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Promoter penalty legislation
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On 6 April 2006 Tax laws Amendment (2006 Measures No 1) Bill, which contained measures to deter the promotion of tax exploitation schemes, received Royal Assent. The new measures apply to conduct on or after that date. 
 
Consultation on the new measures 
 
The Australian Taxation Office (ATO) has established a National Tax Liaison Group - Promoter Penalty Co-design Subcommittee to co-design administrative and governance arrangements for the ATO. The objective of the consultation process is to ensure that the new measures capture only entities intended to be caught and that the laws are applied in a fair and reasonable manner.  
 
Overview of the measures 
 
The legislation allows the Commissioner, within certain time constraints, to apply to the Federal Court for an order that an entity (and not simply an individual as in the draft legislation) pay a penalty if it is satisfied that:

  • an entity engaged in conduct that resulted in the entity being a promoter of a tax exploitation scheme (“TES”)  
  • an entity engaged in conduct that resulted in another entity being a promoter of a TES 
  • an entity engaged in conduct that resulted in a scheme, promoted on the basis of conformity with a product ruling, being implemented in a materially different way.
An application cannot be made if the scheme is based on advice given to the entity or its agent by the Commissioner or in a statement in a publication approved in writing by the Commissioner.  
 
The Court determines what penalty is appropriate, having regard to all relevant matters, subject to the following caps:
  • for individuals, the greater of 5,000 penalty units (currently $550,000) and twice the consideration received in respect of the scheme  
  • for companies, 25,000 penalty units (currently $2.75m) and twice the consideration received.
The Act enables the Commissioner to enter into voluntary undertakings and to apply to the Court for injunctive relief to stop offending conduct. 
 
Promoter 
 
In broad terms, an entity will be a promoter of a tax exploitation scheme if:
  • the entity markets a scheme or encourages its growth or interest in it 
  • the entity receives consideration in respect of that marketing or encouragement and 
  • it is reasonable to conclude that the entity had a substantial role in marketing or encouraging the scheme.
However, an employee is not taken to have had a substantial role merely because he distributes information prepared by another entity. 
 
Advisers are intended to be excluded from the definition of a promoter via an exclusion which prevents an entity being regarded as a promoter of a TES “merely because the entity provides advice about the scheme.”  
 
Tax exploitation scheme 
 
A scheme is a TES if:
  • it is reasonable to conclude that a participant entered into or carried out the scheme with the sole or dominant purpose of getting a scheme benefit, i.e. a reduction in tax and 
  • it is not reasonably arguable that the scheme benefit is available at law.
Exceptions to penalty imposition 
 
The Court is precluded from imposing penalties where:
  • the offending conduct was due to a reasonable mistake of fact 
  • the offending conduct was due to the act or default of another entity (other than an employee or agent), an accident or some other cause beyond the entity’s control providing the entity took reasonable precautions and exercised due diligence to avoid the conduct and 
  • for entities whose conduct results in another entity being a promoter of a TES or an implementer, the entity did not know, and could not reasonably be expected to know, that the entity’s conduct would produce that result.
The Institute’s recommendations 
 
The Institute’s recommendations are set out in its submission on the draft legislation. The Institute is pleased that the meaning of promoter now focuses more accurately on marketing and encouraging. It is also pleased that the Act reflects the Institute’s recommendations that:
  • a tax exploitation scheme not arise where it is reasonably arguable that the scheme benefit is available at law  
  • the Federal Court be able to require the Commonwealth to give an undertaking as to damages as a condition of granting an interim injunction.
 
The legislation is broadly drafted and we encourage members to familiarise themselves with the Act and provide any comments on the new rules to the Tax Group. 
 
More information 
 
Tax Laws Amendment (2006 Measures No. 1) Bill 2006 is available here 
 
The Explanatory Memorandum is available here 
 
The ICAA's submission on the exposure draft legislation (2 September 2005)  
 
The Minister for Revenue's announcement releasing the exposure draft legislation (10 August 2005)  
 
The promoter penalties draft legislation can be downloaded from the Treasury's website.  
 
The (former) Minister for Revenue's media release originally announcing the proposed measures (5 December 2003)