Chapter 7 - Conclusion
7.1
The Committee welcomes the recent decisions of
the ATO towards participants in mass marketed schemes. Although the Committee
believes these initiatives are overdue and should have been part of a coherent
strategy towards scheme participants from the outset, they should nonetheless
be recognised as a step in the right direction. In particular, the Committee is
pleased to see that the ATO is adopting an approach more consistent with its
obligations to take into account individual circumstances, especially for the
many participants caught unwittingly in these arrangements.
7.2
The Committee also wishes to note for the record
that several of these initiatives, particularly those in relation to expediting
test cases, halting recovery action and sending dedicated teams to regional
locations, are in line with some of the conclusions and recommendations that
the Committee had arrived at during the inquiry to date.
7.3
That said, the Committee has a number of
concerns that warrant consideration by the Government and ATO. The ATO’s most
recent announcement on reducing the interest applying to some scheme debts will
require careful handling, particularly the drafting of guidelines for
determining eligibility. The Committee sees this announcement as a sign that
the individual circumstances of participants is coming more into focus in the ATO’s
approach. It is important that the criteria adopted in the guidelines continue
to focus on individual circumstances and do not establish arbitrary limits.
7.4
On the face of the evidence to the inquiry, the
Committee considers a large number of participants fit the ATO’s general
criteria for entitlement to an interest cut – ie, they have generally good tax
records and are not representative of those who use aggressively-driven schemes
to exploit the tax system. The guidelines should be drawn up to reflect this
point.
7.5
The Committee acknowledges the recent decision
of the ATO to fund a number of test cases, even if it is overdue and limited in
nature. This should not only help break the impasse between the ATO and the
various groups running test cases but should also settle the ATO’s position at
law, an outcome that is in the interests of all parties as well as the
functioning of the tax system.
7.6
Further, the Committee considers that there is a
case to be considered for suspending the accrual of interest on the tax debts
of participants selected as test cases. The reason for this is to prevent
financial pressure stemming from compounding interest on tax debts forcing
participants to withdraw from test cases. Any further delays to the test case
program at this stage would be, in the Committee’s view, unacceptable. It is
critical for the overall resolution of the MMS matter that the Courts get to
decide on the ATO’s position at law. A suspension of interest, insofar as it
removes one source of pressure for representative participants, might therefore
be in the public interest.
7.7
Notwithstanding the statements above on the
interest concession and suspending interest for test case participants, the
Committee considers that there may be scope for a further remission in the
interest charge and/or penalty tax in view of the ATO’s role during the growth
of the MMS market. On the evidence before the inquiry, the Committee believes
that the ATO cannot be absolved entirely for the emergence of the risk to the
revenue that mass marketed schemes posed in the period 1996-97, particularly so
far as it is responsible for providing certainty to taxpayers under the self
assessment system. The ATO’s own evidence indicates that it had at the least
questions about the application of Part IVA to mass marketed-like schemes for
over a decade before it eventually addressed the issue. The ATO points to its
disallowance of deductions in some 20-odd cases during the late-1980s and early
1990s as evidence that it was active in addressing the matter. The ATO suggests
that the market and tax professionals should have heeded this action.
7.8
In the Committee’s view, the ATO itself should
have heeded the warning signs that these cases provided and the Commissioner
should have turned his mind to settling the issue of Part IVA’s application to
schemes through issuing a tax ruling. This would have sent a clear signal to
the market, resolved a grey area in the law and provided certainty to
taxpayers. In addition, if a ruling had been reinforced by a series of high
profile statements – similar to the Commissioner’s 1998 ‘Beware the Magic
Pudding’ speech and those that followed – putting abusive scheme promoters on
notice, then the MMS crisis in the mid-1990s may have been averted. That it
took a rapidly escalating risk to the revenue to galvanise the ATO into action
in 1996-97 is not an adequate defence of the ATO’s administration when the
overall timeframe is considered.
7.9
Consequently, the Committee is not convinced
that the ATO is on firm ground in imposing interest and high penalty charges
retrospectively on taxpayers in order to compensate the revenue, when its
failure to provide adequate certainty was partly the cause of the tax shortfall
stemming from mass marketed arrangements. The Committee intends to explore this
issue further in its final report.
Senator Shayne
Murphy
Chairman
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