonably be expected if the branch were a distinct and separate entity dealing at arm's length with the entity. | a. some or all of the losses from foreign operations, b. loss assets at an inflated price (i.e. by not properly accounting for the decrease in value arising from the embedded losses when it is attributed to the Australian branch), or c. the third party liability without attributing to the branch adequate compensation for the value of the liability assumed by the branch. | 4. As a result of the arrangements, greater deductions for losses are sought in Australia by the Australian branch or subsidiary. | 5. Similar tax outcomes may be sought by an Australian resident entity with a foreign branch failing to properly attribute to that branch relevant losses, loss assets or third party liabilities. | Arrangement 2 | 6. A foreign resident entity has an Australian resident associate (including a subsidiary member of a multiple entry consolidated group) with assessable income for the relevant income year. | 7. The foreign resident entity has: a. assets with embedded, but not yet realised, losses (""loss assets"", for example, a book of [bad] debts), or b. a liability to pay a third party (the ""third party liability""). | a. assets with embedded, but not yet realised, losses (""loss assets"", for example, a book of [bad] debts), or b. a liability to pay a third party (the ""third party liability""). | 8. The foreign resident entity and the Australian resident associate arrange to inappropriately transfer: a. loss assets to the Australian resident entity at an inflated price (i.e. by not properly accounting for the decrease in value arising from the embedded losses), or b. the third party liability to the Australian resident entity without receiving proper compensation for the value of the liability assumed. Note: This is likely to involve either an international agreement between related parties that are not dealing at arm's length. | a. loss assets to the Australian resident entity at an inflated price (i.e. by not properly accounting for the decrease in value arising from the embedded losses), or b. the third party liability to the Australian resident entity without receiving proper compensation for the value of the liability assumed. | 9. As a result of the arrangements, greater deductions for losses are sought in Australia by the Australian resident entity. | Features which concern us | The Tax Office considers that arrangements of this type give rise to the following taxation issues, including whether: 1. any amount expended by the Australian resident entity would be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), including the extent to which such an amount was incurred in the gaining or producing of non-assessable non-exempt income 2. any amounts would be reduced by the commercial debt forgiveness provisions in Division 245 of the ITAA 1936 3. any amounts of bad debts would be deductible under section 25-35 of the ITAA 1997 4. any losses would be affected by the participation exemption provisions in Division 768-G of the ITAA 1997 5. any company's tax losses or deductions may be affected by the provisions in Division 175 of the ITAA 1997 6. any transaction may be subject to the transfer pricing provisions contained in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936) 7. any articles in applicable tax treaties between Australian and a relevant country may apply, especially: a. the associated enterprises article (where applicable), or b. the business profits article (where applicable) 8. the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may be applied to cancel any tax benefit under all, or some part, of the arrangement, and 9. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | 1. any amount expended by the Australian resident entity would be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), including the extent to which such an amount was incurred in the gaining or producing of non-assessable non-exempt income 2. any amounts would be reduced by the commercial debt forgiveness provisions in Division 245 of the ITAA 1936 3. any amounts of bad debts would be deductible under section 25-35 of the ITAA 1997 4. any losses would be affected by the participation exemption provisions in Division 768-G of the ITAA 1997 5. any company's tax losses or deductions may be affected by the provisions in Division 175 of the ITAA 1997 6. any transaction may be subject to the transfer pricing provisions contained in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936) 7. any articles in applicable tax treaties between Australian and a relevant country may apply, especially: a. the associated enterprises article (where applicable), or b. the business profits article (where applicable) 8. the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may be applied to cancel any tax benefit under all, or some part, of the arrangement, and 9. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | a. the associated enterprises article (where applicable), or b. the business profits article (where applicable) | The Tax Office is currently reviewing these arrangements. Note 1: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the Income Tax Assessment Act 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented. Note 2: Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 4: Where appropriate, section 167 of the Income Tax Assessment Act 1936 (ITAA 1936) may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24. | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 13 November 2008 | Date of Effect: 13 November 2008 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts PS LA 2007/24 - Making default assessments: section 167 of the Income Tax Assessment Act 1936 and other similar provisions | Subject References: Transfer pricing Double tax agreements International tax Losses Consolidation Bad debts Debt forgiveness Participation exemption General anti-avoidance rule Promoter penalties | Legislative References: Income Tax Assessment Act 1997 Section 8-1 Section 25-35 Division 175 Subdivision 768-G Income Tax Assessment Act 1936 Division 13 Part IVA Division 245 Taxation Administration Act 1953 Division 290 | Contact Officer: Anne Connon Business Line: Large Business & International Section: International Strategy & Operations Phone: (03) 9285 1452",,,,,PS LA 2005/13 - Taxpayer Alerts | PS LA 2007/24 - Making default assessments: section 167 of the Income Tax Assessment Act 1936 and other similar provisions | Section 8-1 | Section 25-35 | Division 175 | Subdivision 768-G | Part IVA | Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200818/NAT/ATO/00001,"This Taxpayer Alert describes arrangements within multi-national companies operating through branches, or operating through transactions with foreign associates, which seek to shift deductions for losses from foreign operations into their Australian businesses. Such arrangements are intended to result in the Australian resident entity or branch reporting a lower taxable income than would have been the case without the arrangement."
TA 2008/19,"Foreign residents attempting to avoid Australian capital gains tax by certain ""staggered sell down"" arrangements",18 November 2008,Current,,"The alert applies to arrangements having the following features: 1. A foreign resident vendor will typically have an existing membership interest of 10% or greater in a resident entity whose assets consist principally of Australian real property 2. The foreign resident vendor enters into an arrangement to dispose of part of its interest, retaining just less than 10% of that interest under a sale agreement 3. The foreign resident vendor concurrently enters into an option agreement to dispose of the remaining interest at a later time 4. This is intended to ensure that the foreign resident vendor can argue that they do not maintain a 10% or more membership interest at both: (a) the time of the second disposal, and (b) throughout a 12 month period that began no earlier than 24 months before that time and ends no later than that time. 5. Such structural planning may result in some capital gains tax being circumvented despite the fact that overall, a greater than 10% interest was held and eventually disposed of by the foreign resident vendor. | 1. A foreign resident vendor will typically have an existing membership interest of 10% or greater in a resident entity whose assets consist principally of Australian real property 2. The foreign resident vendor enters into an arrangement to dispose of part of its interest, retaining just less than 10% of that interest under a sale agreement 3. The foreign resident vendor concurrently enters into an option agreement to dispose of the remaining interest at a later time 4. This is intended to ensure that the foreign resident vendor can argue that they do not maintain a 10% or more membership interest at both: (a) the time of the second disposal, and (b) throughout a 12 month period that began no earlier than 24 months before that time and ends no later than that time. 5. Such structural planning may result in some capital gains tax being circumvented despite the fact that overall, a greater than 10% interest was held and eventually disposed of by the foreign resident vendor. | (a) the time of the second disposal, and (b) throughout a 12 month period that began no earlier than 24 months before that time and ends no later than that time.","A foreign resident company 'FCoA' acquires a 22% holding in a resident entity whose assets consist principally of Australian real property 'AusCo1' on 1 September 2006. | On 1 July 2007, FCoA enters into an agreement to dispose of 12.1% of its shares in AusCo1 to FCoB, another foreign resident company. Any capital gain from this disposal can not be disregarded. | At the same time, FCoA grants FCoB an option to acquire a further 9.9% of its shareholding in AusCo1, exercisable in 14 months from the date the option was granted. | The first share sell down occurs on 1 July 2007 and the subsequent sell down of shares, if the option is exercised, would occur on 1 September 2008. | If FCoA had disposed of its 22% holdings in AusCo1 in a single tranche the entire share disposal would have been subject to capital gains tax assuming the principal asset test is satisfied [i.e. if greater than 50% of the test entity's assets are taxable Australian real property (TARP) assets]. | Structuring the subsequent sell down as an option that is exercisable just after the expiry of the relevant non-portfolio interest test period circumvents the operation of the non-portfolio test in paragraphs 855-25(1)(a)(i) and (ii) ITAA 1997 and results in the capital gain on the subsequent sell down being disregarded. | Features which concern us | Depending upon the individual facts and circumstances, the Tax Office considers that staggered sell down arrangements, having the above mentioned features may give rise to taxation issues including whether: (a) the arrangement, or some transactions within it, may be a sham at general law (b) the amounts from the disposal must be included in the assessable income of the foreign resident vendor under section 6-10 of the ITAA 1997 (c) any capital gain from the first disposal should be included in assessable income, as the foreign resident vendor would satisfy the non-portfolio interest test and the principal asset test (d) capital gains tax event D2 happens at the time the option is granted (e) any capital gain from the second disposal should not be disregarded, where the option agreement attempts to otherwise circumvent section 855-25 of the ITAA 1997 (f) any transaction may be subject to the transfer pricing provisions contained in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936) (g) any articles in applicable tax treaties between Australia and a relevant country may apply, especially: (a) the income from real property article (where applicable), (b) the business profits article (where applicable), (c) the associated enterprises article (where applicable), or (d) the alienation of property article (where applicable) (h) the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may be applied to cancel any tax benefit under all, or some part, of the arrangement, and (i) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | (a) the arrangement, or some transactions within it, may be a sham at general law (b) the amounts from the disposal must be included in the assessable income of the foreign resident vendor under section 6-10 of the ITAA 1997 (c) any capital gain from the first disposal should be included in assessable income, as the foreign resident vendor would satisfy the non-portfolio interest test and the principal asset test (d) capital gains tax event D2 happens at the time the option is granted (e) any capital gain from the second disposal should not be disregarded, where the option agreement attempts to otherwise circumvent section 855-25 of the ITAA 1997 (f) any transaction may be subject to the transfer pricing provisions contained in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936) (g) any articles in applicable tax treaties between Australia and a relevant country may apply, especially: (a) the income from real property article (where applicable), (b) the business profits article (where applicable), (c) the associated enterprises article (where applicable), or (d) the alienation of property article (where applicable) (h) the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may be applied to cancel any tax benefit under all, or some part, of the arrangement, and (i) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | (a) the income from real property article (where applicable), (b) the business profits article (where applicable), (c) the associated enterprises article (where applicable), or (d) the alienation of property article (where applicable) | The Tax Office is currently reviewing these arrangements . Note 1: If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the Income Tax Assessment Act 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented . Note 2 : Base penalties of up to 50 % of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75 % of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3 : Penalties of up to 5 , 000 penalty units for individuals, 25 , 000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed . Note 4 : Where appropriate, section 167 of the Income Tax Assessment Act 1936 (ITAA 1936) may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24 . Note 5 : A registered tax agent may have their registration cancelled or suspended by the Tax Agents' Board under section 251K of the Income Tax Assessment Act 1936 if they are guilty of misconduct as a tax agent or are not considered a fit and proper person to prepare income tax returns. A person under a sentence of imprisonment for a serious taxation offence is not a fit and proper person . | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 18 November 2008 | Date of Effect: 18 November 2008 | Related Practice Statements: PS LA 2008/15 - Taxpayer Alerts | Other References: ATO ID 2008/46 | Subject References: Aggressive tax planning Part IVA Staggered sell downs Capital gains tax Arrangement Foreign resident vendor Australian real property Promoters | Legislative References: Income Tax Assessment Act 1997 Division 855 Income Tax Assessment Act 1936 Pt IVA Taxation Administration Act 1953 Schedule 1 Division 290 | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical and Case Leadership Phone: (02) 6216 2710",,,,PS LA 2008/15 - Taxpayer Alerts | ATO ID 2008/46 | Division 855 | Pt IVA | Schedule 1 Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200819/NAT/ATO/00001,This Taxpayer Alert describes certain 'staggered sell down' arrangements designed to result in disregarded capital gains tax where there is an indirect disposal of Australian real property under Division 855 of the Income Tax Assessment Act 1997 (ITAA 1997).
TA 2008/20,Foreign residents exploiting asset valuations to avoid capital gains tax,18 November 2008,Current,,"The alert applies to arrangements where foreign residents exploit the calculation of the market values of non-TARP assets to exceed the 50% threshold in the principal asset test when determining if they have an indirect real property interest under section 855-25. | These arrangements include the following characteristics: 1. A foreign resident vendor with an existing interest of greater than 10% in Australian real property held indirectly through a chain of interposed entities intends to dispose of some or all of that interest. 2. Prior to the disposal, the vendor attempts to change the ratio of TARP to non-TARP assets through strategies such as: (i) injecting non-TARP assets into the Australian entities (or those higher in the ownership chain) by: (a) the intermediate holding entity (test entity) investing in Redeemable Preference Shares (RPS), issued by its Australian subsidiary, which directly holds the real property, (b) the test entity obtaining a loan from a 3rd party and on-lending the amount to its subsidiary (c) an inter-company loan (arguing that both the assets injected and the inter-company asset may be counted in calculating the ratio of TARP to non-TARP assets). (ii) selective valuation of TARP and non-TARP assets, in circumstances where such valuations are within the control of the vendor and could be carried out on a full market value basis. 3. If the market value of TARP assets does not exceed the market value of non-TARP assets, the foreign resident vendor argues that it does not pass the principal asset test, resulting in the interest disposal in the test entity being disregarded. | 1. A foreign resident vendor with an existing interest of greater than 10% in Australian real property held indirectly through a chain of interposed entities intends to dispose of some or all of that interest. 2. Prior to the disposal, the vendor attempts to change the ratio of TARP to non-TARP assets through strategies such as: (i) injecting non-TARP assets into the Australian entities (or those higher in the ownership chain) by: (a) the intermediate holding entity (test entity) investing in Redeemable Preference Shares (RPS), issued by its Australian subsidiary, which directly holds the real property, (b) the test entity obtaining a loan from a 3rd party and on-lending the amount to its subsidiary (c) an inter-company loan (arguing that both the assets injected and the inter-company asset may be counted in calculating the ratio of TARP to non-TARP assets). (ii) selective valuation of TARP and non-TARP assets, in circumstances where such valuations are within the control of the vendor and could be carried out on a full market value basis. 3. If the market value of TARP assets does not exceed the market value of non-TARP assets, the foreign resident vendor argues that it does not pass the principal asset test, resulting in the interest disposal in the test entity being disregarded. | (i) injecting non-TARP assets into the Australian entities (or those higher in the ownership chain) by: (a) the intermediate holding entity (test entity) investing in Redeemable Preference Shares (RPS), issued by its Australian subsidiary, which directly holds the real property, (b) the test entity obtaining a loan from a 3rd party and on-lending the amount to its subsidiary (c) an inter-company loan (arguing that both the assets injected and the inter-company asset may be counted in calculating the ratio of TARP to non-TARP assets). (ii) selective valuation of TARP and non-TARP assets, in circumstances where such valuations are within the control of the vendor and could be carried out on a full market value basis. | (a) the intermediate holding entity (test entity) investing in Redeemable Preference Shares (RPS), issued by its Australian subsidiary, which directly holds the real property, (b) the test entity obtaining a loan from a 3rd party and on-lending the amount to its subsidiary (c) an inter-company loan (arguing that both the assets injected and the inter-company asset may be counted in calculating the ratio of TARP to non-TARP assets). | Features which concern us | Depending upon the individual facts and circumstances, the Tax Office considers arrangements having the above mentioned features may give rise to taxation issues including whether: (a) the arrangement, or any transaction within it, may be a sham at general law (b) any amounts from the disposal must be included in the assessable income of the foreign resident vendor under section 6-10 of the ITAA 1997 (c) the market value of any TARP or non-TARP asset should be used in calculating whether the principal asset test in section 855-30 has been met (d) the operation of the integrity provision in subsection 855-30(5) of the ITAA 1997 prevents the injection of assets if done for the purpose of circumventing the principal asset test (e) any transaction may be subject to the transfer pricing provisions contained in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936) (f) any articles in applicable tax treaties between Australia and a relevant country may apply, especially: (a) the income from real property article (where applicable), (b) the business profits article (where applicable), (c) the associated enterprises article (where applicable), or (d) the alienation of property article (where applicable) (g) the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may be applied to cancel any tax benefit under all, or some part, of the arrangement, and (h) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | (a) the arrangement, or any transaction within it, may be a sham at general law (b) any amounts from the disposal must be included in the assessable income of the foreign resident vendor under section 6-10 of the ITAA 1997 (c) the market value of any TARP or non-TARP asset should be used in calculating whether the principal asset test in section 855-30 has been met (d) the operation of the integrity provision in subsection 855-30(5) of the ITAA 1997 prevents the injection of assets if done for the purpose of circumventing the principal asset test (e) any transaction may be subject to the transfer pricing provisions contained in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936) (f) any articles in applicable tax treaties between Australia and a relevant country may apply, especially: (a) the income from real property article (where applicable), (b) the business profits article (where applicable), (c) the associated enterprises article (where applicable), or (d) the alienation of property article (where applicable) (g) the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may be applied to cancel any tax benefit under all, or some part, of the arrangement, and (h) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | (a) the income from real property article (where applicable), (b) the business profits article (where applicable), (c) the associated enterprises article (where applicable), or (d) the alienation of property article (where applicable) | The Tax Office is currently reviewing these arrangements . Note 1 : If you have received a private ruling in respect of your arrangement, please check that the application of Part IVA of the Income Tax Assessment Act 1936 is considered in that ruling. The applicant may not have sought for us to rule on the application of Part IVA to the arrangement ruled upon, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies to your arrangement, we will first need to obtain and consider all the relevant facts about the arrangement, including (if relevant) the manner in which it has actually been implemented . Note 2 : Base penalties of up to 50% of the tax avoided can apply where Part IVA is applied. Base penalties of up to 75% of the tax avoided can apply where you make a false and misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 3 : Penalties of up to 5, penalty units for individuals, 25, penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed . Note 4 : Where appropriate, section 167 of the Income Tax Assessment Act 1936 (ITAA 1936) may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24 . Note 5 : A registered tax agent may have their registration cancelled or suspended by the Tax Agents' Board under section 251K of the Income Tax Assessment Act 1936 if they are guilty of misconduct as a tax agent or are not considered a fit and proper person to prepare income tax returns. A person under a sentence of imprisonment for a serious taxation offence is not a fit and proper person . | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 18 November 2008 | Date of Effect: 18 November 2008 | Related Practice Statements: PS LA 2008/15 - Taxpayer Alerts | Subject References: Aggressive tax planning Part IVA Capital gains tax Arrangement Foreign resident vendor Australian real property Promoters Valuations | Legislative References: Income Tax Assessment Act 1997 Division 855 Income Tax Assessment Act 1936 Pt IVA Taxation Administration Act 1953 Schedule 1 Division 290 | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical and Case Leadership Phone: (02) 6216 2710",,,,,PS LA 2008/15 - Taxpayer Alerts | Division 855 | Pt IVA | Schedule 1 Division 290,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA200820/NAT/ATO/00001,"This Taxpayer Alert describes certain arrangements where foreign residents seek to avoid capital gains tax from the indirect disposal of Australian real property under Division 855 of the Income Tax Assessment Act 1997 (ITAA 1997), circumventing the principal asset test by exploiting the valuation of non-taxable Australian real property assets (non-TARP)."
TA 2007/1,Lease by a charitable institution to an associated endorsed charitable institution designed to gain input tax credits.,6 March 2007,Current,,"The alert applies to arrangements that exhibit some or all of the following features. | 1. Entity A, a charitable institution, owns land and buildings from which it makes or could make supplies of residential accommodation. | 2. Supplies of residential accommodation by Entity A would be input taxed as they are made for consideration that is 75% or more of the GST inclusive market value of the supply and 75% or more of the cost to Entity A of providing the accommodation (sections 40-35 and 38-250 of the A New Tax System (Goods and Services Tax) Act 1999) (GST Act). | 3. Entity A enters into a lease to supply the land and buildings to Entity B, an associated endorsed charitable institution. | 4. The lease payments from Entity B to Entity A are recorded as book entries and no actual payments are made. | 5. Entity B then provides the accommodation to residents. | 6. The lease payments recorded from Entity B to Entity A serve to increase the cost to Entity B of providing the accommodation, so that the consideration to Entity B falls below 75% of the cost to the supplier of providing the accommodation. | 7. Entity B treats the supplies of accommodation to residents as GST-free and claims input tax credits. | FEATURES WHICH THE TAX OFFICE CONSIDERS GIVE RISE TO TAXATION ISSUES | The Tax Office considers that the arrangement outlined above gives rise to taxation issues that include whether: (a) Entity B's supply of accommodation to residents is GST-free under section 38-250 of the GST Act; and (b) The anti-avoidance provisions of Division 165 of the GST Act apply, as the arrangement appears artificial and contrived in its design and execution. | (a) Entity B's supply of accommodation to residents is GST-free under section 38-250 of the GST Act; and (b) The anti-avoidance provisions of Division 165 of the GST Act apply, as the arrangement appears artificial and contrived in its design and execution. | The Australian Taxation Office is examining these arrangements. | Date of Issue: 6 March 2007 | Date of Effect: 6 March 2007 | Related Rulings/Determinations: GSTR 2001/1 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: charitable institutions Goods and Services Tax GST-free supply input taxed supply accommodation | Legislative References: A New Tax System (Goods and Services Tax) Act 1999 Subdivision 38-G Subdivision 40-B Division 165 | Contact Officer: Walter Hadeed Business Line: Goods and Services Tax Section: GST Aggressive Tax Planning Phone: (03) 9275 4595",,,,,GSTD 2007/2. | GSTR 2001/1 | PS LA 2005/13 - Taxpayer Alerts | Subdivision 38-G | Subdivision 40-B | Division 165,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20071/NAT/ATO/00001,This Taxpayer Alert describes arrangements designed to gain entitlement to input tax credits by treating otherwise input taxed supplies of residential accommodation as GST-free. These arrangements involve charitable institutions leasing land and buildings to associated endorsed charitable institutions in an attempt to increase the cost of making supplies of accommodation to residents and thereby satisfying a concessional GST provision.
TA 2007/2,Employee Entitlement Fund,3 May 2007,Current,,"The Alert applies to arrangements having the following features: 1. The employer agrees to participate in a domestic or offshore entitlement fund, controlled by a trustee associated with those who market the arrangement. 2. The employer purportedly pays contributions to the entitlement fund on the basis that the contributions are to be set aside to meet entitlements that may arise in the future for employees. 3. The arrangement may be marketed with the claim that the contributions are financed through a promissory note or loan, or that there may be cash or in-specie payments. 4. The entitlement fund purportedly invests the contributions on behalf of the employees, or their nominees, for the purpose of meeting entitlements that may arise in the future. 5. The arrangement may be marketed with the claim that the contributions to the entitlement fund are to be invested in tax-free offshore life insurance bonds. In practice an employer's contribution may be returned to the employer via associates. | 1. The employer agrees to participate in a domestic or offshore entitlement fund, controlled by a trustee associated with those who market the arrangement. 2. The employer purportedly pays contributions to the entitlement fund on the basis that the contributions are to be set aside to meet entitlements that may arise in the future for employees. 3. The arrangement may be marketed with the claim that the contributions are financed through a promissory note or loan, or that there may be cash or in-specie payments. 4. The entitlement fund purportedly invests the contributions on behalf of the employees, or their nominees, for the purpose of meeting entitlements that may arise in the future. 5. The arrangement may be marketed with the claim that the contributions to the entitlement fund are to be invested in tax-free offshore life insurance bonds. In practice an employer's contribution may be returned to the employer via associates. | FEATURES WHICH THE TAX OFFICE CONSIDERS GIVE RISE TO TAXATION ISSUES | The Tax Office considers that the arrangements outlined above give rise to taxation issues which include whether: (a) any legal relations purportedly created reflect the intentions of the parties entering into any and all parts of the arrangement(s); (b) amounts said to be for the cost of establishing and running the entitlement fund, interest claimed in respect of any purported borrowings to fund contributions and the contributions to the entitlement fund are deductible to the employer under section 8-1 of the Income Tax Assessment Act 1997 ; (c) the funds committed to the arrangement are commensurate with the income tax deductions claimed; (d) arm's length employees are provided for under these arrangements; (e) the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 apply. | (a) any legal relations purportedly created reflect the intentions of the parties entering into any and all parts of the arrangement(s); (b) amounts said to be for the cost of establishing and running the entitlement fund, interest claimed in respect of any purported borrowings to fund contributions and the contributions to the entitlement fund are deductible to the employer under section 8-1 of the Income Tax Assessment Act 1997 ; (c) the funds committed to the arrangement are commensurate with the income tax deductions claimed; (d) arm's length employees are provided for under these arrangements; (e) the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 apply. | The Australian Taxation Office is examining these arrangements. | Date of Issue: 3 May 2007 | Date of Effect: 3 May 2007 | Related Rulings/Determinations: TR 2004/3 (paragraphs 14 and 15, and 19 to 22) | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: Employee Entitlement Fund Employee Benefit Arrangements | Legislative References: Income Tax Assessment Act 1997 8-1 Income Tax Assessment Act 1936 Part IVA | Case References: Cameron Brae Pty Ltd v FCT 2006 ATC 4433 63 ATR 488 Walstern v FCT 2003 ATC 5076 54 ATR 423 Kajewski & Others v FCT 2003 ATC 4375 52 ATR 455 Essenbourne v FCT 2002 ATC 5201 51 ATR 629 Spotlight Stores Pty Ltd & Ano v FCT 2004 ATC 4674 55 ATR 745 | Cameron Brae Pty Ltd v FCT 2006 ATC 4433 63 ATR 488 | Walstern v FCT 2003 ATC 5076 54 ATR 423 | Kajewski & Others v FCT 2003 ATC 4375 52 ATR 455 | Essenbourne v FCT 2002 ATC 5201 51 ATR 629 | Spotlight Stores Pty Ltd & Ano v FCT 2004 ATC 4674 55 ATR 745 | Contact Officer: Leanna James Business Line: Aggressive Tax Planning Section: Technical Leadership Phone: (08) 9268 6094",,,,,"TR 2004/3 (paragraphs 14 and 15, and 19 to 22) | PS LA 2005/13 - Taxpayer Alerts | 8-1 | Part IVA | 2006 ATC 4433 | 2003 ATC 5076 | 2003 ATC 4375 | 2002 ATC 5201 | 2004 ATC 4674",False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20072/NAT/ATO/00001,"This Taxpayer Alert describes an arrangement where an employer seeks to obtain a deduction for contributions purportedly made to an Employee Entitlement Fund (entitlement fund) on the basis that the contributions are to meet entitlements that may arise in the future for employees. The entitlement fund is established for that employer, in Australia or in a foreign country, and is controlled by those who market the arrangement. The contributed funds may be returned to the employer, or put under the employer's control, via associates."
TA 2007/3,Income Tax: Foreign tax credit enhanced return bond investment.,14 May 2007,Current,,This alert applies to arrangements generally marketed to financial institutions that exhibit some or all of the following elements: 1. An Australian resident taxpayer (the taxpayer) establishes a wholly owned limited liability company (LLC) in an offshore jurisdiction. 2. The LLC is treated on a flow-through basis for the purposes of tax in the foreign jurisdiction and is treated as a foreign hybrid for Australian tax purposes. 3. The LLC acquires bonds (or similar instruments) issued in the United Kingdom (UK) by a UK financial institution ('the Issuer'). 4. The bonds offer an enhanced return over those of a similar grade of issuer. 5. The payment of interest on the bonds is claimed by the issuer to attract UK withholding tax at the rate applicable. 6. A securities lending arrangement is put in place within the Issuer's group that is claimed by that group to create a credit known as a 'reverse charge' tax credit. That credit is equal to the amount of the UK withholding tax liable to be paid under UK tax law. 7. A foreign tax credit is claimed by the taxpayer for the amount of UK withholding tax paid. 8. The foreign tax credit exceeds the Australian income tax payable on the net interest income from the arrangement. 9. This excess is claimed to be available for use to reduce Australian tax payable on other foreign sourced income of the taxpayer. 10. The effect of this arrangement is that the taxpayer is provided with an enhanced return funded not by the issuer but through the availability of the foreign tax credits. | 1. An Australian resident taxpayer (the taxpayer) establishes a wholly owned limited liability company (LLC) in an offshore jurisdiction. 2. The LLC is treated on a flow-through basis for the purposes of tax in the foreign jurisdiction and is treated as a foreign hybrid for Australian tax purposes. 3. The LLC acquires bonds (or similar instruments) issued in the United Kingdom (UK) by a UK financial institution ('the Issuer'). 4. The bonds offer an enhanced return over those of a similar grade of issuer. 5. The payment of interest on the bonds is claimed by the issuer to attract UK withholding tax at the rate applicable. 6. A securities lending arrangement is put in place within the Issuer's group that is claimed by that group to create a credit known as a 'reverse charge' tax credit. That credit is equal to the amount of the UK withholding tax liable to be paid under UK tax law. 7. A foreign tax credit is claimed by the taxpayer for the amount of UK withholding tax paid. 8. The foreign tax credit exceeds the Australian income tax payable on the net interest income from the arrangement. 9. This excess is claimed to be available for use to reduce Australian tax payable on other foreign sourced income of the taxpayer. 10. The effect of this arrangement is that the taxpayer is provided with an enhanced return funded not by the issuer but through the availability of the foreign tax credits. | DIAGRAM | FEATURES WHICH THE TAX OFFICE CONSIDERS GIVE RISE TO TAXATION ISSUES | The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: (a) the withholding tax paid in the UK on the interest received by the LLC was paid 'in accordance with this convention' for the purposes of Article 22(1) of the 2003 UK Convention and Notes in Schedule 1 of the International Tax Agreements Act 1953 (UK Convention); (b) under Article 22(1) of the UK Convention and Division 18 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) a credit against Australian tax is to be allowed to the taxpayer in respect of the withholding tax paid in the UK; and (c) the general anti-avoidance provisions in Part IVA of the ITAA 1936 apply. | (a) the withholding tax paid in the UK on the interest received by the LLC was paid 'in accordance with this convention' for the purposes of Article 22(1) of the 2003 UK Convention and Notes in Schedule 1 of the International Tax Agreements Act 1953 (UK Convention); (b) under Article 22(1) of the UK Convention and Division 18 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) a credit against Australian tax is to be allowed to the taxpayer in respect of the withholding tax paid in the UK; and (c) the general anti-avoidance provisions in Part IVA of the ITAA 1936 apply. | The Australian Taxation Office is examining these arrangements. | Date of Issue: 14 May 2007 | Date of Effect: 14 May 2007 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: foreign tax credits foreign hybrid international tax withholding tax | Legislative References: International Tax Agreements Act 1953 Article 22 of the 2003 UK Convention and Notes in Schedule 1 Income Tax Assessment Act 1936 Division 18 of Part III Part IVA | Contact Officer: Marie Seneviratne Business Line: Large Business & International Section: Financial Services Industry Group Phone: 03 9946 9100,,,,,PS LA 2005/13 - Taxpayer Alerts | Part IVA,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20073/NAT/ATO/00001,"This Taxpayer Alert describes an arrangement where an Australian resident taxpayer seeks to enhance its return on a bond investment, through access to foreign tax credits for withholding tax claimed to be payable under the arrangement. The desired net effect of the arrangement is that neither the bond issuer group, nor the Australian resident taxpayer, bears the economic cost of the tax withheld."
TA 2007/4,Share options granted under an employee share scheme to a related trust,5 June 2007,Current,,"This alert applies to arrangements that exhibit some or all of the following features: 1. An individual taxpayer, is to be granted options to acquire shares in a company (the company) under an employee share scheme upon their appointment as an employee, director or executive of the company. 2. The taxpayer arranges for the options to be granted to a related trust. The taxpayer may be a director of a company acting as trustee of the trust, and/or the taxpayer may be a beneficiary of the trust. 3. The options are not 'qualifying' rights under Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) as they are not granted to an employee. 4. The marketing of the arrangement may include the claim that the grant of the options is in consideration for the trust procuring the services of the individual taxpayer for the company rather than in respect of their employment or services provided. This claim is for the purpose of arguing that the trust, rather than the individual taxpayer, should be assessed on the grant of the options. 5. Under each option a share can be acquired upon payment of an exercise price. 6. The exercise price of each option is below market value of the share at the time of grant. 7. The trustee of the trust exercises the options to acquire the shares and then sells the shares. 8. In preparation of the trust return, the gain from the sale is included in the assessable income of the trust. 9. The net income of the trust may be distributed to a beneficiary, or beneficiaries, in a tax preferred position, for example, they may have accumulated tax losses. | 1. An individual taxpayer, is to be granted options to acquire shares in a company (the company) under an employee share scheme upon their appointment as an employee, director or executive of the company. 2. The taxpayer arranges for the options to be granted to a related trust. The taxpayer may be a director of a company acting as trustee of the trust, and/or the taxpayer may be a beneficiary of the trust. 3. The options are not 'qualifying' rights under Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) as they are not granted to an employee. 4. The marketing of the arrangement may include the claim that the grant of the options is in consideration for the trust procuring the services of the individual taxpayer for the company rather than in respect of their employment or services provided. This claim is for the purpose of arguing that the trust, rather than the individual taxpayer, should be assessed on the grant of the options. 5. Under each option a share can be acquired upon payment of an exercise price. 6. The exercise price of each option is below market value of the share at the time of grant. 7. The trustee of the trust exercises the options to acquire the shares and then sells the shares. 8. In preparation of the trust return, the gain from the sale is included in the assessable income of the trust. 9. The net income of the trust may be distributed to a beneficiary, or beneficiaries, in a tax preferred position, for example, they may have accumulated tax losses. | FEATURES WHICH THE TAX OFFICE CONSIDERS GIVE RISE TO TAXATION ISSUES | The Tax Office considers that the arrangement outlined above gives rise to taxation issues which include whether: (a) the discount given in relation to the options is included in the assessable income of the individual taxpayer under section 139D of the ITAA 1936 ; (b) the options are a benefit provided to the individual taxpayer, as per section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997) , and should be returned as statutory income as per section 6-10 of the ITAA 1997 ; and (c) the general anti-avoidance provisions in Part IVA of the ITAA 1936 apply. | (a) the discount given in relation to the options is included in the assessable income of the individual taxpayer under section 139D of the ITAA 1936 ; (b) the options are a benefit provided to the individual taxpayer, as per section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997) , and should be returned as statutory income as per section 6-10 of the ITAA 1997 ; and (c) the general anti-avoidance provisions in Part IVA of the ITAA 1936 apply. | The Australian Taxation Office is examining these arrangements. | Date of Issue: 5 June 2007 | Date of Effect: 5 June 2007 | Subject References: employee share schemes | Legislative References: Income Tax Assessment Act 1997 6-10 15-2 Income Tax Assessment Act 1936 Division 13A Part IVA | Contact Officer: Ricky Herbert Business Line: Micro Enterprise & Individuals Section: Active Compliance Phone: (08) 8208 1506",,,,,2003/192 | 6-10 | 15-2 | Part IVA,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20074/NAT/ATO/00001,"This Taxpayer Alert describes an arrangement to avoid tax, through the use of a related trust, by an individual taxpayer in respect of options to acquire shares granted under an employee share scheme."
TA 2007/5,Arrangements designed to avoid the operation of Division 7A through the use of a Corporate Limited Partnership,6 June 2007,Current,,"This alert applies to arrangements that exhibit some or all of the following features: | Arrangement 1 | 1. A private company with accumulated profits ('the Profit Co') wishes to make distributions to a shareholder (or their associate) that would trigger Division 7A if made directly. | 2. A structure, said to be a CLP, is established ('the CLP') and the constitution of the Profit Co is amended to create a new class of shares which are subsequently issued to the 'CLP' for a nominal value. | 3. The Profit Co pays a fully franked dividend to the CLP which amounts to the accumulated profits held in the Profit Co. This payment effectively reduces the Profit Co's distributable surplus for Division 7A purposes to nil. | 4. The Profit Co enters into a loan agreement with the CLP whereby an amount equal to the dividend paid to the CLP is lent back to the Profit Co. | 5. The Profit Co uses the funds borrowed from the CLP to make a loan to a shareholder (or their associate). The amount treated as a dividend under Division 7A in respect of this loan is nil as the Profit Co has no distributable surplus. | Diagram of a Typical Arrangement 1 | 6. In some arrangements a variation is used where the CLP lends the funds received from the Profit Co directly to a shareholder of the Profit Co (or the shareholder's associate) as an alternative to lending the funds to the Profit Co to lend to a shareholder (or their associate). | Diagram of a Typical Arrangement 1 - Variation 1 | 7. A further variation involves the Profit Co being presently entitled to income of a trust (but where that income has not been paid to the Profit Co) and the trustee has made a loan to a shareholder of the Profit Co (or the shareholder's associate). In such arrangements, after the Profit Co pays a fully franked dividend to the CLP, the CLP lends to the trustee an amount equal to the dividend received. The trustee then uses these funds to pay the outstanding entitlements owed to the Profit Co. | Diagram of a Typical Arrangement 1 - Variation 2 | Arrangement 2 | 8. The income of a discretionary trust has in prior years been appointed in favour of a private company with accumulated profits ('the Profit Co'). A shareholder of the Profit Co (or the shareholder's associate) wishes to enjoy the net income of the trust without triggering section 109UB or Subdivision EA of Division 7A. | 9. A structure, said to be a CLP, is established (the 'CLP') and the trust deed of the discretionary trust is amended to add the CLP as an additional discretionary object. | 10. The trustee appoints a share of the income of the trust in favour of the CLP and pays that purported present entitlement to the CLP. | 11. The CLP lends the funds received from the trustee to a shareholder of the Profit Co (or the shareholder's associate). | Diagram of Typical Arrangement 2 | 12. In some arrangements a variation is used where the trustee does not pay the purported present entitlement of the CLP and instead lends an amount equal to the unpaid purported present entitlement to a shareholder of the Profit Co (or the shareholder's associate). | Diagram of Typical Arrangement 2 - Variation 1 | 13. By appointing a share of the income of the trust in favour of the CLP rather than the Profit Co, the application of section 109UB and Subdivision EA of Division 7A is sought to be circumvented. | 14. Further variations of arrangements 1 and 2 above may include the use of multiple trust structures. | FEATURES WHICH THE TAX OFFICE CONSIDERS GIVE RISE TO TAXATION ISSUES | The Tax Office considers that the arrangements outlined above give rise to taxation issues which include whether: a. the partners must carry on a business in common in order for Division 5A of Part III of the ITAA 1936 to apply; b. the interposed entity provisions of Division 7A of the ITAA 1936 apply; c. the share of trust income referred to in arrangement 2 is derived individually by the partners or by the notional company recognised in Division 5A of the ITAA 1936 ; d. the provisions of the General Value Shifting Regime, specifically Divisions 725 and 727 of the Income Tax Assessment Act 1997 , apply to arrangement 1; e. the anti-avoidance provisions of Part IVA of the ITAA 1936 apply. | a. the partners must carry on a business in common in order for Division 5A of Part III of the ITAA 1936 to apply; b. the interposed entity provisions of Division 7A of the ITAA 1936 apply; c. the share of trust income referred to in arrangement 2 is derived individually by the partners or by the notional company recognised in Division 5A of the ITAA 1936 ; d. the provisions of the General Value Shifting Regime, specifically Divisions 725 and 727 of the Income Tax Assessment Act 1997 , apply to arrangement 1; e. the anti-avoidance provisions of Part IVA of the ITAA 1936 apply. | The Australian Taxation Office is examining these arrangements. | Date of Issue: 6 June 2007 | Date of Effect: 6 June 2007 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: Corporate Limited Partnerships Division 7A | Legislative References: Income Tax Assessment Act 1997 Division 725 Division 727 Income Tax Assessment Act 1936 Division 5A Division 7A Part IVA | Contact Officer: Andrew Simpson Business Line: Active Compliance Section: Aggressive Tax Planning Phone: (08) 9268 5689",,,,,TD 2008/15 | PS LA 2005/13 - Taxpayer Alerts | Division 725 | Division 727 | Division 5A | Division 7A | Part IVA,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20075/NAT/ATO/00001,"Taxation Determination TD 2008/15 sets out the ATO view that an unincorporated association of persons acting only in Australia who do not carry on a business in common with a view to profit cannot be a corporate limited partnership within the meaning of section 94D of the Income Tax Assessment Act 1936 (ITAA 1936). From 1 July 2009 section 109BB of the ITAA 1936 provides for the application of Division 7A of the ITAA 1936 to closely held corporate limited partnerships. For more information refer to the fact sheet Division 7A - closely held corporate limited partnerships | This Taxpayer Alert describes arrangements which attempt to circumvent the application of Division 7A of Part III the Income Tax Assessment Act 1936 (ITAA 1936) through the use of what is claimed to be a Corporate Limited Partnership ('CLP'). | Examples of the type of arrangements which the Tax Office are concerned about, are outlined in this Taxpayer Alert."
TA 2007/6,Scholarship Trusts and Education Funding Programs,14 June 2007,Current,,"The Alert applies to arrangements having the following features: 1. A taxpayer applies to an entity controlled by the marketer of the arrangement, based either in Australia or in a foreign country, for a student (usually related to the taxpayer) to be accepted into a purported 'Education Funding Program' ('the program'). The program offers assistance in the form of a 'student loan', 'scholarship', 'bursary', 'educational allowance', or 'educational assistance,' 2. If the student is accepted into the program the taxpayer is invited to contribute money to a purported 'Scholarship Trust' that is associated with the program, controlled by the marketer of the arrangement, and based either in Australia or in a foreign country. 3. The marketing of the arrangement may include the claim that the money contributed by the taxpayer may be in the form of a 'distribution' from a trust (including from a service trust), an 'assignment' from a partnership or a 'distribution' from a joint venture. 4. An 'Individual Scholarship Trust' for the student is then purportedly established, either in Australia or in a foreign country, for the purpose of receiving educational assistance that is granted to the student. The Trustee of the 'Individual Scholarship Trust' is an associate of the marketer of the arrangement. 5. When educational assistance is granted, the 'Scholarship Trust' transfers the assistance to the 'Individual Scholarship Trust'. The trustee of the 'Individual Scholarship Trust' then distributes to, or expends funds on behalf of, the student an amount referred to as a 'student loan', 'scholarship', 'bursary', 'educational allowance' or 'educational assistance,' 6. The marketing of the arrangement includes the claim that the assistance provided to the student is a 'scholarship', 'bursary', 'educational allowance' or 'educational assistance' which is exempt from income tax. 7. The marketing of the arrangement also includes the claim that, where the assistance provided to the student is referred to as a 'student loan', that loan may be subsequently forgiven without an amount being included in the assessable income of the student. 8. The marketing of the arrangement may also include the claims that the 'Scholarship Trust' is liable to tax in Australia on the 'distribution' or the 'assignment' contributed by the taxpayer and that the 'Scholarship Trust' receives a deduction for funds it transfers to the 'Individual Scholarship Trust,' 9. In variations to these arrangements the marketing may include the claim that surplus funds of the 'Individual Scholarship Trust' may be invested in a ten year 'Investment Bond' where the funds will accumulate free of tax. | 1. A taxpayer applies to an entity controlled by the marketer of the arrangement, based either in Australia or in a foreign country, for a student (usually related to the taxpayer) to be accepted into a purported 'Education Funding Program' ('the program'). The program offers assistance in the form of a 'student loan', 'scholarship', 'bursary', 'educational allowance', or 'educational assistance,' 2. If the student is accepted into the program the taxpayer is invited to contribute money to a purported 'Scholarship Trust' that is associated with the program, controlled by the marketer of the arrangement, and based either in Australia or in a foreign country. 3. The marketing of the arrangement may include the claim that the money contributed by the taxpayer may be in the form of a 'distribution' from a trust (including from a service trust), an 'assignment' from a partnership or a 'distribution' from a joint venture. 4. An 'Individual Scholarship Trust' for the student is then purportedly established, either in Australia or in a foreign country, for the purpose of receiving educational assistance that is granted to the student. The Trustee of the 'Individual Scholarship Trust' is an associate of the marketer of the arrangement. 5. When educational assistance is granted, the 'Scholarship Trust' transfers the assistance to the 'Individual Scholarship Trust'. The trustee of the 'Individual Scholarship Trust' then distributes to, or expends funds on behalf of, the student an amount referred to as a 'student loan', 'scholarship', 'bursary', 'educational allowance' or 'educational assistance,' 6. The marketing of the arrangement includes the claim that the assistance provided to the student is a 'scholarship', 'bursary', 'educational allowance' or 'educational assistance' which is exempt from income tax. 7. The marketing of the arrangement also includes the claim that, where the assistance provided to the student is referred to as a 'student loan', that loan may be subsequently forgiven without an amount being included in the assessable income of the student. 8. The marketing of the arrangement may also include the claims that the 'Scholarship Trust' is liable to tax in Australia on the 'distribution' or the 'assignment' contributed by the taxpayer and that the 'Scholarship Trust' receives a deduction for funds it transfers to the 'Individual Scholarship Trust,' 9. In variations to these arrangements the marketing may include the claim that surplus funds of the 'Individual Scholarship Trust' may be invested in a ten year 'Investment Bond' where the funds will accumulate free of tax. | FEATURES WHICH THE TAX OFFICE CONSIDERS GIVE RISE TO TAXATION ISSUES | The Tax Office considers that the arrangements outlined above give rise to taxation issues which include whether: (a) the money contributed by the taxpayer to the 'Scholarship Trust' is properly categorised as a distribution from a trust, an assignment from a partnership or a distribution from a joint venture; (b) there exists an income tax liability of the 'Scholarship Trust' and of the 'Individual Scholarship Trust' in Australia and/or overseas; (c) payments from the 'Scholarship Trust' to the 'Individual Scholarship Trust' are deductible to the 'Scholarship Trust,' (d) the 'Individual Scholarship Trust' distributions to the student, or the expenditure by the trustee of that trust on behalf of the student, are exempt income of the student under section 51-10 of the Income Tax Assessment Act 1997 (see Note 1); (e) the payments made to a student, or for their benefit, are deductible in the calculation of the taxable income of the 'Individual Scholarship Trust,' (f) the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 apply. | (a) the money contributed by the taxpayer to the 'Scholarship Trust' is properly categorised as a distribution from a trust, an assignment from a partnership or a distribution from a joint venture; (b) there exists an income tax liability of the 'Scholarship Trust' and of the 'Individual Scholarship Trust' in Australia and/or overseas; (c) payments from the 'Scholarship Trust' to the 'Individual Scholarship Trust' are deductible to the 'Scholarship Trust,' (d) the 'Individual Scholarship Trust' distributions to the student, or the expenditure by the trustee of that trust on behalf of the student, are exempt income of the student under section 51-10 of the Income Tax Assessment Act 1997 (see Note 1); (e) the payments made to a student, or for their benefit, are deductible in the calculation of the taxable income of the 'Individual Scholarship Trust,' (f) the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 apply. | Note 1 | The Tax Office view as published in Taxation Ruling TR 93/39 is that a 'scholarship, bursary or other educational allowance or educational assistance' is an award for merit attained as a result of competition or selection on the basis of general criteria. There is an issue as to whether the payments made by the trusts in the arrangement described in this alert meet these criteria and consequently whether the distributions are exempt income of the student. | The Australian Taxation Office is examining these and similar arrangements . | Date of Issue: 14 June 2007 | Date of Effect: 14 June 2007 | Related Rulings/Determinations: TR 93/39 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: Scholarships and Education | Legislative References: Income Tax Assessment Act 1997 section 8-1 section 51-10 section 51-35 Income Tax Assessment Act 1936 section 95A section 97 section 98 Part IVA | Related Taxpayer Alerts: | Contact Officer: Leanna James Business Line: Aggressive Tax Planning Section: Technical Leadership Phone: (08) 9268 6094",,,,,TR 93/39 | PS LA 2005/13 - Taxpayer Alerts | section 8-1 | section 51-10 | section 51-35 | section 95A | section 97 | section 98 | Part IVA | TA 2002/6,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20076/NAT/ATO/00001,"The Taxation Office view on this arrangement is set out in Taxation Ruling TR 93/39 | This Taxpayer Alert describes an arrangement where a Scholarship Trust is claimed to be established either in Australia or in a foreign country and, in combination with what is described as an 'Education Funding Program', seeks to provide funds to a student which the marketer claims are free of tax. | These arrangements seek to take an assessable income distribution from a trust and make it exempt income."
TA 2005/1,Profit washing scheme using a trust and loss entity,2 May 2005,Current,,"This Taxpayer Alert describes an arrangement where the taxpayer seeks to minimise tax payable by seeking to use tax losses in an unrelated entity. The business of the taxpayer is restructured so that the income of the business passes through a chain of trusts and on to a loss company. The income, less an amount for promoter fees, remains effectively under the control of the taxpayer, or associates. | This alert applies to arrangements that exhibit some or all of the following features: | Arrangement 1 | 1. A trading entity (the 'taxpayer') derives income from a business that it carries on. The business is restructured into a hybrid trust (the 'new trust') which then derives the income. | 2. The new trust has a number of classes of units. Each class of units has different rights attached. The taxpayer or associates hold units with income, capital and voting rights in the new trust (class A units). Another trust (the promoter trust) holds units in the new trust with income rights only (class B units). | 3. The trustee of the new trust has discretion as to the distribution of the income to class A or class B income unit holders. | 4. All the units in the promoter trust are held by a company with carry forward losses (the 'loss company'). | 5. The new trust distributes a large proportion of the income to the class B unit holders. A smaller proportion may be distributed to the class A unit holders. | 6. An amount, say 10% of the distribution to the class B unit holders, is paid in cash to the promoter trust. The balance of 90% is never paid and by agreement (usually verbal) between the parties is never intended to be paid. | 7. The promoter trust then distributes all of the income distribution from the new trust to the loss company. The promoter claims that the loss company has carry forward losses that offset the distribution from the promoter trust. | Arrangement 2 | 8. In some arrangements a variation is used where the 90% balance of the distribution referred to in paragraph 6 above is paid but remains under the effective control of the taxpayer or associates through the use of a joint venture. | 9. In these arrangements a joint venture is formed between the taxpayer or associates and the promoter trust. | 10. By agreement the taxpayer or associates have effective control over the assets of the joint venture. | 11. As described above in Arrangement 1 the new trust distributes the income to the promoter trust, however, pursuant to an agreement between the parties, the promoter trust then makes a capital contribution, say 90% of the distribution it receives from the new trust, to the joint venture thereby maintaining the effective control of the taxpayer or associates over those funds. In some cases the funds giving effect to the capital contribution by the promoter trust may be paid directly by the new trust to the joint venture. | FEATURES WHICH THE TAX OFFICE CONSIDERS GIVE RISE TO TAXATION ISSUES | The Tax Office considers that the arrangement outlined above gives rise to taxation issues that include whether: (a) Section 100A of the Income Tax Assessment Act 1936 ('the ITAA 1936') applies to the trust distributions made in connection with or as a result of reimbursement agreements; (b) The loss company has available carry forward losses, and if so, whether those losses are deductible; (c) The general anti-avoidance provisions in Part IVA of the ITAA 1936 have application as; i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits; (d) the arrangement or crucial parts of it are a sham; (e) a CGT event or other tax consequences occur as a result of the restructure of the trading entity; Note 1. In appropriate cases possible sanctions under criminal law may apply. | (a) Section 100A of the Income Tax Assessment Act 1936 ('the ITAA 1936') applies to the trust distributions made in connection with or as a result of reimbursement agreements; (b) The loss company has available carry forward losses, and if so, whether those losses are deductible; (c) The general anti-avoidance provisions in Part IVA of the ITAA 1936 have application as; i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits; (d) the arrangement or crucial parts of it are a sham; (e) a CGT event or other tax consequences occur as a result of the restructure of the trading entity; | i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits; | The Australian Taxation Office is examining these arrangements.",,,,,TD 2005/34 | TR 1999/9 | PS LA 2008/15 | Division 104 | Division 165 | Section 100A | Part IVA,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20051/NAT/ATO/00001,
TA 2005/2,Prepaid Services Warrant Arrangement,28 November 2005,Current,,"This Taxpayer Alert describes an arrangement where a taxpayer claims large income tax deductions for business losses. The losses are created by the taxpayer or a partnership in which the taxpayer is a partner acquiring prepaid service warrants that may be redeemable for the provision of legal and other professional services. The arrangement seeks to produce significant tax deductions for a relatively small cash outlay. | The alert applies to arrangements having the following features. | 1. The taxpayer or partnership claims to buy a series of warrants that are redeemable for professional services from a service provider. | 2. Prior to buying the warrants, a taxpayer or a partnership purports to enter into a 'Business Agent Dealership' (dealership). The taxpayer or the partnership may claim to be in the business of acquiring and disposing of prepaid service warrants. | 3. The taxpayer or partnership acquires a series of warrants by making a part payment, with the balance due when the warrants are redeemed. For example, a warrant with a stated value of legal services to be provided (a face value) of $50,000 may be acquired by paying $7,500 (15% of the face value) with the balance owing to the service provider. | 4. The taxpayer's or the partnership's claimed objective is to endorse the warrants to a client for a fee so the client can redeem the warrant for legal or other professional services from the service provider. Alternatively, rather than paying a fee, the client assigns the taxpayer or the partnership an interest in a cause of action. That is, the warrants may be exchanged for a percentage of any proceeds recovered from litigation. | 5. The service warrants generally have a life, described as an ""eligible service period"" of 13 months. However in some cases involving litigation the service period may be 4 years. | 6. The taxpayer or the partnership may appoint an administrator to conduct the administration of the dealership including acquiring the warrants and seeking clients to whom the warrants will be endorsed. | 7. The warrants are marketed on the basis that all warrants that have not been endorsed to clients by the end of the 13 month period are cancelled and refunded by the service provider at a discount. Generally this discount is equal to the part payment made at the time the warrants were purchased. The refund is credited against the balance outstanding on the purchase of the warrants, leaving no amount outstanding by the taxpayer or the partnership. | 8. It is claimed that the purchase of the warrants will give rise to an allowable deduction equal to the face value of the warrants in the financial year they are acquired. | 9. Where the dealership is a partnership, the partners claim a share of the partnership loss in their tax returns. | 10. It is claimed that on endorsing the warrants to the client or on cancelling of the warrants by the service provider the taxpayer or the partnership would derive assessable income. Generally it is claimed that this assessable income would be derived in a financial year subsequent to that in which the deduction, referred to in paragraph 9 above, is claimed. | 11. It is claimed that the arrangements are supported by the Federal Court decision in Lamont v Commissioner of Taxation [2005] FCA 513 (Lamont). | 12. The warrants are marketed on the basis that a continuing deferral of income tax may be achieved by entering into purchases of warrants in subsequent financial years. | (a) The arrangement seems artificial and lacks an ordinary business purpose in its design and execution. | (b) For taxpayers using a partnership structure the arrangement raises questions about whether a partnership exists. | (c) The arrangement raises questions about whether a business is being carried on. | (d) The arrangement raises questions about the deductibility of the cost of the warrants. | (e) The arrangement raises questions about the application of the anti-avoidance provisions in section 82KZME and section 82KZMF of the Income Tax Assessment Act 1936 (ITAA 1936). | (f) The arrangement raises questions about the application of the deferral of losses from non-commercial business activities provisions of Division 35 of the Income Tax assessment Act 1997 (ITAA 1997). | (g) The arrangement raises questions about the application of the general anti-avoidance provisions of Part IVA of the ITAA 1936. | (h) The income tax consequences arising from the arrangement have not been determined by the Lamont decision. In his decision, which dealt with a private binding ruling, Hill J stated: ""It follows in my view that where an applicant asks the Commissioner to rule upon an arrangement where one of the facts are [sic] that the partnership of which the applicant is a member in fact carries on a particular kind of business, the Commissioner may proceed to rule upon that application on the basis that the facts as stated are correct. Of course, should it turn out that the facts as stated were incorrect, the applicant for the ruling will get no protection from the ruling. That however, is not a matter which need concern the Commissioner who is required to rule upon a stated arrangement having the factual parameters which the applicant sets out"" (paragraph 23); ""Thus it is quite possible in the present case that the ruling will have no utility at all to the applicant or those others who have made similar applications"" (paragraph 24); ""There may be thought to be a number of legal, commercial and ethical problems associated with the proposal. It is not for the court to comment upon any lack of commerciality which may appear to arise, although those matters may have relevance to the operation of Pt IVA of the ITTA 1936"" (paragraph 30); ""However, because it is possible that the Commissioner might in any year of income make a determination under section 177F(1) and because in light of the facts, that determination may be correctly made, the answers to the question of deductibility and the question of whether income is assessable should be qualified by words to the effect that the answers could be altered if a determination were made under the provisions of Pt IVA which operated to disallow the deductions otherwise allowable"" (paragraph 53). | (i) Depending on the specific circumstances of the parties to the transaction and whether an enterprise is being carried on, the sale of the warrants may result in a liability to GST under the New Tax System (Goods and Services Tax) Act 1999 . | The Australian Taxation Office is examining these arrangements.",,,,,TD 2003/9 | 8-1 | Part IVA | PS 2008/15 | The Act | Division 35 | Section 8-1 | Section 82KZME | Section 82KZMF | TA 2002/5,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20052/NAT/ATO/00001,SME Aggressive Tax Planning
TA 2005/3,Income Tax - Consolidation Application of the tax cost setting rules to copyright,30 November 2005,Current,,"This Taxpayer Alert describes an arrangement where an inflated tax cost setting amount is worked out in relation to copyright ('the copyright') said to subsist in assets containing significant amounts of knowledge and/or information when an entity joins a consolidated group or a consolidated group is formed. The head company of the consolidated group seeks to claim under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997), a capital allowance for the decline in value of the copyright based on the inflated tax cost setting amount of that copyright as a depreciating asset under that Division. | Assets containing significant amounts of knowledge and/or information may include, for example, client lists or records, procedural manuals, industrial processes, secret formulae, or staff training packages. Such assets may be found in small, medium and large enterprises in a wide range of industries. | The arrangement is of particular concern where any copyright has little or no commercial value, in contrast to the commercial value inherent in the knowledge or information asset. | The alert applies to arrangements having the following features:- 1. Company A ('CoA'), a service provider entity, owns an asset ('the asset') containing significant amounts of knowledge and/or information, for example, a client list, which it has either acquired or created. 2. CoA claims that copyright subsists in the asset and that it also owns the copyright. In some cases, the asset has been disaggregated in an attempt to come within the low value pooling of depreciable asset provisions of Subdivision 40-E of the ITAA 1997. 3. CoA is an eligible member of a group of companies that consolidate, or joins an existing consolidated group. 4. In some cases, prior to consolidation, CoA has not identified the copyright as a valuable asset for accounting or tax purposes. 5. The head company ('HeadCo') of the consolidated group identifies the copyright as a reset cost base asset. 6. HeadCo purports to ascribe a market value to the copyright which has been determined by reference to some or all of the market value of the asset. 7. In some cases, no appropriate methodology for valuing the copyright has been applied by HeadCo. 8. The allocable cost amount for CoA, calculated in accordance with the consolidation legislation, is allocated proportionally to the asset with reference to its market value. 9. HeadCo works out the tax cost setting amount for the copyright to be an inflated amount reflecting some or all of the value of the asset. 10. HeadCo then claims a deduction under Division 40 of the ITAA 1997 for the decline in value of the copyright based on the inflated tax cost setting amount. | 1. Company A ('CoA'), a service provider entity, owns an asset ('the asset') containing significant amounts of knowledge and/or information, for example, a client list, which it has either acquired or created. 2. CoA claims that copyright subsists in the asset and that it also owns the copyright. In some cases, the asset has been disaggregated in an attempt to come within the low value pooling of depreciable asset provisions of Subdivision 40-E of the ITAA 1997. 3. CoA is an eligible member of a group of companies that consolidate, or joins an existing consolidated group. 4. In some cases, prior to consolidation, CoA has not identified the copyright as a valuable asset for accounting or tax purposes. 5. The head company ('HeadCo') of the consolidated group identifies the copyright as a reset cost base asset. 6. HeadCo purports to ascribe a market value to the copyright which has been determined by reference to some or all of the market value of the asset. 7. In some cases, no appropriate methodology for valuing the copyright has been applied by HeadCo. 8. The allocable cost amount for CoA, calculated in accordance with the consolidation legislation, is allocated proportionally to the asset with reference to its market value. 9. HeadCo works out the tax cost setting amount for the copyright to be an inflated amount reflecting some or all of the value of the asset. 10. HeadCo then claims a deduction under Division 40 of the ITAA 1997 for the decline in value of the copyright based on the inflated tax cost setting amount. | The Tax Office considers that the arrangement outlined above gives rise to taxation issues which include whether:- (a) section 701A-10 of the Income Tax (Transitional Provisions) Act 1997 applies; (b) copyright in an asset that contains knowledge and/or information, is a separate asset or a number of separate assets (distinguishable from the asset or assets that contains the knowledge and/or information ) for the purpose of Part 3-90 of the ITAA 1997; (c) an amount is deductible under Division 40 of the ITAA 1997 for the decline in value of the copyright under the circumstances described in this alert; (d) an amount is deductible under the low value pooling of depreciating assets provisions of Subdivision 40-E of the ITAA 1997; (e) the value proposed for the copyright where it subsists in an asset that contains the knowledge and or/information, accurately reflects the market value of the copyright, and is supported by an appropriate valuation methodology. | (a) section 701A-10 of the Income Tax (Transitional Provisions) Act 1997 applies; (b) copyright in an asset that contains knowledge and/or information, is a separate asset or a number of separate assets (distinguishable from the asset or assets that contains the knowledge and/or information ) for the purpose of Part 3-90 of the ITAA 1997; (c) an amount is deductible under Division 40 of the ITAA 1997 for the decline in value of the copyright under the circumstances described in this alert; (d) an amount is deductible under the low value pooling of depreciating assets provisions of Subdivision 40-E of the ITAA 1997; (e) the value proposed for the copyright where it subsists in an asset that contains the knowledge and or/information, accurately reflects the market value of the copyright, and is supported by an appropriate valuation methodology. | The Australian Taxation Office is examining these arrangements.",,,,,TD 2004/13 | TD 2005/1 | Part 3-90 | Subdivision 40-E | Division 705 | Section 701A-10 | TA 2004/5,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20053/NAT/ATO/00001,Large Business & International | Financial Services Industry Group
TA 2005/4,Creation of Goods and Service Tax (GST) input tax credits by barter exchanges.,19 December 2005,Current,,"This Taxpayer Alert describes arrangements where a barter exchange buys and sells in its own right, effectively acting as a member with its own trading account. The barter exchange has access to unlimited trade dollars to spend on the acquisition of goods and services often at commercially unrealistic prices from its members. Consequently, large GST refunds are claimed by ensuring that its acquisitions continually exceed its supplies by significant amounts within the barter operation. | This alert applies to arrangements that exhibit some or all of the following features: 1. The barter exchange acts as a member with its own trading account to record transactions with its members. 2. The barter exchange debits or credits the account in trade dollars each time it makes an acquisition or supply respectively. 3. The barter exchange acquires goods and services from its members at grossly inflated prices that do not reflect the commercial value of the acquisition. Additionally, acquisitions of services from members, particularly advertising are disproportionately high relative to the level of activity carried on in the barter exchange. 4. The amounts ""paid"" by the barter exchange in trade dollars are higher than it would have paid, had it paid in Australian dollars on the open market. For example, under a typical agreement, the barter exchange acquires advertising space from a member for 5,500 trade dollars where the market value is $550. 5. Acquisitions by the barter exchange in trade dollars create a GST liability for the supplying member. In some instances, the member offsets its liability through additional acquisitions in trade dollars at grossly inflated prices. 6. The barter exchange records its acquisitions by debiting its trading account. This account becomes increasingly overdrawn, as acquisitions are not limited to the amount of trade dollars in its account. (In many cases, there is no third party requirement that the overdrawn amount be repaid). 7. The barter exchange lodges a Business Activity Statement (BAS) claiming GST refunds as its acquisitions exceed its supplies. 8. In some instances goods and services ""acquired"" do not exist or do not take place. | 1. The barter exchange acts as a member with its own trading account to record transactions with its members. 2. The barter exchange debits or credits the account in trade dollars each time it makes an acquisition or supply respectively. 3. The barter exchange acquires goods and services from its members at grossly inflated prices that do not reflect the commercial value of the acquisition. Additionally, acquisitions of services from members, particularly advertising are disproportionately high relative to the level of activity carried on in the barter exchange. 4. The amounts ""paid"" by the barter exchange in trade dollars are higher than it would have paid, had it paid in Australian dollars on the open market. For example, under a typical agreement, the barter exchange acquires advertising space from a member for 5,500 trade dollars where the market value is $550. 5. Acquisitions by the barter exchange in trade dollars create a GST liability for the supplying member. In some instances, the member offsets its liability through additional acquisitions in trade dollars at grossly inflated prices. 6. The barter exchange records its acquisitions by debiting its trading account. This account becomes increasingly overdrawn, as acquisitions are not limited to the amount of trade dollars in its account. (In many cases, there is no third party requirement that the overdrawn amount be repaid). 7. The barter exchange lodges a Business Activity Statement (BAS) claiming GST refunds as its acquisitions exceed its supplies. 8. In some instances goods and services ""acquired"" do not exist or do not take place. | The Tax Office considers that the arrangement outlined above gives rise to taxation issues that include whether: (a) The acquisitions made using the trading account of the barter exchange in the circumstances described above are creditable acquisitions under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act'). (b) The barter exchange is carrying on an enterprise as defined by subsection 9-20(1) of the (GST Act) and (c) The anti-avoidance provisions of Division 165 of the GST Act apply, as the arrangements appears artificial and contrived in their design and execution (see note 1). Note 1 In appropriate cases possible sanctions under criminal law may apply, for example, where the supplies are shams. | (a) The acquisitions made using the trading account of the barter exchange in the circumstances described above are creditable acquisitions under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act'). (b) The barter exchange is carrying on an enterprise as defined by subsection 9-20(1) of the (GST Act) and (c) The anti-avoidance provisions of Division 165 of the GST Act apply, as the arrangements appears artificial and contrived in their design and execution (see note 1). | The Australian Taxation Office is examining these arrangements.",,,,,GSTD 2006/5 | GSTR 2003/14 | MT 2004/D3 (Withdrawn) | MT 2006/1 | IT 2668 | PS 2005/13 - Taxpayer Alerts | Division 9 | Division 11 | Division 165,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20054/NAT/ATO/00001,ILEC - Aggressive Tax Planning
TA 2005/5,Use of an outbound offshore re-invoicing arrangement to avoid or evade Australian tax,21 December 2005,Current,,"This Alert contains references to Part XI of the Income Tax Assessment Act 1936 , which has been repealed and will not apply to taxpayers from the 2010-11 income year. For further information, please refer to the Foreign income return form guide 2011-12 (NAT 1840). | This Taxpayer Alert describes arrangements to artificially depress profits, and resulting Australian tax, from sales of goods or services to overseas third parties. Under such arrangements an Australian resident provides goods or services to an offshore structure below market value. Subsequently the offshore structure provides the same goods or services to a third party customer at market value. The Australian resident does not disclose their interest in the offshore structure and pays no Australian tax on the profits. | This alert applies to arrangements generally marketed to micro and small businesses that exhibit some or all of the following features: 1. The taxpayer establishes an offshore structure, or uses an existing structure, in a tax haven or country with bank secrecy with the assistance of a promoter. The promoter may provide a 'paper trail' of documents designed to conceal the true nature of the transactions and the taxpayer's interest in the offshore structure. 2. The offshore structure may include one or a combination of the following types of entity, which are promoted on the basis of not being subject to attribution under Australia's anti-deferral regimes: a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. 3. The taxpayer claims to provide goods or services to a third party. This occurs through a re-invoicing arrangement via the offshore structure. 4. A typical re-invoicing arrangement involves: a) An agreement for the taxpayer to provide goods or services to the offshore structure at a price substantially below market value; b) An agreement for the offshore structure to provide the same goods or services to a third party at market value. 5. The taxpayer declares income from the claimed provision of goods or services. The income is lower than would be derived if the goods or services were provided at market value directly to a third party. 6. The offshore structure accumulates the profits on the price differential. 7. The taxpayer may access these profits, often in a disguised form. 8. The taxpayer does not disclose their involvement with the offshore structure and does not pay Australian tax on the profits accumulated in the offshore structure or when they access those profits. 9. In some arrangements, the documentation supporting the above transactions is absent, incomplete or falsified and the valuations used may be highly questionable. In addition, such documents do not disclose the Australian resident's interest in, or involvement with, the offshore structure. | 1. The taxpayer establishes an offshore structure, or uses an existing structure, in a tax haven or country with bank secrecy with the assistance of a promoter. The promoter may provide a 'paper trail' of documents designed to conceal the true nature of the transactions and the taxpayer's interest in the offshore structure. 2. The offshore structure may include one or a combination of the following types of entity, which are promoted on the basis of not being subject to attribution under Australia's anti-deferral regimes: a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. 3. The taxpayer claims to provide goods or services to a third party. This occurs through a re-invoicing arrangement via the offshore structure. 4. A typical re-invoicing arrangement involves: a) An agreement for the taxpayer to provide goods or services to the offshore structure at a price substantially below market value; b) An agreement for the offshore structure to provide the same goods or services to a third party at market value. 5. The taxpayer declares income from the claimed provision of goods or services. The income is lower than would be derived if the goods or services were provided at market value directly to a third party. 6. The offshore structure accumulates the profits on the price differential. 7. The taxpayer may access these profits, often in a disguised form. 8. The taxpayer does not disclose their involvement with the offshore structure and does not pay Australian tax on the profits accumulated in the offshore structure or when they access those profits. 9. In some arrangements, the documentation supporting the above transactions is absent, incomplete or falsified and the valuations used may be highly questionable. In addition, such documents do not disclose the Australian resident's interest in, or involvement with, the offshore structure. | a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. | a) An agreement for the taxpayer to provide goods or services to the offshore structure at a price substantially below market value; b) An agreement for the offshore structure to provide the same goods or services to a third party at market value. | The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: (a) such an arrangement or crucial parts of it may be a sham; (b) any entity within the offshore structure was a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); (c) any entity within the offshore structure, the promoter or other persons involved with the structure's operation, management and administration: i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; (d) the income of the offshore structure was attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; (e) the income of the offshore structure is assessable to the taxpayer under any other provision of the tax law; (f) the transactions may be subject to Division 13 of Part III of the ITAA 1936; (g) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. Note 1: Up to 50% penalties can apply to underpaid tax where Part IVA is applied. Base penalties for intentional disregard for the tax law start at 75% of the tax unpaid. Reductions in base penalties may be available if the taxpayer makes a voluntary disclosure to the Tax Office. Note 2: In appropriate cases possible sanctions under criminal law may also apply. | (a) such an arrangement or crucial parts of it may be a sham; (b) any entity within the offshore structure was a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); (c) any entity within the offshore structure, the promoter or other persons involved with the structure's operation, management and administration: i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; (d) the income of the offshore structure was attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; (e) the income of the offshore structure is assessable to the taxpayer under any other provision of the tax law; (f) the transactions may be subject to Division 13 of Part III of the ITAA 1936; (g) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. | i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; | i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. | The Australian Taxation Office is examining these arrangements.",,,,,ATO ID 2007/47 | TD 2007/20 | TR 2007/13 | PS LA 2007/7 | PS 2008/15 - Taxpayer Alerts | 6(1) | Part X | Part IVA | TA 2005/6 | TA 2005/7 | TA 2005/8,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20055/NAT/ATO/00001,Large Business & International | International Strategy & Operations
TA 2005/6,Use of an inbound offshore re-invoicing arrangement to avoid or evade Australian tax,21 December 2005,Current,,"This Alert contains references to Part XI of the Income Tax Assessment Act 1936 , which has been repealed and will not apply to taxpayers from the 2010-11 income year. For further information, please refer to the Foreign income return form guide 2011-12 (NAT 1840). | This Taxpayer Alert describes arrangements to artificially inflate Australian tax deductions for goods or services by the use of an offshore structure. Under such arrangements a third party supplier provides goods or services to the offshore structure at market value. Subsequently the offshore structure provides the same goods or services to an Australian resident at a price substantially above market value. The Australian resident does not disclose their interest in the offshore structure and pays no Australian tax on the profits. In extreme cases, no actual goods or services may be provided by the offshore structure, and no third party may actually be involved. | This alert applies to arrangements generally marketed to micro and small businesses that exhibit some or all of the following features: 1. The taxpayer establishes an offshore structure, or uses an existing structure, in a tax haven or country with bank secrecy with the assistance of a promoter. The promoter may provide a 'paper trail' of documents designed to conceal the true nature of these transactions and the taxpayer's interest in the offshore structure. 2. The offshore structure may include one or a combination of the following types of entity, which are promoted on the basis of not being subject to attribution under Australia's anti-deferral regimes: a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. 3. The taxpayer claims to obtain goods or services at an arm's length price. This occurs through a re-invoicing arrangement via the offshore structure. 4. A typical inbound re-invoicing arrangement involves: a) An agreement for a third party to provide to the offshore structure goods or services at market value; b) An agreement for the taxpayer to obtain the same goods or services from the offshore structure at a price substantially above their market value. 5. In extreme cases, no goods or services are provided by the offshore structure, and no third party may actually be involved. 6. The taxpayer claims deductions for the goods or services allegedly provided by the offshore structure. The deductions claimed are higher than if the goods or services (if any) had been provided at market value directly by a third party. 7. The offshore structure accumulates the profits on the price differential. 8. The taxpayer may access these profits, often in a disguised form. 9. The taxpayer does not disclose their involvement with the offshore structure and does not pay Australian tax on the profits accumulated in the offshore structure or when they access those profits. 10. In some arrangements, the documentation supporting the above transactions is absent, incomplete or falsified and the valuations used may be highly questionable. In addition, such documents do not disclose the Australian resident's interest in, or involvement with, the offshore structure. | 1. The taxpayer establishes an offshore structure, or uses an existing structure, in a tax haven or country with bank secrecy with the assistance of a promoter. The promoter may provide a 'paper trail' of documents designed to conceal the true nature of these transactions and the taxpayer's interest in the offshore structure. 2. The offshore structure may include one or a combination of the following types of entity, which are promoted on the basis of not being subject to attribution under Australia's anti-deferral regimes: a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. 3. The taxpayer claims to obtain goods or services at an arm's length price. This occurs through a re-invoicing arrangement via the offshore structure. 4. A typical inbound re-invoicing arrangement involves: a) An agreement for a third party to provide to the offshore structure goods or services at market value; b) An agreement for the taxpayer to obtain the same goods or services from the offshore structure at a price substantially above their market value. 5. In extreme cases, no goods or services are provided by the offshore structure, and no third party may actually be involved. 6. The taxpayer claims deductions for the goods or services allegedly provided by the offshore structure. The deductions claimed are higher than if the goods or services (if any) had been provided at market value directly by a third party. 7. The offshore structure accumulates the profits on the price differential. 8. The taxpayer may access these profits, often in a disguised form. 9. The taxpayer does not disclose their involvement with the offshore structure and does not pay Australian tax on the profits accumulated in the offshore structure or when they access those profits. 10. In some arrangements, the documentation supporting the above transactions is absent, incomplete or falsified and the valuations used may be highly questionable. In addition, such documents do not disclose the Australian resident's interest in, or involvement with, the offshore structure. | a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. | a) An agreement for a third party to provide to the offshore structure goods or services at market value; b) An agreement for the taxpayer to obtain the same goods or services from the offshore structure at a price substantially above their market value. | The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: (a) such an arrangement or crucial parts of it may be a sham; (b) a deduction or reduced deduction is allowable to the taxpayer under the provisions of the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997); (c) any entity within the offshore structure was a resident of Australia under subsection 6(1) of the ITAA 1936; (d) any entity within the offshore structure, the promoter or other persons involved with the structure operation, management and administration: i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; (e) the income or proceeds of the offshore structure was attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; (f) the income of the offshore structure is assessable to the taxpayer under any other provision of the tax law; (g) the transactions may be subject to Division 13 of the ITAA 1936; (h) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. Note 1: Up to 50% penalties can apply to underpaid tax where Part IVA is applied. Base penalties for intentional disregard for the tax law start at 75% of the tax unpaid. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office. Note 2: In appropriate cases possible sanctions under criminal law may also apply. | (a) such an arrangement or crucial parts of it may be a sham; (b) a deduction or reduced deduction is allowable to the taxpayer under the provisions of the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997); (c) any entity within the offshore structure was a resident of Australia under subsection 6(1) of the ITAA 1936; (d) any entity within the offshore structure, the promoter or other persons involved with the structure operation, management and administration: i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; (e) the income or proceeds of the offshore structure was attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; (f) the income of the offshore structure is assessable to the taxpayer under any other provision of the tax law; (g) the transactions may be subject to Division 13 of the ITAA 1936; (h) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. | i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; | i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. | The Australian Taxation Office is examining these arrangements.",,,,,ATO ID 2007/47 | TD 2007/20 | TR 2007/13 | PS LA 2007/7 | PS 2008/15 | 6(1) | Part X | Part IVA | TA 2005/5 | TA 2005/7 | TA 2005/8,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20056/NAT/ATO/00001,Large Business & International | International Strategy & Operations
TA 2005/7,Asset transfer to an offshore structure at below market value in anticipation of resale to a third party at market value,21 December 2005,Current,,"This Alert contains references to Part XI of the Income Tax Assessment Act 1936 , which has been repealed and will not apply to taxpayers from the 2010-11 income year. For further information, please refer to the Foreign income return form guide 2011-12 (NAT 1840). | This Taxpayer Alert describes an arrangement to artificially depress the value of an asset transferred to an offshore structure in order to escape Australian tax on a capital gain. The offshore structure subsequently sells the asset to a third party at market value. The Australian resident does not disclose their interest in the offshore structure and pays no Australian tax on the gains on disposal of the asset. | This alert applies to arrangements generally marketed to wealthy individuals and their closely held entities that exhibit some or all of the following features: 1. The taxpayer establishes an offshore structure, or uses an existing structure, in a tax haven or country with bank secrecy, with the assistance of a promoter. The promoter may provide a 'paper trail' of documents designed to conceal the true nature of these transactions and the taxpayer's interest in the offshore structure. 2. The offshore structure may include one or a combination of the following types of entity, which are promoted on the basis of not being subject to attribution under Australia's anti-deferral regimes: a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. 3. The taxpayer transfers an asset to the offshore structure at a price substantially below its market value. 4. Assets may include shares, options over shares, intellectual property or other intangibles, or the creation of a new asset such as the assignment of rights to future income. 5. The offshore structure subsequently disposes of the asset to a third party at market value, retaining the proceeds. 6. The taxpayer may access these proceeds often in a disguised form. 7. The taxpayer does not pay the correct amount of Australian tax on the initial disposal of the asset to the offshore structure, i.e. the gain that would have resulted from a market value sale to a third party. 8. The taxpayer does not disclose their involvement with the offshore structure and does not pay Australian tax on the proceeds of any subsequent disposal of the asset by the offshore structure or when they access those proceeds. 9. In some arrangements, the documentation supporting the above transactions is absent, incomplete or falsified and the valuations used may be highly questionable. In addition, such documents do not disclose the Australian resident's interest in, or involvement with, the offshore structure. | 1. The taxpayer establishes an offshore structure, or uses an existing structure, in a tax haven or country with bank secrecy, with the assistance of a promoter. The promoter may provide a 'paper trail' of documents designed to conceal the true nature of these transactions and the taxpayer's interest in the offshore structure. 2. The offshore structure may include one or a combination of the following types of entity, which are promoted on the basis of not being subject to attribution under Australia's anti-deferral regimes: a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. 3. The taxpayer transfers an asset to the offshore structure at a price substantially below its market value. 4. Assets may include shares, options over shares, intellectual property or other intangibles, or the creation of a new asset such as the assignment of rights to future income. 5. The offshore structure subsequently disposes of the asset to a third party at market value, retaining the proceeds. 6. The taxpayer may access these proceeds often in a disguised form. 7. The taxpayer does not pay the correct amount of Australian tax on the initial disposal of the asset to the offshore structure, i.e. the gain that would have resulted from a market value sale to a third party. 8. The taxpayer does not disclose their involvement with the offshore structure and does not pay Australian tax on the proceeds of any subsequent disposal of the asset by the offshore structure or when they access those proceeds. 9. In some arrangements, the documentation supporting the above transactions is absent, incomplete or falsified and the valuations used may be highly questionable. In addition, such documents do not disclose the Australian resident's interest in, or involvement with, the offshore structure. | a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. | The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: (a) such an arrangement or crucial parts of it may be a sham; (b) any gain on the disposal of assets is subject to Australian tax under sub-chapters 3.1 or 3.3 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular whether the market value substitution rules apply; (c) any entity within the offshore structure was a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); (d) any entity within the offshore structure, the promoter or other persons involved with the structure's operation, management and administration: i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure (e) the income of the offshore structure is assessable to the taxpayer under any other provision of the tax law; (f) the income of the offshore structure was attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; (g) the transactions may be subject to Division 13 of the ITAA 1936; (h) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. Note 1: Up to 50% penalties can apply to underpaid tax where Part IVA is applied. Base penalties for intentional disregard for the tax law start at 75% of the tax unpaid. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office. Note 2: In appropriate cases possible sanctions under criminal law may also apply. | (a) such an arrangement or crucial parts of it may be a sham; (b) any gain on the disposal of assets is subject to Australian tax under sub-chapters 3.1 or 3.3 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular whether the market value substitution rules apply; (c) any entity within the offshore structure was a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); (d) any entity within the offshore structure, the promoter or other persons involved with the structure's operation, management and administration: i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure (e) the income of the offshore structure is assessable to the taxpayer under any other provision of the tax law; (f) the income of the offshore structure was attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; (g) the transactions may be subject to Division 13 of the ITAA 1936; (h) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. | i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure | i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. | The Australian Taxation Office is examining these arrangements.",,,,,ATO ID 2007/47 | TD 2007/20 | TR 2007/13 | PS LA 2007/7 | PS 2008/15 | 6(1) | Part X | Part IVA | TA 2005/5 | TA 2005/6 | TA 2005/8,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20057/NAT/ATO/00001,Large Business & International | International Strategy & Operations
TA 2005/8,Asset transfer to an offshore structure at below market value with subsequent use to produce income not attributed to the taxpayer for Australian tax purposes,21 December 2005,Current,,"This Alert contains references to Part XI of the Income Tax Assessment Act 1936 , which has been repealed and will not apply to taxpayers from the 2010-11 income year. For further information, please refer to the Foreign income return form guide 2011-12 (NAT 1840). | This Taxpayer Alert describes an arrangement to artificially depress the value of an asset transferred to an offshore structure in order to escape Australian tax on a capital gain. The offshore structure then uses that asset to produce income without the payment of any Australian tax. The Australian resident does not disclose their interest in the offshore structure and pays no Australian tax on attributable income generated by the structure's operation of the asset. | This alert applies to arrangements generally marketed to wealthy individuals and their closely held entities that exhibit some or all of the following features: 1. The taxpayer establishes an offshore structure, or uses an existing structure, in a tax haven or country with bank secrecy with the assistance of a promoter. The promoter may provide a 'paper trail' of documents designed to conceal the true nature of these transactions and the taxpayer's interest in the offshore structure. 2. The offshore structure may include one or a combination of the following types of entity, which are promoted on the basis of not being subject to attribution under Australia's anti-deferral regimes: a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. 3. The taxpayer transfers an asset to the offshore structure at a price substantially below its market value. 4. Assets may include shares, intellectual property or other intangibles, or the creation of a new asset such as the assignment of rights to future income. 5. The offshore structure then uses the asset to generate passive income which is retained by the structure. 6. The taxpayer may access this income often in a disguised form. 7. The taxpayer does not pay the correct amount of Australian tax on the initial disposal of the asset to the offshore structure, i.e. the gain that would have resulted from a market value sale to a third party. 8. The taxpayer does not disclose their involvement with the offshore structure and does not pay Australian tax on the income generated by the offshore structure from the use of the asset or when they access that income. 9. In some arrangements, the documentation supporting the above transactions is absent, incomplete or falsified and the valuations used may be highly questionable. In addition, such documents do not disclose the Australian resident's interest in, or involvement with, the offshore structure. | 1. The taxpayer establishes an offshore structure, or uses an existing structure, in a tax haven or country with bank secrecy with the assistance of a promoter. The promoter may provide a 'paper trail' of documents designed to conceal the true nature of these transactions and the taxpayer's interest in the offshore structure. 2. The offshore structure may include one or a combination of the following types of entity, which are promoted on the basis of not being subject to attribution under Australia's anti-deferral regimes: a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. 3. The taxpayer transfers an asset to the offshore structure at a price substantially below its market value. 4. Assets may include shares, intellectual property or other intangibles, or the creation of a new asset such as the assignment of rights to future income. 5. The offshore structure then uses the asset to generate passive income which is retained by the structure. 6. The taxpayer may access this income often in a disguised form. 7. The taxpayer does not pay the correct amount of Australian tax on the initial disposal of the asset to the offshore structure, i.e. the gain that would have resulted from a market value sale to a third party. 8. The taxpayer does not disclose their involvement with the offshore structure and does not pay Australian tax on the income generated by the offshore structure from the use of the asset or when they access that income. 9. In some arrangements, the documentation supporting the above transactions is absent, incomplete or falsified and the valuations used may be highly questionable. In addition, such documents do not disclose the Australian resident's interest in, or involvement with, the offshore structure. | a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. | The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: (a) such as arrangement or crucial parts of it may be a sham; (b) any gain on the disposal of assets is subject to Australian tax under sub-chapters 3.1 or 3.3 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular whether the market value substitution rules apply; (c) any entity within the offshore structure was a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); (d) any entity within the offshore structure, the promoter or other persons involved with the structure's operation, management and administration: i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; (e) the income of the offshore structure is assessable to the taxpayer under any other provision of the tax law; (f) the income of the offshore structure was attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; (g) the transactions may be subject to Division 13 of the ITAA 1936; (h) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. Note 1: Up to 50% penalties can apply to underpaid tax where Part IVA is applied. Base penalties for intentional disregard for the tax law start at 75% of the tax unpaid. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office. Note 2: In appropriate cases possible sanctions under criminal law may also apply. | (a) such as arrangement or crucial parts of it may be a sham; (b) any gain on the disposal of assets is subject to Australian tax under sub-chapters 3.1 or 3.3 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular whether the market value substitution rules apply; (c) any entity within the offshore structure was a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); (d) any entity within the offshore structure, the promoter or other persons involved with the structure's operation, management and administration: i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; (e) the income of the offshore structure is assessable to the taxpayer under any other provision of the tax law; (f) the income of the offshore structure was attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936; (g) the transactions may be subject to Division 13 of the ITAA 1936; (h) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. | i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; | i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. | The Australian Taxation Office is examining these arrangements.",,,,,ATO ID 2007/47 | TD 2007/20 | TR 2007/13 | PS LA 2007/7 | PS 2008/15 | 6(1) | Part X | Part IVA | TA 2005/5 | TA 2005/6 | TA 2005/7,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20058/NAT/ATO/00001,Large Business & International | International Strategy & Operations
TA 2004/1,Non-arm's length arrangements using Goods and Services Tax (GST) cash / non-cash accounting methods to obtain a GST benefit.,8 January 2004,Current,,"This Taxpayer Alert describes non-arm's length arrangements where an entity makes acquisitions from another entity at commercially unrealistic prices to obtain an inflated input tax credit. The arrangements seek to manipulate a timing advantage between a vendor using a cash basis of accounting and a purchaser using a non-cash basis of accounting. | The Alert applies to arrangements having some or all of the following features: 1. The vendor and the purchaser are not dealing at arm's length. 2. The vendor makes a supply to the purchaser at a price that is not in keeping with the commercial value of the supply. 3. For GST purposes, the vendor is registered, accounts on a cash basis, and may have quarterly tax periods. (A vendor accounting for GST on a cash basis is only required to attribute GST to a tax period to the extent of the consideration received in the tax period). 4. For GST purposes, the purchaser is registered, accounts on a non-cash basis, and may have monthly tax periods. (A purchaser accounting for GST on a non-cash basis can claim the full input tax credit in the period in which any of the consideration is provided or an invoice is issued). 5. Under a typical agreement the vendor supplies an item to the purchaser for consideration that is inflated to a commercially unrealistic amount inclusive of GST, for example, $550,000. 6. The purchaser may be required to make an initial payment, for example, $1,000 with the balance to be paid in instalments. The payment schedule is structured so that the subsequent payments are spread over a number of years. 7. The purchaser claims the $50,000 input tax credit on the acquisition in the tax period in which the tax invoice is received. This will usually be in the tax period in which the agreement is made. 8. The vendor remits GST on the payment of $1,000 in the period it is received. The vendor is not required to account for the balance of the GST payable on the supply until the subsequent payments are received. 9. The purchaser claims refunds of input tax credits in a tax period much earlier than the GST is required to be paid by the vendor. 10. Often under these arrangements the vendor and the purchaser are related parties. 11. In some instances payments are never made and goods 'acquired' do not exist. | 1. The vendor and the purchaser are not dealing at arm's length. 2. The vendor makes a supply to the purchaser at a price that is not in keeping with the commercial value of the supply. 3. For GST purposes, the vendor is registered, accounts on a cash basis, and may have quarterly tax periods. (A vendor accounting for GST on a cash basis is only required to attribute GST to a tax period to the extent of the consideration received in the tax period). 4. For GST purposes, the purchaser is registered, accounts on a non-cash basis, and may have monthly tax periods. (A purchaser accounting for GST on a non-cash basis can claim the full input tax credit in the period in which any of the consideration is provided or an invoice is issued). 5. Under a typical agreement the vendor supplies an item to the purchaser for consideration that is inflated to a commercially unrealistic amount inclusive of GST, for example, $550,000. 6. The purchaser may be required to make an initial payment, for example, $1,000 with the balance to be paid in instalments. The payment schedule is structured so that the subsequent payments are spread over a number of years. 7. The purchaser claims the $50,000 input tax credit on the acquisition in the tax period in which the tax invoice is received. This will usually be in the tax period in which the agreement is made. 8. The vendor remits GST on the payment of $1,000 in the period it is received. The vendor is not required to account for the balance of the GST payable on the supply until the subsequent payments are received. 9. The purchaser claims refunds of input tax credits in a tax period much earlier than the GST is required to be paid by the vendor. 10. Often under these arrangements the vendor and the purchaser are related parties. 11. In some instances payments are never made and goods 'acquired' do not exist. | The ATO considers that the arrangements outlined above give rise to taxation issues that include whether: (a) the valuation methods used to value the supply and acquisition in non-arm's length transactions, whether or not by associated entities, are appropriate; and (b) the anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply, as the arrangements appear artificial and contrived in their design and execution (see note 1). | (a) the valuation methods used to value the supply and acquisition in non-arm's length transactions, whether or not by associated entities, are appropriate; and (b) the anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply, as the arrangements appear artificial and contrived in their design and execution (see note 1). | Note 1 In appropriate cases possible sanctions under criminal law may apply. | In appropriate cases possible sanctions under criminal law may apply. | The Australian Taxation Office is examining these arrangements.",,,,,PS 2008/15 | GST Act subsection 9-5 | GST Act subsection 11-5 | GST Act Division 29 | GST Act Division 165,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20041/NAT/ATO/00001,ILEC - Agressive Tax Planning Team
TA 2004/2,Avoidance of Goods and Services Tax (GST) on the sale of new residential premises,8 January 2004,Current,,"This Taxpayer Alert describes an arrangement using the joint venture provisions to attempt to avoid GST on the sale of new residential premises. The parties to the arrangement purportedly form a joint venture for the purpose of creating an 'internal sale' of new home units/houses by the joint venture operator to a participant in the joint venture. This is to support a claim that the units/houses are no longer 'new residential premises'. On this basis, any subsequent sale of the residential units/houses is claimed to be input taxed and not subject to GST. | The alert applies to arrangements that exhibit some or all of the following features: 1. Two or more entities, which typically include a developer and a marketer, enter into an arrangement, which they refer to as a joint venture, for the purpose of constructing and marketing residential premises. 2. The entities apply for approval as a GST joint venture. 3. The developer is nominated as the GST joint venture operator. 4. The developer owns or acquires land and engages a construction company, which may be an associate, to construct residential units/houses on the land. 5. The developer sells the units/houses to the marketer without paying GST. (Generally, sales of new residential premises are taxable supplies. However, a supply by a joint venture operator to an entity that is a participant in a GST joint venture is treated as if it were not a taxable supply). 6. The marketer subsequently sells the units/houses to third parties, and treats the sales as input taxed for GST purposes, as they are claimed to no longer be ""new residential premises"", having previously been sold by the developer to the marketer. 7. Notwithstanding that the sale of units/houses by the marketer to third parties is treated as being input taxed, the developer claims input tax credits on the costs of constructing the units/houses and/or the acquisition of the land. 8. The proceeds from the sale of the units/houses to third parties are distributed amongst the participants in the arrangement. | 1. Two or more entities, which typically include a developer and a marketer, enter into an arrangement, which they refer to as a joint venture, for the purpose of constructing and marketing residential premises. 2. The entities apply for approval as a GST joint venture. 3. The developer is nominated as the GST joint venture operator. 4. The developer owns or acquires land and engages a construction company, which may be an associate, to construct residential units/houses on the land. 5. The developer sells the units/houses to the marketer without paying GST. (Generally, sales of new residential premises are taxable supplies. However, a supply by a joint venture operator to an entity that is a participant in a GST joint venture is treated as if it were not a taxable supply). 6. The marketer subsequently sells the units/houses to third parties, and treats the sales as input taxed for GST purposes, as they are claimed to no longer be ""new residential premises"", having previously been sold by the developer to the marketer. 7. Notwithstanding that the sale of units/houses by the marketer to third parties is treated as being input taxed, the developer claims input tax credits on the costs of constructing the units/houses and/or the acquisition of the land. 8. The proceeds from the sale of the units/houses to third parties are distributed amongst the participants in the arrangement. | The ATO considers that the arrangements outlined above give rise to taxation issues that include: (a) whether the structure adopted by the entities is a joint venture; (b) if the structure is a joint venture, whether; (i) the transfer of the units/houses by the developer to the marketer is in the course of an activity for which the joint venture was entered into; (ii) the developer's sale of the new units/houses to the marketer is in the developer's capacity as the joint venture operator; and (c) whether the anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply, as the arrangements appear artificial and contrived in their design and execution. | (a) whether the structure adopted by the entities is a joint venture; (b) if the structure is a joint venture, whether; (i) the transfer of the units/houses by the developer to the marketer is in the course of an activity for which the joint venture was entered into; (ii) the developer's sale of the new units/houses to the marketer is in the developer's capacity as the joint venture operator; and (c) whether the anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply, as the arrangements appear artificial and contrived in their design and execution. | (i) the transfer of the units/houses by the developer to the marketer is in the course of an activity for which the joint venture was entered into; (ii) the developer's sale of the new units/houses to the marketer is in the developer's capacity as the joint venture operator; and | The Australian Taxation Office is examining these arrangements.",,,,,GSTR 2004/3 | PS 2008/15 | GST Act Division 165 | GST Act subsection 51-5 | GST Act subsection 51-30(2) | GST Act subsection 40-75 | GST Regulation 51-5.01,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20042/NAT/ATO/00001,ILEC - Agressive Tax Planning Team
TA 2004/3,Dividend Stripping / Distribution of Surplus Profits Arrangements,28 January 2004,Current,,"This Alert contains references to Division 140 of the Income Tax Assessment Act 1997 , which has been remade into Division 725 of the Income Tax Assessment Act 1997 . | This Taxpayer Alert describes arrangements involving the transfer of retained earnings and/or current year profits of a company to the shareholders or their associates in a non-taxable form. | The alert applies to arrangements having the following features: 1. An associate of a company with retained earnings and/or current year profits (the 'target company') acquires 'A' class shares in New Co at a nominal value, for example $1. The shareholders of the associate are also shareholders (or associates of shareholders) of the target company. 2. The target company acquires 'B' class shares in New Co at a considerable premium. 3. The rights of the 'B' class shares in New Co are varied to restrict the amount payable on liquidation, with the result that: • the value of the 'B' class shares is reduced; and • there is a commensurate increase in the value of 'A' class shares. 4. The target company makes a book loss on the acquisition of the 'B' class shares in New Co, which is offset against the retained earnings and/or current year profits. 5. The assets of New Co are distributed on liquidation to the associate holding the 'A' class shares. Broadly, the assets of New Co consist of the amount paid by the target company for the 'B' class shares. | 1. An associate of a company with retained earnings and/or current year profits (the 'target company') acquires 'A' class shares in New Co at a nominal value, for example $1. The shareholders of the associate are also shareholders (or associates of shareholders) of the target company. 2. The target company acquires 'B' class shares in New Co at a considerable premium. 3. The rights of the 'B' class shares in New Co are varied to restrict the amount payable on liquidation, with the result that: • the value of the 'B' class shares is reduced; and • there is a commensurate increase in the value of 'A' class shares. 4. The target company makes a book loss on the acquisition of the 'B' class shares in New Co, which is offset against the retained earnings and/or current year profits. 5. The assets of New Co are distributed on liquidation to the associate holding the 'A' class shares. Broadly, the assets of New Co consist of the amount paid by the target company for the 'B' class shares. | • the value of the 'B' class shares is reduced; and • there is a commensurate increase in the value of 'A' class shares. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: (a) Whether the provisions of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) apply. (b) Whether the scheme is by way of or in the nature of dividend stripping, or has substantially the effect of a scheme by way of or in the nature of dividend stripping such that section 177E of the ITAA 1936 applies. (c) Whether the provisions of Part IVA of the ITAA 1936 apply as; • The arrangements appear contrived and artificial in their method of execution; • There is little or no underlying business activity or purpose in the arrangement. | (a) Whether the provisions of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) apply. (b) Whether the scheme is by way of or in the nature of dividend stripping, or has substantially the effect of a scheme by way of or in the nature of dividend stripping such that section 177E of the ITAA 1936 applies. (c) Whether the provisions of Part IVA of the ITAA 1936 apply as; • The arrangements appear contrived and artificial in their method of execution; • There is little or no underlying business activity or purpose in the arrangement. | • The arrangements appear contrived and artificial in their method of execution; • There is little or no underlying business activity or purpose in the arrangement. | The Australian Taxation Office is examining these and similar arrangements.",,,,,IT 2627 | TD 95/37 | PS 2008/15 | ITAA 1936 Part IVA | ITAA 1997 Division 725,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20043/NAT/ATO/00001,
TA 2004/4,New Zealand Foreign Trust,10 February 2004,Current,,"This Alert contains references to Schedule 4 of the International Tax Agreements Act 1953, which is now found in the Convention Between Australia And New Zealand For The Avoidance Of Double Taxation With Respect To Taxes On Income And Fringe Benefits And The Prevention Of Fiscal Evasion [2010] ATS 10. | This Taxpayer Alert describes an arrangement where a New Zealand based foreign discretionary trust provides services, at a mark up, to an Australian resident business. A New Zealand foreign trust is one that is established by a settlor who is not a resident of New Zealand or Australia and whose beneficiaries are not resident of New Zealand. The promoter argues that tax is not payable in New Zealand on the service fees and that no income is attributable to the Australian beneficiaries. | This alert applies to arrangements having the following features: 1. A New Zealand foreign discretionary trust (the trust) is created by a New Zealand based promoter with a settlor which is a company that is not a resident of either New Zealand or Australia. The trust has a New Zealand corporate trustee controlled by the promoter. 2. The trust is represented in Australia by an Australian resident who is associated with the New Zealand promoter. The Australian representative has been given a power of attorney for the trust. 3. The trust and an Australian business enter into a service agreement where the trust provides staff and services such as administration, business equipment and the provision of a motor vehicle to that business. 4. The Australian business is located and operating in Australia. The owner of the Australian business is closely associated with the controller of the foreign settlor of the trust. 5. The Australian business claims a deduction for the cost of staff and services plus the mark up. 6. The fees paid by the Australian business are deposited into an Australian bank account controlled by the Australian representative of the trust. 7. The owner of the Australian business appears to have access to the funds in the Australian bank account. | 1. A New Zealand foreign discretionary trust (the trust) is created by a New Zealand based promoter with a settlor which is a company that is not a resident of either New Zealand or Australia. The trust has a New Zealand corporate trustee controlled by the promoter. 2. The trust is represented in Australia by an Australian resident who is associated with the New Zealand promoter. The Australian representative has been given a power of attorney for the trust. 3. The trust and an Australian business enter into a service agreement where the trust provides staff and services such as administration, business equipment and the provision of a motor vehicle to that business. 4. The Australian business is located and operating in Australia. The owner of the Australian business is closely associated with the controller of the foreign settlor of the trust. 5. The Australian business claims a deduction for the cost of staff and services plus the mark up. 6. The fees paid by the Australian business are deposited into an Australian bank account controlled by the Australian representative of the trust. 7. The owner of the Australian business appears to have access to the funds in the Australian bank account. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include whether: a) The trust has a permanent establishment in Australia. b) The transferor trust provisions in Division 6AAA of Part III of the Income Tax Assessment Act 1936 (ITAA) apply. c) The transfer pricing provisions in Division 13 of Part III of the ITAA have application. d) The trust is a resident of New Zealand for the purposes of the Australia/New Zealand Double Tax Agreement. e) The general anti-avoidance provisions in Part IVA of the ITAA have application as: i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. it appears that the dominant purpose of entering into the arrangement is to obtain a tax benefit. f) The arrangement is a sham. | a) The trust has a permanent establishment in Australia. b) The transferor trust provisions in Division 6AAA of Part III of the Income Tax Assessment Act 1936 (ITAA) apply. c) The transfer pricing provisions in Division 13 of Part III of the ITAA have application. d) The trust is a resident of New Zealand for the purposes of the Australia/New Zealand Double Tax Agreement. e) The general anti-avoidance provisions in Part IVA of the ITAA have application as: i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. it appears that the dominant purpose of entering into the arrangement is to obtain a tax benefit. f) The arrangement is a sham. | i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. it appears that the dominant purpose of entering into the arrangement is to obtain a tax benefit. | The Australian Taxation Office is examining these arrangements.",,,,,TR | 2005/14. | PS 2008/15 | Australia/New Zealand Double Tax Agreement | ITAA 1936 subsection 6(1) | ITAA 1936 Part IVA | ITAA 1936 Division 6AAA | ITAA 1936 Division 6 | ITAA 1997 Section 8-1 | International Tax Agreements Act 1953 Schedule 4 (Repealed),False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20044/NAT/ATO/00001,Large Business & International | International Strategy and Operations
TA 2004/5,Copyright Transfer Arrangement,9 March 2004,Current,,"This Taxpayer Alert describes an arrangement involving a transfer of client records that have been created or acquired in which copyright may subsist. The taxpayer, who is unable to claim a deduction in relation to any copyright in the client records it has created, disposes of the records to an entity that is part of the same wholly-owned group. That entity then claims a deduction in relation to copyright under the capital allowance provisions. | This Alert applies to arrangements having some or all of the following features: 1. In the ordinary course of business, Company A creates client records. Company A has also acquired client records as a result of various business acquisitions. The information in these records is of value to Company A in its ongoing business activities. 2. Company A recognises copyright in the client records post acquisition and apportions a significant amount of the consideration attributed in the contract to goodwill and/or other unspecified intangibles to this copyright. Company A then proceeds to claim a capital allowance deduction for the copyright. 3. Company A does not claim a capital allowance deduction for the copyright in the internally created client records. 4. Company A then makes a loan to Company B. In turn, Company B makes a loan of the same amount to Company C. These three companies are all within the same wholly-owned group but have not yet consolidated for income tax purposes. 5. Company C purchases all of the client records and any copyright that may subsist in the records from Company A. The consideration payable by Company C is the same amount as the loan it received from Company B. 6. Company C claims a deduction under the capital allowance provisions based on the entire amount of the consideration paid, purportedly on the basis that that amount is attributable to any copyright that may subsist in the records. 7. Company C uses the low-value pool provisions to accelerate the capital allowance deduction on the basis that each item of copyright is a separate asset. | 1. In the ordinary course of business, Company A creates client records. Company A has also acquired client records as a result of various business acquisitions. The information in these records is of value to Company A in its ongoing business activities. 2. Company A recognises copyright in the client records post acquisition and apportions a significant amount of the consideration attributed in the contract to goodwill and/or other unspecified intangibles to this copyright. Company A then proceeds to claim a capital allowance deduction for the copyright. 3. Company A does not claim a capital allowance deduction for the copyright in the internally created client records. 4. Company A then makes a loan to Company B. In turn, Company B makes a loan of the same amount to Company C. These three companies are all within the same wholly-owned group but have not yet consolidated for income tax purposes. 5. Company C purchases all of the client records and any copyright that may subsist in the records from Company A. The consideration payable by Company C is the same amount as the loan it received from Company B. 6. Company C claims a deduction under the capital allowance provisions based on the entire amount of the consideration paid, purportedly on the basis that that amount is attributable to any copyright that may subsist in the records. 7. Company C uses the low-value pool provisions to accelerate the capital allowance deduction on the basis that each item of copyright is a separate asset. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: a) Whether Company A and Company C are the holders of depreciating assets. b) Whether the contract consideration can be re-characterised. c) Whether the valuation methodology used accurately reflects the value attributable to the copyright. d) Deductibility under Division 40 (the capital allowance provisions) of the Income Tax Assessment Act 1997 (the ITAA 1997). e) Whether the rollover provisions in Division 40 of the ITAA 1997 have been complied with. f) The application of the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936). | a) Whether Company A and Company C are the holders of depreciating assets. b) Whether the contract consideration can be re-characterised. c) Whether the valuation methodology used accurately reflects the value attributable to the copyright. d) Deductibility under Division 40 (the capital allowance provisions) of the Income Tax Assessment Act 1997 (the ITAA 1997). e) Whether the rollover provisions in Division 40 of the ITAA 1997 have been complied with. f) The application of the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936). | The Australian Taxation Office is examining these arrangements.",,,,,TD 2005/1. | PS LA 2008/15 | ITAA 1997 Division 40 | ITAA 1997 Section 40-180 | ITAA 1997 Section 40-340 | ITAA 1997 Subdivision 40-E | ITAA 1936 Part IVA,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20045/NAT/ATO/00001,Large Business & International
TA 2004/6,Use of the Grouping provisions of the GST Act to avoid Goods and Services Tax (GST) on the sale of new residential premises,7 April 2004,Current,,"This Taxpayer Alert describes an arrangement that uses the grouping provisions in an attempt to avoid GST on the sale of new residential premises. The parties to the arrangement use a GST group structure for the purposes of creating an 'internal sale' of new home units/houses between GST group members. This is to support a claim that the units/houses are no longer 'new residential premises'. On this basis, any subsequent sale of the residential units/houses is claimed to be input taxed and not subject to GST. | The alert applies to arrangements that exhibit some or all of the following features: 1. Two or more entities apply for approval as a GST group, or are currently members of a GST group. The entities may be new or existing. 2. A group member owns or acquires land and constructs or arranges the construction of residential units/houses on the land. 3. The group member sells the units/houses to another group member without levying GST. (A supply between GST group members is treated as if it were not a taxable supply). 4. The acquiring group member sells the units/houses to third parties, and treats the sales as input taxed for GST purposes. The sale is claimed not to be that of ""new residential premises"", having previously been sold within the group. (Supplies of new residential premises are taxable supplies). 5. Despite the acquiring group member treating the sale of the units/houses to third parties as input taxed, the GST group claims input tax credits on the costs of constructing the units/houses and/or the acquisition of the land. | 1. Two or more entities apply for approval as a GST group, or are currently members of a GST group. The entities may be new or existing. 2. A group member owns or acquires land and constructs or arranges the construction of residential units/houses on the land. 3. The group member sells the units/houses to another group member without levying GST. (A supply between GST group members is treated as if it were not a taxable supply). 4. The acquiring group member sells the units/houses to third parties, and treats the sales as input taxed for GST purposes. The sale is claimed not to be that of ""new residential premises"", having previously been sold within the group. (Supplies of new residential premises are taxable supplies). 5. Despite the acquiring group member treating the sale of the units/houses to third parties as input taxed, the GST group claims input tax credits on the costs of constructing the units/houses and/or the acquisition of the land. | The ATO considers that the arrangements outlined above give rise to taxation issues that include whether the: (a) sale of the new home units/houses within the group is the first sale of residential premises; (b) sale of real property within the group is a taxable supply despite the operation of subsection 48-40(2); (c) GST group representative is entitled to input tax credits on the costs of construction and/or the acquisition of the land; and (d) anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply, as the arrangements appear artificial and contrived in their design and execution. | (a) sale of the new home units/houses within the group is the first sale of residential premises; (b) sale of real property within the group is a taxable supply despite the operation of subsection 48-40(2); (c) GST group representative is entitled to input tax credits on the costs of construction and/or the acquisition of the land; and (d) anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply, as the arrangements appear artificial and contrived in their design and execution. | The Australian Taxation Office is examining these arrangements.",,,,,GSTR 2005/4. | PS LA 2008/15 | GST Act Division 165 | GST Act Division 48 | GST Act Division 9 | GST Regulation 48 | TA 2004/2,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20046/NAT/ATO/00001,ILEC - Aggressive Tax Planning Team
TA 2004/7,Use of the Grouping provisions and the Margin Scheme to avoid or reduce the Goods and Services Tax (GST) on the sale of new residential premises,7 April 2004,Current,,"The Taxation Office view on this arrangement is set out in GST Ruling - GSTR 2005/4 . | This Taxpayer Alert describes an arrangement that uses the grouping provisions and the margin scheme in an attempt to avoid or reduce GST on the sale of new residential premises. Relying on a concession within the grouping provisions, substantially completed residential units/houses are sold within a group and not treated as a taxable supply. The acquiring group member completes the residential units/houses and sells them as a taxable supply to third parties, paying GST only on the margin between this sale price and the intra-group sale price. The effect of the intra-group sale is to avoid or reduce the margin for GST on the sale to the third party. | The alert applies to arrangements that exhibit some or all of the following features: 1. Two or more entities apply for approval as a GST group, or are currently members of a GST group. The entities may be new or existing. 2. A group member owns or acquires land and substantially completes, or arranges the substantial completion, of residential units/houses on the land. 3. The group member sells the substantially completed residential units/houses to another group member without levying GST. A supply between GST group members is treated as if it were not a taxable supply. 4. In some instances, the intra-group sale is claimed to be a GST-free supply of a going concern. 5. The acquiring group member completes, or arranges the completion of, the residential units/houses, and sells them to third parties, paying GST only on the margin between the relevant sale price and the intra-group sale price. 6. The GST group claims input tax credits on the costs of construction, and/or the acquisition of the land. | 1. Two or more entities apply for approval as a GST group, or are currently members of a GST group. The entities may be new or existing. 2. A group member owns or acquires land and substantially completes, or arranges the substantial completion, of residential units/houses on the land. 3. The group member sells the substantially completed residential units/houses to another group member without levying GST. A supply between GST group members is treated as if it were not a taxable supply. 4. In some instances, the intra-group sale is claimed to be a GST-free supply of a going concern. 5. The acquiring group member completes, or arranges the completion of, the residential units/houses, and sells them to third parties, paying GST only on the margin between the relevant sale price and the intra-group sale price. 6. The GST group claims input tax credits on the costs of construction, and/or the acquisition of the land. | The ATO considers that the arrangements outlined above give rise to taxation issues that include whether the: (a) acquiring group member can apply the margin scheme on the sale of the units/houses to third parties; (b) intra-group sale is the supply of a GST-free going concern; and (c) anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply, as the arrangements appear artificial and contrived in their design and execution. | (a) acquiring group member can apply the margin scheme on the sale of the units/houses to third parties; (b) intra-group sale is the supply of a GST-free going concern; and (c) anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply, as the arrangements appear artificial and contrived in their design and execution. | The Australian Taxation Office is examining these arrangements.",,,,,GSTR 2005/4 | PS LA 2001/15 | GST Act Division 165 | GST Act Division 75 | GST Act Division 48 | GST Act Subdivision 38-J | TA 2004/2 | TA 2004/6,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20047/NAT/ATO/00001,ILEC - Aggressive Tax Planning Team
TA 2004/8,Use of the Going Concern provisions and the Margin Scheme to avoid or reduce the Goods and Services Tax (GST) on the sale of new residential premises,7 April 2004,Current,,"This Taxpayer Alert describes an arrangement involving an entity which makes a sale of substantially completed residential units/houses to another entity as a GST-free going concern. The acquiring entity completes the residential units/houses and sells them as a taxable supply to third parties, paying GST only on the margin between this sale price and its acquisition cost, which is designed to set the price to reduce or eliminate the margin for GST. | The alert applies to arrangements that exhibit some or all of the following features: 1. An entity owns or acquires land and substantially constructs, or arranges the substantial construction of, residential units/houses on the land. 2. The entity sells the substantially completed residential units/houses to another entity, which may or may not be an associate, as a GST-free going concern. 3. The acquiring entity completes, or arranges the completion of, the units/houses, and sells them as a taxable supply to third parties, applying the margin scheme to calculate the GST payable on those sales. GST is calculated only on the margin between the sale price to the third parties and the acquisition cost. 4. Both entities claim input tax credits on the costs incurred in constructing the units/houses and/or the acquisition of the land. | 1. An entity owns or acquires land and substantially constructs, or arranges the substantial construction of, residential units/houses on the land. 2. The entity sells the substantially completed residential units/houses to another entity, which may or may not be an associate, as a GST-free going concern. 3. The acquiring entity completes, or arranges the completion of, the units/houses, and sells them as a taxable supply to third parties, applying the margin scheme to calculate the GST payable on those sales. GST is calculated only on the margin between the sale price to the third parties and the acquisition cost. 4. Both entities claim input tax credits on the costs incurred in constructing the units/houses and/or the acquisition of the land. | The ATO considers that the arrangements outlined above give rise to taxation issues that include whether the: (a) supply of the substantially completed residential units/houses is the supply of a GST-free going concern; and (b) anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply, as the arrangements appear artificial and contrived in their design and execution. | (a) supply of the substantially completed residential units/houses is the supply of a GST-free going concern; and (b) anti-avoidance provisions of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply, as the arrangements appear artificial and contrived in their design and execution. | The Australian Taxation Office is examining these arrangements.",,,,,GSTR 2005/5. | PS LA 2008/15 | GST Act Division 165 | GST Act Subdivision 38-J | GST Act Division 72 | GST Act Division 75 | TA 2004/2 | TA 2004/6 | TA 2004/7,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20048/NAT/ATO/00001,ILEC - Aggressive Tax Planning Team
TA 2004/9,Exploitation of the second-hand goods provisions to obtain Goods and Services Tax (GST) input tax credits.,13 May 2004,Current,,"With effect from 1 July 2015, the term 'Australia' is replaced in nearly all instances within the GST, Luxury Car Tax and Wine Equalisation Tax legislation with the term 'indirect tax zone' by the Treasury Legislation Amendment (Repeal Day) Act 2015 . The scope of the new term, however, remains the same as the repealed definition of 'Australia' used in those Acts. For readability and other reasons, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act. | This Taxpayer Alert describes arrangements apparently designed in an attempt to exploit the GST second-hand goods provisions resulting in claims for GST input tax credits in relation to second-hand goods sold to an interposed associated entity. A GST registered entity acquires goods (usually of high value) through a non-taxable supply. The acquiring entity sells the goods to an associated entity, thus creating a claim for an input tax credit on its acquisition of the goods under the second-hand goods provisions. | Three examples of arrangements that seek to exploit the second-hand goods provisions, which exhibit some or all of the identified features, are set out below: | Arrangement 1: cancellation of registration | 1. Entity A applies for cancellation of its GST registration. | 2. As a result of the cancellation, Entity A has an increasing adjustment in respect of equipment on hand for which it had previously claimed input tax credits. | 3. Subsequent to cancellation of its registration, Entity A transfers all of its equipment to an associated entity (Entity B). This includes the equipment for which it had the increasing adjustment as well as equipment held before the commencement of GST. | 4. Entity B subsequently sells the equipment to a financing entity (Entity C). | 5. Entity B leases the equipment back from Entity C for use in its business. | 6. Entity B claims an input tax credit in relation to its acquisition of the equipment from Entity A under the second-hand goods provisions. The credit claimed relates to the equipment for which Entity A had an increasing adjustment, as well as equipment acquired before the commencement of GST even though there was no GST embedded in the price paid to Entity A for that equipment. | Arrangement 2: imported goods | 1. Entity D, which is registered for GST, acquires high value goods from a related offshore entity (Entity E), which is not registered nor required to be registered for GST. The sale by Entity E is claimed to be a non-taxable supply on the basis that it is not connected with Australia. | 2. Entity D immediately sells the goods to an associated entity (Entity F) which is registered for GST. | 3. Entity F leases the goods to a third party. | 4. Entity D claims an input tax credit under the second-hand goods provisions in respect of its acquisition of the goods even though there is no GST embedded in the price it paid for the goods. | Arrangement 3: exported goods | 1. Entity G exports high value second-hand goods directly to overseas customers. It mainly purchases from persons who are not registered for GST. Its sales are GST-free under the export provisions. | 2. An associated Entity (Entity H) is interposed between Entity G and its overseas customers. | 3. Thus, Entity G continues to acquire the second-hand goods from unregistered suppliers, but now sells them to Entity H. | 4. Entity H in turn sells to the overseas customers. | 5. Following the interposition of Entity H, Entity G now claims input tax credits under the second-hand goods provisions on its acquisitions of second-goods from unregistered persons. | The ATO considers that the arrangements outlined above give rise to taxation issues that include whether: (a) the entities are entitled to the input tax credits claimed under Division 66; and (b) the general anti-avoidance provisions of Division 165 of the GST Act apply, as the arrangements appear artificial and contrived in their design and execution. | (a) the entities are entitled to the input tax credits claimed under Division 66; and (b) the general anti-avoidance provisions of Division 165 of the GST Act apply, as the arrangements appear artificial and contrived in their design and execution. | The Australian Taxation Office is examining these arrangements.",,,,,GSTR 2005/3. | PS LA 2001/15 | GST Act Division 165 | GST Act Division 66 | GST Act Division 11 | GST Act Section 9-25,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20049/NAT/ATO/00001,ILEC - Aggressive Tax Planning Team
TA 2003/1,Distribution to Superannuation Fund from Interposed Fixed Trust This Taxpayer Alert describes an arrangement where a taxpayer establishes a fixed trust to distribute business profits to the taxpayer's superannuation fund. This is done in an attempt to access the concessional tax rate of 15% on the distribution and at the same time avoid the age based deduction limits and superannuation surcharge.,11 February 2003,Current,,"This Taxpayer Alert describes an arrangement where a taxpayer establishes a fixed trust to distribute business profits to the taxpayer's superannuation fund. This is done in an attempt to access the concessional tax rate of 15% on the distribution and at the same time avoid the age based deduction limits and superannuation surcharge. | The alert applies to arrangements having the following features. 1. An existing business is operated under a trust, partnership or company structure, or a new business is established within a trust structure. 2. For an existing business, modifications are made to the trust deed and a fixed trust is established as a beneficiary of the trust. Alternatively, the partnership or corporate business structure is replaced so that the business is now operated through a trust. 3. A fixed trust is also then established as a beneficiary. 4. The operating trust distributes a substantial amount of income to the fixed trust. 5. The fixed trust then makes an equivalent distribution to a superannuation fund. 6. The superannuation fund is purported to be taxed at the concessional rate of 15% on the distribution from the fixed trust. 7. The members of the superannuation fund are the owners of the business and other family members. | 1. An existing business is operated under a trust, partnership or company structure, or a new business is established within a trust structure. 2. For an existing business, modifications are made to the trust deed and a fixed trust is established as a beneficiary of the trust. Alternatively, the partnership or corporate business structure is replaced so that the business is now operated through a trust. 3. A fixed trust is also then established as a beneficiary. 4. The operating trust distributes a substantial amount of income to the fixed trust. 5. The fixed trust then makes an equivalent distribution to a superannuation fund. 6. The superannuation fund is purported to be taxed at the concessional rate of 15% on the distribution from the fixed trust. 7. The members of the superannuation fund are the owners of the business and other family members. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: (a) Whether the arrangement circumvents the anti-avoidance provisions of subsection 273(7) of the Income Tax Assessment Act 1936 ('ITAA 1936') which deals with special income of superannuation funds. (b) The opportunity to arbitrage tax rates between the concessional 15% tax rate for superannuation funds and the marginal tax rate on the business income (either at company or individual tax rates). (c) Circumventing the age based deduction limits. (d) Avoiding the superannuation surcharge. Note 1. The income of complying superannuation funds may be taxed at 47% if it is special income (section 273 of the ITAA 1936) Note 2. If the fund holds a fixed entitlement and derives income under an arrangement or has acquired the fixed entitlement under an 'arrangement' and the parties were not dealing with each other at arms length in relation to the 'arrangement', and the amount of income is greater than might have been expected if they were dealing at arm's length then the trust distribution from a fixed entitlement will be regarded as special income. | (a) Whether the arrangement circumvents the anti-avoidance provisions of subsection 273(7) of the Income Tax Assessment Act 1936 ('ITAA 1936') which deals with special income of superannuation funds. (b) The opportunity to arbitrage tax rates between the concessional 15% tax rate for superannuation funds and the marginal tax rate on the business income (either at company or individual tax rates). (c) Circumventing the age based deduction limits. (d) Avoiding the superannuation surcharge. | The Australian Taxation Office is examining these arrangements.",,,,,ATO Interpretative Decision 2003/230 | TR 2006/7 | PS 2001/15 - Taxpayer Alerts | ITAA 1936 section 273 | Part 2 of Superannuation Contributions Tax (Assessment & Collection) Act 1997,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20031/NAT/ATO/00001,
TA 2003/2,Investment into Foreign Life Insurance Policies,25 March 2003,Current,,"This Taxpayer Alert describes an arrangement which has as one of its features the purchase of a life insurance policy from a tax haven based life insurance company. An investor borrows money to indirectly invest in the life insurance policy, via a trust and a company. The investor seeks to earn tax-free income outside Australia on the investment and income tax deductions for interest payments on the borrowings. It would seem that the only economic benefit achievable by an investor entering into this arrangement is through the claimed tax savings. | The alert applies to arrangements having the following features: 1. A investor obtains for a small premium, for example $1,000, a life insurance policy from a tax haven based life insurance company. The policy can be surrendered at any time. 2. At the same time, the investor subscribes for units in an Australian resident unit trust to the value of, for example, $100,000. Payment for the units may be funded by a loan from a tax haven based bank related to the life insurance company at an interest rate of, for example, 10%. 3. The unit trust invests the funds from the unit subscription into an Australian resident company. 4. That company enters into an Investment Agreement with the life insurance company to invest the $100,000 into the same life insurance policy purchased by the investor for a guaranteed return which approximates the interest rate on the investor's loan, 10%. Under the terms of the Investment Agreement the company will receive a return of, for example, 3%. The balance of the income, being 7%, will accrue on the life insurance policy for the benefit of the investor. 5. The company pays this return of 3% as franked dividends to the unit trust. In turn any profit the trust makes after deducting various fees and expenses will be distributed to the investor. 6. The investor receiving a distribution of income claims a rebate for the franking credits and deductions for the interest payments made on the borrowing. 7. After 10 years the company surrenders its interest in the life insurance policy and receives its invested amount of $100,000. The company is liquidated with a capital return to the unit trust of $100,000 whose units in turn will be redeemed allowing the investor to use these funds to pay out the borrowing. 8. At the time of this surrender by the company, the amounts that have accrued on the life insurance policy will be paid to the investor. | 1. A investor obtains for a small premium, for example $1,000, a life insurance policy from a tax haven based life insurance company. The policy can be surrendered at any time. 2. At the same time, the investor subscribes for units in an Australian resident unit trust to the value of, for example, $100,000. Payment for the units may be funded by a loan from a tax haven based bank related to the life insurance company at an interest rate of, for example, 10%. 3. The unit trust invests the funds from the unit subscription into an Australian resident company. 4. That company enters into an Investment Agreement with the life insurance company to invest the $100,000 into the same life insurance policy purchased by the investor for a guaranteed return which approximates the interest rate on the investor's loan, 10%. Under the terms of the Investment Agreement the company will receive a return of, for example, 3%. The balance of the income, being 7%, will accrue on the life insurance policy for the benefit of the investor. 5. The company pays this return of 3% as franked dividends to the unit trust. In turn any profit the trust makes after deducting various fees and expenses will be distributed to the investor. 6. The investor receiving a distribution of income claims a rebate for the franking credits and deductions for the interest payments made on the borrowing. 7. After 10 years the company surrenders its interest in the life insurance policy and receives its invested amount of $100,000. The company is liquidated with a capital return to the unit trust of $100,000 whose units in turn will be redeemed allowing the investor to use these funds to pay out the borrowing. 8. At the time of this surrender by the company, the amounts that have accrued on the life insurance policy will be paid to the investor. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: (a) The application of the Foreign Investment Fund ('FIF') measures contained in Part XI of the Income Tax Assessment Act 1936 (the ITAA 1936). An Australian resident who has invested in a offshore life insurance policy with an investment component will be subject to the FIF measures (section 482 of the ITAA 1936). These provisions are an accruals system of taxing foreign source income such that an amount of income will be attributed each year to the investor. (b) The application of section 26AH of the ITAA 1936 and the availability of the rebate in section 160AAB of the ITAA 1936. (c) Whether the interest expenses on funds borrowed to acquire units in the trust are deductible. (d) Whether the general anti-avoidance provisions of Part IVA of the ITAA 1936 apply having regard to the appearance of round robin funding or a circular movement of funds and guaranteed returns. | (a) The application of the Foreign Investment Fund ('FIF') measures contained in Part XI of the Income Tax Assessment Act 1936 (the ITAA 1936). An Australian resident who has invested in a offshore life insurance policy with an investment component will be subject to the FIF measures (section 482 of the ITAA 1936). These provisions are an accruals system of taxing foreign source income such that an amount of income will be attributed each year to the investor. (b) The application of section 26AH of the ITAA 1936 and the availability of the rebate in section 160AAB of the ITAA 1936. (c) Whether the interest expenses on funds borrowed to acquire units in the trust are deductible. (d) Whether the general anti-avoidance provisions of Part IVA of the ITAA 1936 apply having regard to the appearance of round robin funding or a circular movement of funds and guaranteed returns. | The Australian Taxation Office is examining these and similar arrangements.",,,,,TR 2004/3 | PS 2001/15 - Taxpayer Alerts | ITAA 1936 section 26AH | ITAA 1936 section 160AAB | ITAA 1936 section 482 | ITAA 1936 Part IVA,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20032/NAT/ATO/00001,Large Business & Internationals | International Strategy & Operations - Taxation of Residents Practice
TA 2003/3,Avoidance of Capital Gains Tax Utilising a Trust Structure,24 June 2003,Current,,"This Taxpayer Alert describes an arrangement involving the sale of capital gains tax (CGT) assets. The arrangement seeks to ensure that on the sale of the CGT assets to an arm's length party the taxable capital gains are streamed to a tax preferred entity, such as a charity, whilst the original owners of the assets receive the sale proceeds free of any CGT liability. | The alert applies to arrangements having the following features: 1. Assets owned by an individual or under a partnership or trust structure are disposed of to a special purpose company ('SPC'). Roll-over relief is claimed under Division 122 of the Income Tax Assessment Act 1997 ('ITAA 1997'). 2. A ""bare"" trust (First Trust) is created over the SPC assets with the sole beneficiary of the trust being the SPC. The trust deed allows further beneficiaries to be appointed with the consent of the original beneficiary. First Trust is a discretionary trust but is referred to as a hybrid or convertible trust. 3. SPC consents to the trustee appointing new beneficiaries of the First Trust which are trustees of other trusts and may be associates of the promoter of the arrangement. 4. A second trust is created (Second Trust) of which the beneficiaries are the original owner/s of the assets. The assets are then sold to this Second Trust for a nominal amount. However, the promoter argues that this sale for CGT purposes is deemed to have occurred at market value. This means that the First Trust has a deemed capital gain and the Second Trust acquires the assets with a market value cost base. 5. The Second Trust sells the assets for market value to a third party purchaser. 6. The Second Trust claims to have no taxable capital gain and distributes the sale proceeds (after deducting the promoter's fees) to the original owners in an arguably tax free manner, for example, as a loan or capital distribution. 7. The First Trust returns the deemed assessable capital gain and distributes this to the newly appointed beneficiaries, which in turn distribute this income to a beneficiary which has significant capital losses or is tax exempt such as a charity. No funds are actually received by the charity or other beneficiary. | 1. Assets owned by an individual or under a partnership or trust structure are disposed of to a special purpose company ('SPC'). Roll-over relief is claimed under Division 122 of the Income Tax Assessment Act 1997 ('ITAA 1997'). 2. A ""bare"" trust (First Trust) is created over the SPC assets with the sole beneficiary of the trust being the SPC. The trust deed allows further beneficiaries to be appointed with the consent of the original beneficiary. First Trust is a discretionary trust but is referred to as a hybrid or convertible trust. 3. SPC consents to the trustee appointing new beneficiaries of the First Trust which are trustees of other trusts and may be associates of the promoter of the arrangement. 4. A second trust is created (Second Trust) of which the beneficiaries are the original owner/s of the assets. The assets are then sold to this Second Trust for a nominal amount. However, the promoter argues that this sale for CGT purposes is deemed to have occurred at market value. This means that the First Trust has a deemed capital gain and the Second Trust acquires the assets with a market value cost base. 5. The Second Trust sells the assets for market value to a third party purchaser. 6. The Second Trust claims to have no taxable capital gain and distributes the sale proceeds (after deducting the promoter's fees) to the original owners in an arguably tax free manner, for example, as a loan or capital distribution. 7. The First Trust returns the deemed assessable capital gain and distributes this to the newly appointed beneficiaries, which in turn distribute this income to a beneficiary which has significant capital losses or is tax exempt such as a charity. No funds are actually received by the charity or other beneficiary. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: (a) Whether the initial disposal to SPC is an effective rollover under Division 122 to defer the making of a capital gain; (b) Whether the declaration of trust over the SPC assets is a CGT event under Division 104 of the ITAA 1997; (c) Whether the appointment of new beneficiaries to the First Trust results in a new trust being created; (d) Whether the amounts received on the disposal by the Second Trust are assessable as ordinary income under section 6-5 of the ITAA 1997; (e) Whether the entity which ultimately derives the deemed capital gain is exempt from tax or has deductible losses; (f) Whether Part IVA of the ITAA 1936 applies as: i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. it appears the dominant purpose of entering the arrangement is to provide tax relief to the original owners of the asset. The owners avoid an assessable capital gain upon subsequent sale to an arm's length third party. | (a) Whether the initial disposal to SPC is an effective rollover under Division 122 to defer the making of a capital gain; (b) Whether the declaration of trust over the SPC assets is a CGT event under Division 104 of the ITAA 1997; (c) Whether the appointment of new beneficiaries to the First Trust results in a new trust being created; (d) Whether the amounts received on the disposal by the Second Trust are assessable as ordinary income under section 6-5 of the ITAA 1997; (e) Whether the entity which ultimately derives the deemed capital gain is exempt from tax or has deductible losses; (f) Whether Part IVA of the ITAA 1936 applies as: i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. it appears the dominant purpose of entering the arrangement is to provide tax relief to the original owners of the asset. The owners avoid an assessable capital gain upon subsequent sale to an arm's length third party. | i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. it appears the dominant purpose of entering the arrangement is to provide tax relief to the original owners of the asset. The owners avoid an assessable capital gain upon subsequent sale to an arm's length third party. | The Australian Taxation Office is examining these arrangements.",,,,,TD 2003/03 | PS 2008/15 | ITAA 1997 Section 6-5 | ITAA 1997 Division 104 | ITAA 1997 Division 122 | ITAA 1936 Part IVA,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20033/NAT/ATO/00001,Large Business & Internationals
TA 2003/4,Assignment of Australian Copyright on Articles Prepared by Non-Resident Authors,20 October 2003,Current,,"This Taxpayer Alert describes an arrangement involving a purported assignment of Australian copyright on articles prepared by non-resident authors. It is argued that the payments made to the non-resident authors are not subject to Royalty Withholding Tax (RWT). | The alert applies to arrangements having the following features: 1. A non-resident writes an article which is submitted to an Australian publisher for publication. 2. After publication the non-resident author sends an invoice to the Australian publisher. 3. The invoice is endorsed with words to the effect that the non-resident author assigns the Australian copyright in the article to the Australian publisher for a short period of time, say three months. 4. The non-resident author and the Australian publisher also agree that no RWT will be deducted from the payment to the author as they argue that the payment is for the assignment of the ownership of the copyright in the article rather than for the use of that copyright. 5. The Australian publisher makes payment to the non-resident author for the purported purpose of acquiring the copyright in the article, rather than as a royalty for its use, and does not deduct and remit RWT. | 1. A non-resident writes an article which is submitted to an Australian publisher for publication. 2. After publication the non-resident author sends an invoice to the Australian publisher. 3. The invoice is endorsed with words to the effect that the non-resident author assigns the Australian copyright in the article to the Australian publisher for a short period of time, say three months. 4. The non-resident author and the Australian publisher also agree that no RWT will be deducted from the payment to the author as they argue that the payment is for the assignment of the ownership of the copyright in the article rather than for the use of that copyright. 5. The Australian publisher makes payment to the non-resident author for the purported purpose of acquiring the copyright in the article, rather than as a royalty for its use, and does not deduct and remit RWT. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: a) The validity of the copyright assignment; b) Whether the payment for the purported assignment of copyright falls within the definition of a royalty in subsection 6(1) of the Income Tax Assessment Act 1936 ('ITAA 1936'); c) Whether the failure to deduct and remit RWT results in a liability for the Australian publisher; and d) Whether Part IVA of the ITAA 1936 applies as it appears the dominant purpose of entering the arrangement is to obtain a tax benefit through avoiding RWT. | a) The validity of the copyright assignment; b) Whether the payment for the purported assignment of copyright falls within the definition of a royalty in subsection 6(1) of the Income Tax Assessment Act 1936 ('ITAA 1936'); c) Whether the failure to deduct and remit RWT results in a liability for the Australian publisher; and d) Whether Part IVA of the ITAA 1936 applies as it appears the dominant purpose of entering the arrangement is to obtain a tax benefit through avoiding RWT. | The Australian Taxation Office is examining these arrangements.",,,,,TD 2006/10. | IT 2660 | PS 2008/15 | ITAA 1936 Subsection 6 (1) | ITAA 1936 Section 128B | ITAA 1936 Part IVA | ITAA 1997 Section 15-20 | ITAA 1997 Section 995-1 | TAA 1953 Section 16-25 | TAA 1953 Section 16-30,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20034/NAT/ATO/00001,Large Business & Internationals | International Strategy and Operations
TA 2002/1,Internet Marketing Expenses Scheme,30 January 2002,Current,,"Internet Marketing Expenses Scheme | This Taxpayer Alert describes an arrangement where a taxpayer claims large income tax deductions for Internet marketing expenses paid to a tax haven based Internet marketer. | The alert applies to arrangements having the following features. 1. A taxpayer enters into a marketing agreement with a tax haven based Internet marketer to 'establish a location on the Internet and to carry on the business of selling advertising and marketing services over the Internet'. The agreement is for one year only. 2. The taxpayer prepays a marketing fee of, for example, $100,000 to the Internet marketer of which $20,000 is sourced from the individual's own means and $80,000 is borrowed (for a period of one year) from another tax haven entity. 3. The taxpayer claims a tax deduction of $100,000. 4. The taxpayer's borrowed funds are guaranteed and indemnified by an Australian company of which the taxpayer is the sole owner and director. 5. The Internet marketer guarantees a return of at least $20,000 in advertising revenue to the taxpayer. 6. The borrowed funds of $80,000 are not repaid. Neither the taxpayer nor the guarantor is pursued to repay the borrowed funds. | 1. A taxpayer enters into a marketing agreement with a tax haven based Internet marketer to 'establish a location on the Internet and to carry on the business of selling advertising and marketing services over the Internet'. The agreement is for one year only. 2. The taxpayer prepays a marketing fee of, for example, $100,000 to the Internet marketer of which $20,000 is sourced from the individual's own means and $80,000 is borrowed (for a period of one year) from another tax haven entity. 3. The taxpayer claims a tax deduction of $100,000. 4. The taxpayer's borrowed funds are guaranteed and indemnified by an Australian company of which the taxpayer is the sole owner and director. 5. The Internet marketer guarantees a return of at least $20,000 in advertising revenue to the taxpayer. 6. The borrowed funds of $80,000 are not repaid. Neither the taxpayer nor the guarantor is pursued to repay the borrowed funds. | (a) The arrangement raises questions about the deductibility of the expenses under the general provisions. The expenditure appears to be capital in nature. (b) The arrangement raises questions about the application of the general anti-avoidance provisions of Part IVA of the ITAA 1936. (c) The arrangement seems artificial and lacking commerciality in its design and execution. (d) There appears to be round robin funding or a circular movement of funds and guaranteed returns. (e) There appears to have been a substantial removal of risk from the taxpayer. (f) The transactions involve tax havens. | (a) The arrangement raises questions about the deductibility of the expenses under the general provisions. The expenditure appears to be capital in nature. (b) The arrangement raises questions about the application of the general anti-avoidance provisions of Part IVA of the ITAA 1936. (c) The arrangement seems artificial and lacking commerciality in its design and execution. (d) There appears to be round robin funding or a circular movement of funds and guaranteed returns. (e) There appears to have been a substantial removal of risk from the taxpayer. (f) The transactions involve tax havens. | The Australian Taxation Office is examining these arrangements.",,,,,TD 2002/23. | PS 2001/15 - Taxpayer Alerts | Section 8-1 of the ITAA 1997 | Pt IVA of the ITAA 1936,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20021/NAT/ATO/00001,
TA 2002/2,Scrip Loan and Option Arrangement,14 February 2002,Current,,"Scrip Loan and Option Arrangement | This Taxpayer Alert describes an arrangement where a taxpayer enters into a scrip loan and takes out an option position over the same number of shares. | The alert applies to arrangements having the following features: 1. A company declares a franked dividend. 2. The taxpayer borrows a parcel of shares in the company cum dividend from a lender before the shares become ex dividend. 3. The taxpayer also purchases an option from the lender over the same number of shares in the same company. The option may be closed out or sold. The option is cash-settled (i.e. no right to call for the physical delivery of the shares). 4. The taxpayer cannot sell, assign, or deal with the shares in any way without the express written consent of the lender. 5. The taxpayer is not entitled to exercise any voting power in relation to the shares or to retain any bonus shares or capital repayments. 6. The taxpayer pays the lender a transaction fee which approximates the value of the cash dividend on the shares borrowed. 7. A franked dividend is paid on the shares and the taxpayer is entitled to the dividend and the franking credits. 8. The parcel of shares is returned to the lender after the dividend has been paid. 9. The taxpayer may be obliged to apply the dividend in satisfaction of the transaction fee by way of set-off or otherwise. 10. The taxpayer returns the grossed-up dividend as income, claims a tax offset for the franking credits and claims a deduction for the transaction fee. | 1. A company declares a franked dividend. 2. The taxpayer borrows a parcel of shares in the company cum dividend from a lender before the shares become ex dividend. 3. The taxpayer also purchases an option from the lender over the same number of shares in the same company. The option may be closed out or sold. The option is cash-settled (i.e. no right to call for the physical delivery of the shares). 4. The taxpayer cannot sell, assign, or deal with the shares in any way without the express written consent of the lender. 5. The taxpayer is not entitled to exercise any voting power in relation to the shares or to retain any bonus shares or capital repayments. 6. The taxpayer pays the lender a transaction fee which approximates the value of the cash dividend on the shares borrowed. 7. A franked dividend is paid on the shares and the taxpayer is entitled to the dividend and the franking credits. 8. The parcel of shares is returned to the lender after the dividend has been paid. 9. The taxpayer may be obliged to apply the dividend in satisfaction of the transaction fee by way of set-off or otherwise. 10. The taxpayer returns the grossed-up dividend as income, claims a tax offset for the franking credits and claims a deduction for the transaction fee. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: (a) The entitlement to franking credits. i) Whether the arrangement satisfies the ""at risk"" requirement for the holding period rule in relation to entitlement to franking credits; and ii) The arrangement raises questions about the application of the anti-avoidance provisions directed against franking credit trading. (b) The deductibility of the transaction fee. (c) The correct tax treatment of the option in this arrangement. (d) The application of the general anti-avoidance provisions of Part IVA of the ITAA 1936. | (a) The entitlement to franking credits. i) Whether the arrangement satisfies the ""at risk"" requirement for the holding period rule in relation to entitlement to franking credits; and ii) The arrangement raises questions about the application of the anti-avoidance provisions directed against franking credit trading. (b) The deductibility of the transaction fee. (c) The correct tax treatment of the option in this arrangement. (d) The application of the general anti-avoidance provisions of Part IVA of the ITAA 1936. | i) Whether the arrangement satisfies the ""at risk"" requirement for the holding period rule in relation to entitlement to franking credits; and ii) The arrangement raises questions about the application of the anti-avoidance provisions directed against franking credit trading. | The Australian Taxation Office is examining these arrangements.",,,,,TD | 2003/32. | PS 2001/15 - Taxpayer Alerts | Section 8-1 of the ITAA 1997 | Part 3-1 of the ITAA 1997 | Part IVA of the ITAA 1936 | Section 177EA of the ITAA 1936,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20022/NAT/ATO/00001,Large Business & International | Financial Services Industry Group - Finance Houses Team
TA 2002/4,Personal Services - Partnership Arrangement,27 March 2002,Current,,"Personal Services - Partnership Arrangement | This Taxpayer Alert describes an arrangement whereby a taxpayer who earns personal services income from the provision of professional services enters into a partnership with other unrelated taxpayers who also earn personal services income. The intended effect is to recharacterise the income being earned as income of the partnership so as to enable the taxpayer to split their income with their spouse or a related party. | 1. A taxpayer earning personal services income from the provision of professional services pays an arranger to organise a partnership with other unrelated taxpayers. 2. The taxpayer pays to the arranger an upfront fee and a continuing management fee. 3. The taxpayer renews existing or enters into new contracts for the provision of personal services in the name of the partnership. 4. Tax invoices for services provided are generally in the name of the partnership. 5. The taxpayer directs the service acquirer to make payments either to the taxpayer as the representative of the partnership or to the arranger as agent for the partnership. 6. If the payment for services are made directly to the taxpayer, that taxpayer pays to the arranger the GST in respect of the provision of the services and the continuing management fee. 7. If the payment for services is made directly to the arranger by the service acquirer the arranger will deduct the applicable GST and the continuing management fee. The net amount is generally paid to the taxpayer who provided the services. 8. The taxpayer's income from the partnership is based on the income generated by the taxpayer's personal services rather than a share of the net income of the partnership income. 9. The taxpayer assigns up to 49% of their alledged interest in the partnership to their spouse or a related party. | 1. A taxpayer earning personal services income from the provision of professional services pays an arranger to organise a partnership with other unrelated taxpayers. 2. The taxpayer pays to the arranger an upfront fee and a continuing management fee. 3. The taxpayer renews existing or enters into new contracts for the provision of personal services in the name of the partnership. 4. Tax invoices for services provided are generally in the name of the partnership. 5. The taxpayer directs the service acquirer to make payments either to the taxpayer as the representative of the partnership or to the arranger as agent for the partnership. 6. If the payment for services are made directly to the taxpayer, that taxpayer pays to the arranger the GST in respect of the provision of the services and the continuing management fee. 7. If the payment for services is made directly to the arranger by the service acquirer the arranger will deduct the applicable GST and the continuing management fee. The net amount is generally paid to the taxpayer who provided the services. 8. The taxpayer's income from the partnership is based on the income generated by the taxpayer's personal services rather than a share of the net income of the partnership income. 9. The taxpayer assigns up to 49% of their alledged interest in the partnership to their spouse or a related party. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: (a) The validity of the partnership. For example: there does not appear to be an objective intention to carry on a business in common with a view to profit with the other partners. (b) Whether a business providing professional services is being carried on through a partnership. (c) Whether the arrangement circumvents the provisions of Part 2-42 of the ITAA 1997 which deals with taxpayers deriving personal services income. (d) The application of Part IVA of the ITAA 1936: i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. in the dominant purpose of entering into the arrangement is to obtain the tax advantages of income splitting and access to an increased range of deductions. | (a) The validity of the partnership. For example: there does not appear to be an objective intention to carry on a business in common with a view to profit with the other partners. (b) Whether a business providing professional services is being carried on through a partnership. (c) Whether the arrangement circumvents the provisions of Part 2-42 of the ITAA 1997 which deals with taxpayers deriving personal services income. (d) The application of Part IVA of the ITAA 1936: i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. in the dominant purpose of entering into the arrangement is to obtain the tax advantages of income splitting and access to an increased range of deductions. | i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. in the dominant purpose of entering into the arrangement is to obtain the tax advantages of income splitting and access to an increased range of deductions.",,,,,TD 2002/D8 | TD 2002/24. | PS 2001/15 - Taxpayer Alerts | Section 8-1 of the ITAA 1997 | Part 2-42 of the ITAA 1997 | Part IVA of the ITAA 1936,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20024/NAT/ATO/00001,
TA 2002/5,Prepaid Service Warrant Arrangement,8 April 2002,Current,,"Prepaid Service Warrant Arrangement | This Taxpayer Alert describes an arrangement where a taxpayer claims large income tax deductions for partnership losses. The partnership's losses are created by the partnership acquiring prepaid service warrants that may be redeemable for the provision of financial and wealth creation seminars. The arrangement produces significant tax deductions for a small cash outlay. | The alert applies to arrangements having the following features: 1. A taxpayer purports to enter into a partnership which claims to be in the business of acquiring and disposing of prepaid service warrants. 2. The partnership claims to buy a series of warrants that are redeemable for services from an offshore seminar provider (""service provider""). 3. The partnership acquires a series of warrants, for example, for a face value of $50,000 by paying $6,250 (or 12.5% of the face value) with the balance owing to the service provider. No 'loan' agreement is evident for the balance owing. 4. The arrangement is entered into at the end of the financial year. 5. The partnership's objective is to endorse the warrants over to a client for a fee so the client can redeem them for financial and wealth creation seminars from the service provider. There is a question as to whether any warrants are actually made available to the partnership. 6. All warrants that have not been endorsed over to clients by the end of a 12 month period will be re-purchased by the service provider at a 12.5% discount of their face value. In the example at paragraph 3, this is the amount equal to the balance owing. 7. It is claimed that the purchase of the warrants by the partnership will give rise to a loss in the partnership for the face value of the warrants in the year that the warrants are acquired. 8. It is claimed that on endorsing the warrants over to the client or on the re-purchasing of the warrants by the service provider the partnership would derive assessable income. If the warrants are endorsed or repurchased any assessable income would not be derived until the subsequent year. 9. The partners claim a share of the partnership loss in their tax returns. | 1. A taxpayer purports to enter into a partnership which claims to be in the business of acquiring and disposing of prepaid service warrants. 2. The partnership claims to buy a series of warrants that are redeemable for services from an offshore seminar provider (""service provider""). 3. The partnership acquires a series of warrants, for example, for a face value of $50,000 by paying $6,250 (or 12.5% of the face value) with the balance owing to the service provider. No 'loan' agreement is evident for the balance owing. 4. The arrangement is entered into at the end of the financial year. 5. The partnership's objective is to endorse the warrants over to a client for a fee so the client can redeem them for financial and wealth creation seminars from the service provider. There is a question as to whether any warrants are actually made available to the partnership. 6. All warrants that have not been endorsed over to clients by the end of a 12 month period will be re-purchased by the service provider at a 12.5% discount of their face value. In the example at paragraph 3, this is the amount equal to the balance owing. 7. It is claimed that the purchase of the warrants by the partnership will give rise to a loss in the partnership for the face value of the warrants in the year that the warrants are acquired. 8. It is claimed that on endorsing the warrants over to the client or on the re-purchasing of the warrants by the service provider the partnership would derive assessable income. If the warrants are endorsed or repurchased any assessable income would not be derived until the subsequent year. 9. The partners claim a share of the partnership loss in their tax returns. | (a) The arrangement seems artificial and lacks an ordinary business purpose in its design and execution. (b) The arrangement raises questions about whether a partnership actually exists. (c) The arrangement raises questions about whether a business is actually being carried on. (d) The arrangement raises questions about the deductibility of the cost of the warrants. (e) The arrangement raises questions about the application of the anti-avoidance provisions in Section 82KZME and Section 82KZMF of the ITAA 1936. (f) The arrangement raises questions about the application of the general anti-avoidance provisions of Part IVA of the ITAA 1936. | (a) The arrangement seems artificial and lacks an ordinary business purpose in its design and execution. (b) The arrangement raises questions about whether a partnership actually exists. (c) The arrangement raises questions about whether a business is actually being carried on. (d) The arrangement raises questions about the deductibility of the cost of the warrants. (e) The arrangement raises questions about the application of the anti-avoidance provisions in Section 82KZME and Section 82KZMF of the ITAA 1936. (f) The arrangement raises questions about the application of the general anti-avoidance provisions of Part IVA of the ITAA 1936. | The Australian Taxation Office is examining these arrangements.",,,,,TD | 2003/9. | PS 2001/15 - Taxpayer Alerts | Section 8-1 of the ITAA 1997 | Section 82KZME of the ITAA 1936 | Section 82KZMF of the ITAA 1936 | Part IVA of the ITAA 1936,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20025/NAT/ATO/00001,
TA 2002/6,Education or Scholarship Trust Arrangements,8 August 2002,Current,,"Education or Scholarship Trust Arrangements | This Taxpayer Alert describes arrangements where an Education or Scholarship Trust is established by relatives of a student ('a beneficiary of the trust') for the provision of their education. The income derived from the Trust assets is ""paid"" to the student as a scholarship, bursary, educational allowance or educational assistance, and is claimed to be exempt income. | These arrangements seek to convert an assessable income distribution from a trust to a distribution that would be exempt income. In a variation to these arrangements, some Education or Scholarship Trusts are claiming education expenses as deductions. | The Alert applies to arrangements having the following features: 1. An Education or Scholarship Trust is established by relatives of a student for the provision of the student's education, through the granting of scholarships, bursaries, educational allowances or educational assistance. 2. The Education or Scholarship Trust Deed may have clauses which: (a) specify the name of the student eligible for the scholarship or educational assistance; (b) list the criteria which the student must satisfy in order to qualify for the scholarship or educational assistance; (c) ensure that the Education or Scholarship Trust is not open to other students who may meet the set criteria; and/or (d) specify a yearly educational allowance or educational assistance to be paid to the student. 3. The Trust Deed states that where the student is a minor, they are not under a legal disability, they are presently entitled and can demand trust income from the Trustee. 4. The Trustee distributes or expends funds to the student as an amount called a scholarship, bursary, educational allowance or educational assistance. 5. The student claims this income is exempt from tax. 6. In a variation to these arrangements, deductions for education expenses are being claimed by the Education or Scholarship Trust. 7. The arrangements seek to take advantage of section 51-10 of the ITAA 1997 which exempts from income tax, a scholarship, bursary, educational allowance or educational assistance. The arrangements seek to convert an assessable distribution from a trust to exempt income. | 1. An Education or Scholarship Trust is established by relatives of a student for the provision of the student's education, through the granting of scholarships, bursaries, educational allowances or educational assistance. 2. The Education or Scholarship Trust Deed may have clauses which: (a) specify the name of the student eligible for the scholarship or educational assistance; (b) list the criteria which the student must satisfy in order to qualify for the scholarship or educational assistance; (c) ensure that the Education or Scholarship Trust is not open to other students who may meet the set criteria; and/or (d) specify a yearly educational allowance or educational assistance to be paid to the student. 3. The Trust Deed states that where the student is a minor, they are not under a legal disability, they are presently entitled and can demand trust income from the Trustee. 4. The Trustee distributes or expends funds to the student as an amount called a scholarship, bursary, educational allowance or educational assistance. 5. The student claims this income is exempt from tax. 6. In a variation to these arrangements, deductions for education expenses are being claimed by the Education or Scholarship Trust. 7. The arrangements seek to take advantage of section 51-10 of the ITAA 1997 which exempts from income tax, a scholarship, bursary, educational allowance or educational assistance. The arrangements seek to convert an assessable distribution from a trust to exempt income. | (a) specify the name of the student eligible for the scholarship or educational assistance; (b) list the criteria which the student must satisfy in order to qualify for the scholarship or educational assistance; (c) ensure that the Education or Scholarship Trust is not open to other students who may meet the set criteria; and/or (d) specify a yearly educational allowance or educational assistance to be paid to the student. | The ATO considers that the arrangements outlined above give rise to taxation issues which include: (a) whether the distribution is exempt income of the student (see Note 1). (b) whether a student who is a minor, is under a legal disability notwithstanding a provision to the contrary in the Trust Deed. (c) the deductibility of payments made to a student, or for their benefit, in the calculation of the net income of the Education or Scholarship Trust. (d) questions about the application of the general anti-avoidance provisions of Part IVA of the ITAA 1936. | (a) whether the distribution is exempt income of the student (see Note 1). (b) whether a student who is a minor, is under a legal disability notwithstanding a provision to the contrary in the Trust Deed. (c) the deductibility of payments made to a student, or for their benefit, in the calculation of the net income of the Education or Scholarship Trust. (d) questions about the application of the general anti-avoidance provisions of Part IVA of the ITAA 1936. | Note 1 | The ATO's view as published in Taxation Ruling TR 93/39 is that a 'scholarship, bursary or other educational allowance or educational assistance' is an award for merit attained as a result of competition or selection on the basis of general criteria. There is an issue as to whether the payments made by the Education or Scholarship Trusts described in these arrangements meet these criteria and consequently whether the distributions are exempt income in the hands of the student.",,,,,TR 93/39. | TR 93/39 | PS 2001/15 - Taxpayer Alerts | ITAA 1997 section 8-1 | ITAA 1997 section 51-10 | ITAA 1997 section 51-35 | ITAA 1936 section 95A | ITAA 1936 section 97 | ITAA 1936 section 98 | ITAA 1936 subsection 98(1) | ITAA 1936 Part IVA,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20026/NAT/ATO/00001,
TA 2002/8,Mutual associations - deductibility of contributions and derivation of income (volume allowances),17 October 2002,Current,,"This Taxpayer Alert describes an arrangement where a retailer directs money received by way of volume allowances (or rebates) receivable from a wholesaler to a company said to be a mutual association. The retailer then claims deductions for the redirected volume allowances as contributions. The contributions are in excess of the expenditure incurred by the mutual association, and it is said the surplus can be returned to the members tax free. | The alert applies to arrangements having the following features: 1. The establishment of a company said to be a mutual association with retailers as members. 2. The mutual association (a 'banner company') carries out marketing, advertising, merchandising and negotiates volume allowances on behalf of the retailers. 3. The company is said to not be a co-operative covered by Division 9 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). 4. The payment of monthly member contributions by the retailers to the company. 5. The redirection of volume allowances derived by the retailers so that they are paid directly from the wholesaler to the company as additional contributions by the retailers. 6. The return of surpluses of contributions over the company's expenditure to the retailer, in proportion to the volume allowance attributable to the retailer, on a regular basis. 7. The arrangements are typically marketed as a 'tax free income' scheme. 8. The arrangement differs from most bona fide mutual arrangements, because of the regular distributions of surpluses to members and the lack of parity between the contributions of members and the company's anticipated expenditure. | 1. The establishment of a company said to be a mutual association with retailers as members. 2. The mutual association (a 'banner company') carries out marketing, advertising, merchandising and negotiates volume allowances on behalf of the retailers. 3. The company is said to not be a co-operative covered by Division 9 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). 4. The payment of monthly member contributions by the retailers to the company. 5. The redirection of volume allowances derived by the retailers so that they are paid directly from the wholesaler to the company as additional contributions by the retailers. 6. The return of surpluses of contributions over the company's expenditure to the retailer, in proportion to the volume allowance attributable to the retailer, on a regular basis. 7. The arrangements are typically marketed as a 'tax free income' scheme. 8. The arrangement differs from most bona fide mutual arrangements, because of the regular distributions of surpluses to members and the lack of parity between the contributions of members and the company's anticipated expenditure. | The ATO has previously issued favourable private binding rulings in respect of one arrangement having these features. However, following a recent high level review of these kinds of arrangements, the ATO considers that they have taxation features that are questionable. That review is the source of this alert. | This alert does not disturb different arrangements involving mutual associations that the ATO has previously ruled on in private or public rulings. | (a) The arrangement raises issues about whether the purported mutual association is in fact a mutual association. The company may be carrying on business of trading with its members. If so, the amounts received by the purported mutual association are derived by it as assessable income. This raises questions about the application of Division 9 of Part III of the ITAA 1936 to the company. (b) The arrangement is said to give the retailers a deduction for their contributions, including the redirected volume allowances, to the purported mutual association. There are questions about the deductibility of payments to a mutual association, under in particular section 8-1 of the ITAA 1997. The mutuality principle established that one cannot make a profit out of themselves. This raises the question as to whether one can make a loss from themselves. (c) The arrangement is said to have the effect that distributions by the purported mutual association are not assessable income of the members to whom it is distributed. However, the distributions may be dividends to which section 44 of the ITAA 1936 applies, or otherwise assessable income. (d) The retailers derive the volume allowances as assessable income. (e) The arrangement raises questions about the application of the anti-avoidance provisions of Part IVA of the ITAA 1936. | (a) The arrangement raises issues about whether the purported mutual association is in fact a mutual association. The company may be carrying on business of trading with its members. If so, the amounts received by the purported mutual association are derived by it as assessable income. This raises questions about the application of Division 9 of Part III of the ITAA 1936 to the company. (b) The arrangement is said to give the retailers a deduction for their contributions, including the redirected volume allowances, to the purported mutual association. There are questions about the deductibility of payments to a mutual association, under in particular section 8-1 of the ITAA 1997. The mutuality principle established that one cannot make a profit out of themselves. This raises the question as to whether one can make a loss from themselves. (c) The arrangement is said to have the effect that distributions by the purported mutual association are not assessable income of the members to whom it is distributed. However, the distributions may be dividends to which section 44 of the ITAA 1936 applies, or otherwise assessable income. (d) The retailers derive the volume allowances as assessable income. (e) The arrangement raises questions about the application of the anti-avoidance provisions of Part IVA of the ITAA 1936. | The Australian Taxation Office is examining these arrangements.",,,,,TR 2004/5. | PS 2001/15 - Taxpayer Alerts | ITAA 1997 Section 8-1 | ITAA 1936 Division 9 of Part III | ITAA 1936 Part IVA | ITAA 1936 Section 44,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20028/NAT/ATO/00001,Large Business & International
TA 2002/9,Remote Area Housing Benefit Arrangements,24 October 2002,Current,,"This Taxpayer Alert describes an arrangement where an employer and its employee enter into a lease agreement on a residential property either owned or leased by the employee in a remote area. The employer makes rental payments to the employee and allows the employee to live in the property rent free. The arrangement seeks to allow the employee to obtain tax deductions in relation to the employee's private residence and to exempt the employer from fringe benefits tax by relying on the remote area housing exemption. | The Alert applies to arrangements having the following features: 1. An employee is employed in a remote area. 2. The employee either buys or leases a residential property in that area. 3. The employee leases the property to his or her employer and receives rent from the employer. The property is then provided to the employee rent-free by the employer until such time as the employee ceases to be in employment or moves to another location. 4. In a variation on this arrangement, the employee enters into a salary sacrifice arrangement with the employer. The employee foregoes part of their expected total remuneration in return for the rent-free housing. The amount foregone is equal to the rental payments made by the employer to the employee. 5. The employee declares the rent received as assessable income and claims property expenses such as interest on loans, rates, maintenance and depreciation as deductions from that income. This is said to result in an overall loss to the employee which can be offset against other income. 6. The employer claims to satisfy the conditions set out in paragraph 58ZC(2)(a) to paragraph 58ZC(2)(e) of the Fringe Benefits Tax Assessment Act 1986 ('the FBTAA') and to be entitled to the remote area housing benefit exemption. | 1. An employee is employed in a remote area. 2. The employee either buys or leases a residential property in that area. 3. The employee leases the property to his or her employer and receives rent from the employer. The property is then provided to the employee rent-free by the employer until such time as the employee ceases to be in employment or moves to another location. 4. In a variation on this arrangement, the employee enters into a salary sacrifice arrangement with the employer. The employee foregoes part of their expected total remuneration in return for the rent-free housing. The amount foregone is equal to the rental payments made by the employer to the employee. 5. The employee declares the rent received as assessable income and claims property expenses such as interest on loans, rates, maintenance and depreciation as deductions from that income. This is said to result in an overall loss to the employee which can be offset against other income. 6. The employer claims to satisfy the conditions set out in paragraph 58ZC(2)(a) to paragraph 58ZC(2)(e) of the Fringe Benefits Tax Assessment Act 1986 ('the FBTAA') and to be entitled to the remote area housing benefit exemption. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: (a) Whether the conditions set out in paragraph 58ZC(2)(a) to subparagraph 58ZC(2)(d)(iii) of the FBTAA are satisfied. (b) Whether paragraph 58ZC(2)(e) of the FBTAA, which denies the exemption, applies. (c) The deductibility of the property expenses to the employee. (d) Whether the general anti-avoidance provision contained in Part IVA of the Income Tax Assessment Act 1936 will apply given that the arrangement seems artificial and contrived in its design and execution. | (a) Whether the conditions set out in paragraph 58ZC(2)(a) to subparagraph 58ZC(2)(d)(iii) of the FBTAA are satisfied. (b) Whether paragraph 58ZC(2)(e) of the FBTAA, which denies the exemption, applies. (c) The deductibility of the property expenses to the employee. (d) Whether the general anti-avoidance provision contained in Part IVA of the Income Tax Assessment Act 1936 will apply given that the arrangement seems artificial and contrived in its design and execution. | The Australian Taxation Office is examining these arrangements.",,,,,2001/761 | 2002/412 | TD 2003/D8 | TD 2004/26 | PS 2001/15 - Taxpayer Alerts | ITAA 1997 Section 8-1 | FBTAA section 58ZC | FBTAA paragraph 58ZC(2)(e) | ITAA 1936 Part IVA,False,https://www.ato.gov.au/law/view/document?docid=TPA/TA20029/NAT/ATO/00001,13 28 66 Select the Fringe Benefit Tax option