Recognising, rejecting and reporting tax avoidance schemes – What to do if your client asks about or is involved in a potential tax avoidance scheme

Issued by – Australian Tax Office’s

Fact sheet for tax professionals

MANAGING PROMOTER PENALTY RISKS TO YOUR FIRM – GOOD GOVERNANCE

If you provide tax planning advice to clients, it is important to consider what level of risk you are prepared to accept and what processes you have in place to protect you and your practice from inadvertently contravening the promoter penalty laws.

For more information to help you manage promoter penalty risks, you can read our guide Good governance and promoter penalty laws (NAT 73779).The guide covers topics such as:

■  good governance principles and good practice in tax services

■  how the Australian Taxation Office (ATO) identifies and treats businesses at risk of breaching these laws

■  the consequences of contravening these laws

■  current schemes and behaviours of concern to the ATO

■  how to reduce the risk of inadvertently marketing or encouraging tax avoidance schemes, or incorrectly implementing product ruling arrangements.

TAX PLANNING ARRANGEMENTS

You should be cautious about any arrangements you recommend. You need to be able to recognise when an arrangement may be a tax avoidance scheme and know the potential risks for facilitating a scheme.

To avoid exposure to the promoter penalty laws, any advice you offer must be balanced and independent and should not facilitate or advocate a tax avoidance scheme in any way. You should be especially careful in ensuring that you have a reasonably arguable position on an arrangement so that you:

■  identify accurate relevant and material facts (not just accept assumed or instructed facts without prudent questioning)

■  robustly analyse relevant legal authorities for points of law, including ordinary provisions and anti-avoidance rules – and appropriately considering both positive and negative positions.

The promoter penalty laws are not restricted to widely offered schemes. They may apply even in circumstances where there is only one client involved in the arrangement.

STAFF

The behaviour of staff who work for you may also increase your exposure to promoter penalty risks. It is important to ensure staff give balanced and independent advice to clients and explain the tax consequences of an arrangement.

If you or your staff are advocating a particular arrangement and receiving consideration for clients entering that arrangement, you should weigh up whether the benefits you receive are worth the exposure to significant risk.

CASE STUDY

Bob is a tax agent who has been providing tax planning advice to Carl, a plumber with his own business, for many years. This year, Bob tells Carl that he has identified an area of the law where there is room to manoeuvre and that he can design a structure for Carl, as a way to minimise his tax, for an extra fee.Bob has now made the transition from merely providing advice to advocating an arrangement. Having designed and sold a repeatable structure, Bob is now considered a promoter and is exposed to promoter penalty laws.

CLIENTS

Clients who have an appetite for high-risk arrangements and tax avoidance schemes may increase the level of risk you and your firm are exposed to.

You may need to reconsider your connection with any clients who:

■  insist on entering into arrangements where the risk is one that you are not comfortable with, or

■  won’t take your advice and continue to insist you make claims in their return that deliberately avoid or evade tax.

You need to consider whether these connections are worth the potential penalties and risks to your reputation.

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WHAT TO DO IF A CLIENT ASKS ABOUT OR IS INVOLVED IN A SCHEME

Your clients may ask you about minimising tax through tax effective schemes. They may ask you to complete a tax return based on advice they obtained from another adviser or scheme promoter.

You can help your clients avoid penalties or tax debts by explaining the difference between legitimate tax minimisation and abusive tax avoidance schemes.

You should advise your clients that:

■  it is their responsibility to comply with the tax laws

■  if they are involved in a tax avoidance scheme, they will be liable for the tax they avoided, plus penalties and interest

■  as a professional registered tax agent, you have a responsibility to exclude any false or misleading claims from their return.

If you think a client may be involved in a scheme, either inadvertently or otherwise, you should encourage them to make a voluntary disclosure to us – this may help them to avoid or minimise potential penalties for any tax shortfalls.

HOW SCHEMES OPERATE

Schemes often involve a series of complex transactions – they typically move funds through several entities, such as trusts, to avoid or minimise tax otherwise payable. Schemes may also involve distorting the way funds are being used to enable a taxpayer to claim deductions they are not entitled to.

Some of the indicators of a tax avoidance scheme, alone or together, are where the scheme:

■  is contrived or artificial in the way it is carried out

■  uses complex structures or intra-group transactions to create tax benefits that are not related to the commercial activity

■  involves a low level of financial risk and a large tax benefit that you would not expect in a commercially driven transaction

■  includes any of the following

   –  round robin finance

   –  circular funds movement

   –  non-recourse or limited recourse loans to be paid off by future earnings

   –  uses tax exempt entities such as charities, or entities with accumulated tax losses, to wash income

   –  involves a tax haven or bank secrecy country without any sound economic reason

   –  is not implemented as stated in any relevant product ruling.

HOW TO REPORT A TAX AVOIDANCE SCHEME OR PROMOTER

With your help, we can take steps to protect your clients from participating in schemes that may lead to tax debts or penalties, by challenging promoters who are attempting to entice clients away from reputable tax agents.

Advising us of tax schemes and scheme promoters helps us to protect the integrity of the taxation and superannuation systems. It also helps to maintain a level playing field for you and prevent less reputable agents from obtaining a competitive advantage through selling tax avoidance schemes.

WHAT TO DO IF YOU ARE INVOLVED IN PROMOTING A TAX SCHEME

If you find that you are inadvertently involved in the promotion of a tax avoidance scheme and you let us know, we will help you.

In many situations, you will be able to voluntarily self-correct without penalty. In some significant situations, we will accept a voluntary undertaking. A voluntary undertaking will be strictly confidential and contains no admission of liability or exposure to reputational risk through publicity, except in the circumstance where we are enforcing a breach in the terms of the undertaking.

We take a careful and considered approach to legal action – we go to court only in significant and ongoing cases, where this is appropriate because of the seriousness and extent of the conduct.

MORE INFORMATIONFor more information about:

■  product rulings, taxpayer alerts, voluntary undertakings and our publications, visit www.ato.gov.au/taxplanning

■  making a voluntary disclosure, refer to Voluntary disclosures – approved form (NAT 72121)

■  good governance practices, refer to Good governance and promoter penalty laws (NAT 73779).

If you have a concern about a promoter or scheme, phone us on 1800 177 006 between 8.30am and 5.00pm, Monday to Friday.

OUR COMMITMENT TO YOU

We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations.

If you follow our information in this publication and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we must still apply the law correctly. If that means you owe us money, we must ask you to pay it but we will not charge you a penalty. Also, if you acted reasonably and in good faith we will not charge you interest.

If you make an honest mistake in trying to follow our information in this publication and you owe us money as a result, we will not charge you a penalty. However, we will ask you to pay the money, and we may also charge you interest. If correcting the mistake means we owe you money, we will pay it to you. We will also pay you any interest you are entitled to.

If you feel that this publication does not fully cover your circumstances, or you are unsure how it applies to you, you can seek further assistance from us.

We regularly revise our publications to take account of any changes to the law, so make sure that you have the latest information. If you are unsure, you can check for more recent information on our website at www.ato.gov.au or contact us.

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