Taxation Law - Arrangements to Avoid Australian Tax - Could This Be You?

Whenever a taxpayer is involved in aggressive tax planning they need to ensure that they stay on the right side of the law.  Essentially there is a great difference between tax avoidance and tax evasion.  The first is lawful and the latter is unlawful with the consequence that can lead to criminal prosecution and a custodial sentence.  After all, the ATO is there to administer the taxation laws of Australia fairly and honestly whilst at the same time trying to maintain the balance between what is permissible and what is not.  Where taxpayers have entered or are contemplating entering into an arrangement and they require certainty they should seek a formal determination of the ATO's position through a private ruling.  No taxpayer should ever consider entering into an arrangement of any type without first obtaining appropriate advice from a tax lawyer.  Many taxpayers make the mistake that where they are introduced to arrangements normally via their accountant or financial planner that they are compliant and without risk which in many cases couldn't be further from the truth. 

During the 1990s and the early 2000s there was a significant degree of laxity adopting by a number of taxation advisers which led their clients into arrangements which had no underlying tax rationale.  In some cases this led taxpayers to artificially inflate Australian tax deductions for goods or services by the use of an offshore structure(s).  Under such arrangements a thirty party supplier provides goods or services to the offshore structure allegedly at market value.  Subsequently the offshore structure provides the same goods or services to an Australian resident at a price substantially above or below market value or for no value at all.  Essentially this scheme relies upon the Australian resident not disclosing their interest in the offshore structure and therefore pays no tax on the profits.  The greatest abuse occurs where no actual goods or services are provided by the offshore structure and no third party involved e.g. overseas R&D or IT expenditure.  What we are talking about are arrangements which rely for their validity upon concernment which is a sure sign that the arrangement lacks credibility and has significant consequences for the taxpayer once detected including the likelihood of referral to the CDPP for prosecution and a custodial sentence.  Could this be you?

Mass marketed arrangements are normally aimed at a small to medium enterprise market.  The parties to the transaction include promoters, professionals and participants (taxpayers).  These schemes normally exhibit some of the following features:

1. An offshore structure(s).
2. A tax haven or country with bank secrecy.
3. A paper trail designed to conceal the true nature of these transactions and the taxpayer's interest in the offshore structure(s).
4. The taxpayer claims to have obtained arm's length goods or services allegedly at market price.
5. The offshore entity re-invoices the goods or services and dispatches them to the Australian taxpayer for payment.  The re-invoicing can involve the same goods or services being obtained from the offshore structure at a price either substantially above or below true market value.
6. Deductions are claimed for these goods or services irrespective whether or not that price was paid for them.
7. The greatest abuse occurs where no goods or services are provided by the offshore structure and where no third party is involved. 
8. The offshore structure obtains the profits and may or may not be tax compliant within the jurisdiction within which it operates.
9. These profits are accessed by the taxpayer in many cases through the use of a debit or credit card.
10. Taxpayers are required to make a declaration about their overseas interests which is not done thereby avoiding the tax that would have been paid on the omitted income if brought to account. 
11. The documentation involved in these transactions lacks validity concealing the true nature of the Australian taxpayer's interest or involvement with the overseas structure. 

Where these arrangements are discovered by the ATO they will be treated as follows:

1. A sham.
2. Any entity within the offshore structure will be regarded as an Australian resident for taxation purposes.
3. Any third party associated with the offshore structure will be considered to be acting for and on behalf of the Australian resident taxpayer.
4. The proceeds emanating from the offshore structure will be attributable to the Australian taxpayer.
5. The offshore income will be included in the Australian taxpayer's assessable income.
6. Deductions will either be disallowed or substantially reduced.
7. Primary tax, penalties and interest will be charged.
8. Penalties will be looked at to ascertain whether they emanate from intentional disregard, recklessness or carelessness with different consequences flowing from each. 
9. The transactions may fall under Part 3 and Part 4A of the Income Tax Assessment Act 1936.
10. Where they fall under the general anti-avoidance provisions, penalties of up to 50% can be applied to the unpaid Tax. 
11. Cases of serious tax evasion involving a significant degree of criminality will be referred for prosecution.

In all cases in which taxpayers are involved in offshore schemes where the object is to conceal the true nature of the ownership or control of the overseas entity, the type of transaction and the benefit to the Australian taxpayer, the only effective means to mitigate the seriousness of the conduct involved is for the Australian taxpayer to make an unprompted voluntary disclosure in an attempt to reduce the base penalty amount whilst attempting to obtain a positive referral to the CDPP and diminish the likelihood of criminal prosecution.  Whether you have been detected or remain undetected and wish to obtain the benefit of legal professional privilege and specialist taxation advice call Frank Egan at LAC Lawyers for assistance.