Minority Report
Preface
1.1
The Committee has already issued two reports on
the Mass Marketed Tax Effective Schemes fiasco.
1.2
The first – the Interim Report (June 2001) – was
highly critical of the ATO’s management of and approach to the mass marketed
schemes affair.
1.3
The second report (September 2001) proposed an
alternative resolution and settlement option with a view to allowing taxpayers
and the ATO to resolve their differences without proceeding to court.
1.4
The recommended resolution and settlement was
proposed following consultations with taxpayers and the ATO.
1.5
Despite giving a commitment to respond to the
second report promptly, the ATO are yet to advise the Committee of their views
on the recommendations.
1.6
Many of the issues canvassed in the Interim
Report have become clearer and only add to the concerns initially raised by the
Committee.
1.7
The ATO is the manager of Australian Taxation
Law and as such is required to interpret and apply those laws – fairly and
equitably.
1.8
Under the self-assessment tax system, taxpayers
are required to abide by the law and the ATO view of the law, although they do
have a right to challenge the ATO view in the Courts.
1.9
This type of system places great onus on the ATO
to ensure clarity in both the law and their view of the law.
1.10
The ATO’s task can be made more difficult by
government policy objectives, which may impact on the application of the law.
1.11
The mass marketed schemes debacle is a good
example of how things can go horribly wrong where a lack of clarity and action
exists.
1.12
There is no question that ATO administrative
practices have been found wanting on these matters for some time.
Background
1.13
Evidence to the Committee clearly shows that the
ATO was aware of problems associated with claimed deductions in mass marketed
schemes as early as 1982.
1.14
Indeed the ATO audited some twenty-eight schemes
between 1987 and 1997. Fourteen of those audits were completed by 1994 with
nine schemes having deductions disallowed primarily on the basis of round robin
non-recourse financing.
1.15
As can be seen from the table below, scheme
deductions grew at an exponential rate from 1993 to 1998, but it is worth
noting significant increases in 1987 and 1988.
Table 1:
Increasing Scheme Deductions 1987-1998
YEAR
|
SCHEME DEDUCTIONS $M
|
1987
|
13
|
1988
|
113
|
1989
|
73
|
1990
|
2
|
1991
|
7
|
1992
|
54
|
1993
|
54
|
1994
|
176
|
1995
|
288
|
1996
|
666
|
1997
|
1095
|
1998
|
960
|
Source:
ATO Supplementary Submission No. 845B, Attachment 1[1]
1.16
Furthermore, historical evidence shows that both
Governments and the ATO had concerns over claimed deductions associated with
mass marketed schemes.
1.17
A press release from the Federal Treasurer as
far back as the 30th December 1982 shows that the very problem used by the ATO in 1997-1998 to support
retrospective action was a concern then. The press release says:
“On 30 December 1982 I announced that the Commissioner of
Taxation, who has independent statutory responsibility for administration of
the income tax law, had decided to take assessing action under the general
anti-avoidance provisions of Part IVA of the Income Tax Assessment Act to
disallow claims arising from participation in certain film production
arrangements where deductions are substantially leveraged by associated loan
arrangements”(emphasis added).
1.18
Moreover, during the 1980s the media regularly
featured articles on tax effective investments. These articles, as shown below,
clearly demonstrate that knowledge and concern about such activities did exist.
1.19
The Australian,
March 1981:
“Several schemes involve costs related to special loans to
investors which are structured so as to induce them into projects at no real
financial cost to themselves”(emphasis added).
1.20
The Financial Review, December 1984:
“Even the Federal Government implicitly recognises the extent of
the investment distortion caused by high marginal tax rates by two blatant
examples of tax shelters for high marginal tax payers – the film tax
deductibility rort and the licensed management investment companies (MICs)...In
recognition of these factors the previous Government introduced what may have
been seen by some as extremely generous tax concessions so that the industry
could be funded through the tax system and by direct government handouts.”
1.21
Furthermore, in relation to the history of
agribusiness investments in particular, the same article went on to say:
“The combination of tax shelter and capital gain has produced
widespread interest in a variety of primary industry pursuits. The conventional
route is to buy a rundown farm, build it up with tax deductibility investments
over some years, sell it for a capital gain during a good season. There has
been investment in angora goats, avocadoes, guava fruit, mangoes, macadamia
nuts, afforestation, jojoba nuts, the babaco fruit from Ecuador, lychee fruit,
blueberries or the pepino.”
1.22
The National Times, 7th of June 1985 said:
“ PAY TAX OR GROW A FOREST? – very attractive taxation
benefits.”
1.23
Added to that was the 1991 statement by then ATO
Commissioner Boucher, which said in part,
“I would strongly recommend that in order to be assured of their
tax position, investors obtain detailed and comprehensive advice on the full
tax implications from promoters or their own advisers prior to committing
funds.”[2]
1.24
In many cases the financing structures designed
for schemes during the 1980s were exactly the same, and had the same
objectives, as those now subject to retrospective action. That is, they aimed
to limit the investor’s risk, leverage a tax deduction, and by doing so make
the overall investment much more attractive.
1.25
Given the concerns raised by the Federal
Treasurer in 1982, ATO statements and numerous newspaper articles, it is
difficult to accept the ATO argument that it lacked information on or knowledge
of Mass Marketed Schemes and their alleged abusive features when they emerged
during the 1990s.
Effective Signalling
1.26
The ATO maintains that its concerns about
abusive features in schemes were obvious to the market place well prior to the
prolific growth in claimed deductions in the years 1993-1998.
1.27
However, evidence would suggest differently with
the ATO’s position being ambiguous at best. This is highlighted by the ATO
approving thousands of 22ID applications, and issuing a number of Private
Binding Rulings which approved the deductions sought in schemes now subject to
the application of Part IVA. Moreover, a pre ruling consultative document
(PCD9) issued by the ATO in December 1995 and claimed by them to represent a
signal also fails the test of providing clarity and certainty to taxpayers.
1.28
This failing was pointed out in a 1996 internal
ATO report which focused on the very issue of limited recourse financing. The
report stated:
“The PCD does not significantly address the limited recourse
financing issue other than with respect to early termination of the loan and
the application of section 82KL.”
1.29
As stated earlier, the ATO did conduct some
audit activity in the late 1980s- early 1990s. The following list outlines some
of the schemes audited by the ATO and the reasons their deductions were
disallowed.
Scheme
24 – Viticulture / Horticulture Scheme
1987
- Part IVA Application
- Investors were not carrying on a business
- Expenditure by investors was of a capital nature
- Arrangement was a sham
- Non-Recourse Financing
- Round-Robin Transactions
Scheme
25 – Viticulture / Horticulture Scheme
1988
- Part IVA Application
- Round-Robin Transactions
- Non-Recourse Financing
Scheme
21 – Viticulture / Horticulture Scheme
1989
- Part IVA Application
- Taxpayers were not carrying on a business
- Taxpayers were passive investors
- Borrowers borrowed 100% of the funds from an in-house financier
Scheme
28 – Crayfish Breeding
1989
- ATO disallowed deductions claimed
- Financing arrangements were considered artificial flowing in a round-robin between the in-house
finance company, the borrower and the manager.
Scheme
26 – Afforestation Scheme
1992-93
- Scheme had a mixture of full and non-recourse loan arrangements
- Non-Recourse loan element was not allowed
Scheme
22 – Viticulture / Horticulture Scheme
1993-94
- Part IVA Application
- Significant artificial management fee
- Income as a result of round-robin and non-recourse financing
- Whole scheme based on round-robin and non-recourse financing
1.30
Again the question arises that following the
disallowance of deductions in nine out of fourteen schemes on the basis of
non-recourse finance and large upfront fees, why didn’t the ATO issue a tax
ruling? Why did the ATO allow schemes with exactly the same non-recourse
financing and fee elements to continue throughout the 1990s to the extent that
so called non allowable deductions rose to $1.5 billion in 1998/1999? Finally,
why did it take until 1998 before any decisive action was taken?
1.31
Across the board evidence presented to the
Committee suggests that, at best, confusion reigned supreme and, at worst, the
management and application of the tax laws of this country was downright incompetent.
1.32
What is also clear now is there has been no
consistent application of Part IVA, and the obligation on the ATO to provide
certainty and security for taxpayers has not been met in many areas. A
demonstration of such inconsistency arises in the Infrastructure Bonds and Unit
Trusts areas.
Infrastructure Bonds
1.33
During the early 1990s the Federal Government
adopted a number of legislative and policy initiatives through the
establishment of Infrastructure Bonds. Combined with generous legislative based
tax concessions the objective was to facilitate and promote greater investment
in large infrastructure developments. While essentially based on good policy
and sound initiatives, infrastructure investments were viewed as a favourable
way to invest, as the adoption of certain financing arrangements or structures
allowed not only for a leveraged tax deduction but also a limited level of risk
to the investor.
1.34
The structure and financing arrangements of
infrastructure bonds were provided to the Committee by the ATO and illustrated
by Figure 1.[3]
![Figure 1: The structure and financing arrangements of infrastructure bonds](/~/media/wopapub/senate/committee/economics_ctte/completed_inquiries/2002_04/massmark/third_report/d01_1_jpg.ashx)
1.35
As Figure 1 shows the financing structures
developed to market infrastructure bonds to retail investors are not
dis-similar to those employed within the mass marketed area. In essence the
retail investor took out a non-recourse loan, which achieved two objectives.
Firstly, the investor could not only limit their overall risk but claim an
immediate tax deduction. Secondly, the loan in many instances would have been
paid out through proceeds often derived after the completion of the project;
for instance, from tollgate revenue on a freeway project.
1.36
Many large organisations were involved in
Infrastructure Bonds including, for example:
The Commonwealth Bank
1.37
The Commonwealth Bank’s ‘Infrastructure
Investment Package for Develop Australia Bonds’ is one such example worthy of
investigation. In their Offering Memorandum dated the 23rd of April
1996 the Commonwealth Bank stated:
“The loan provided by CBA (Commonwealth Bank of Australia) is
non-recourse to the investor”.
1.38
The investment was constructed in such a way as
to provide an investor with:
“an entitlement to a tax deduction for management fees incurred
on the investment and interest on the loan”.[4]
1.39
Furthermore, the Offering Memorandum went on to
say:
“For a cash outlay of $70,048 by 14 June 1996, an investor
should be able to obtain a tax refund of $80,048”.
1.40
The last point is a clear issue of leveraging
which should surely bring into question the ‘dominant purpose’ of any investor.
However, as far as I am aware not one investor in these investments was ever
issued with an amended assessment – similar to the current ATO action – on the
grounds that their dominant purpose was to obtain a tax deduction or that the
loan arrangements were designed to limited the investor’s overall risk.
Legal and General
1.41
Another relevant example is an offering from
Legal and General Financial Services, in relation to the following products:
‘Legal and
General Infrastructure Fund 1996-2’;
‘Legal and
General Infrastructure Fund 1996-3’;
‘Infrastructure
Investment Offer’; and
‘Taxation
Advice – Individual Investors’
1.42
Advice on these products from Price Waterhouse,
dated 27 May 1996, stated:
“The financing facility will be repaid from the redemption
proceeds of the units in the Infrastructure Funds and the expected
non-assessable distribution of $25,000 per unit made to the unit holders. The
financing facility will be non-recourse to the investors.”[5]
1.43
As mentioned previously, the ATO has
consistently argued that in many instances the nature of the financing
arrangements in the current mass marketed area resulted in little if any risk
to the investor and hence warranted the application of Part IVA. However, both
the Commonwealth Bank and Legal and General Infrastructure investments sought
exactly that – to limit the investors exposure to risk through the use of
non-recourse financing. It could also be argued that, in both these cases, high
fees were set in order to leverage a substantial tax benefit for the investor.
1.44
There also appear to be inconsistencies in the
ATO’s treatment of infrastructure bonds relative to mass marketed schemes on
the issue of their underlying commerciality. First Assistant Commissioner Kevin
Fitzpatrick, in response to questions put to him by the Committee in regard to
Infrastructure Borrowings, said:
“Infrastructure borrowings are distinguishable from mass
marketed tax schemes. In the latter, round robin, non-recourse financing
arrangements have the effect that little of the funds find their way into any
productive activity.”[6]
1.45
If, as Mr Fitzpatrick alludes, the main reason
for the ATO applying Part IVA to mass marketed schemes is the fact that money does
not go into ‘productive activity’, why then have commercially successful
schemes which export their products world wide and which pay large amounts of
company tax to the Commonwealth, had all of their investors’ claimed deductions
disallowed under Part IVA?
1.46
It is farcical for Mr Fitzpatrick to promote
such an argument. If it were the case that the ATO assessed the application of
Part IVA on the grounds of commerciality or that funds actually find their way
into productive activity, then surely it would have been better for the ATO to
have ‘sifted the wheat from the chaff’ in regard the mass marketed schemes
sector. Instead, the ATO has issued amended assessments to any investor or scheme
based not on commerciality but on the financing and fee structures.
Macquarie Bank – Geared Equity Investment Portfolio
1.47
Further inconsistencies in ATO action are
evidenced by a number of Macquarie Bank Investment portfolios. Macquarie’s
‘Geared Equity Investment’ is one such example. In the first instance, the
promotional material for the investment clearly shows investors that the
investment portfolio is ‘APPROVED’ by the ATO with a Product Ruling (PR
2000/70).[7]
More importantly though, the promotional material says:
“A Geared Equities Investment from Macquarie is an ideal way to
build wealth over the long term through the share market. Macquarie will lend
your clients 100% of the value of their selected portfolio...Best of all, your
clients don’t need to take any capital risks...Macquarie offers your clients 100%
protection against the risk of losing their loan capital, giving them maximum
peace of mind.” [8]
Macquarie Bank – Apollo Trust
1.48
Macquarie Bank has another investment
highlighting similar anomalies and complexities in the ATO’s administration of
the tax law. The Apollo Trust is an investment which allows investors to access
returns subject to the performance of hedge funds. With the Apollo Trust,
Macquarie offers investors two loan facilities, of which one, a ‘Capital
Protected Loan’:
“fully protects themselves (the investor) against any fall in
the value of their investment capital (provided their units are not redeemed
before maturity).[9]
1.49
Furthermore, in relation to risk specifically,
Macquarie Bank’s promotional material goes on to say:
“The structure of the investment aims to offer you an
opportunity to increase the returns from your investment portfolio, while
reducing your overall portfolio risk”.[10]
Concluding remarks
1.50
In assessing these issues it is understandable
why investors caught up in the mass marketed agribusiness investment fiasco
feel the ‘big end of town’ has gained preferential treatment from the ATO. This
point has further credence when the ATO themselves point out that 97 per cent
of all investors now issued with amended assessments in relation to the Mass
Marketed schemes area – with associated penalties and interest – sought the
advice of a tax agent in making their claims.[11]
Questions relating to what actually constitutes due diligence by the ATO need
to be seriously addressed, particularly given the onus placed on individual tax
payers by a self assessment tax system. With this to one side, the point still
remains that the financing structures used by many of the current scheme designers
have been utilised for over 20 years with only spasmodic and inconsistent
application of Part IVA.
1.51
The reasons for the ATO applying Part IVA are
complex but are summarised in a speech by Second Commissioner Mr Michael
D’Ascenzo to the Taxation Institute of Australia on 22-24 March 2001. He argued
that there are a number of aspects which trigger the application of Part IVA
namely:
- Grossly
excessive/inflated fees;
- The
mechanisms employed to discharge investor liabilities;
- Financing
arrangements;
- Investor
business risk;
- Source
and amount of cash funds applied to the underlying activity;
- Commerciality
of the project; and
- The
financial position of the promoter and promoter related entities.
1.52
Similarly, Mr D'Ascenzo
made the following comment before the Senate Committee hearings on 23 August
2001:
“Again, the existence of non-recourse finance is a factor that
we take into account. We make it very clear that, when we see non-recourse
financing, the level of risk associated with the activity starts to give rise
to whether or not what you are really after is a tax deduction.”[12]
1.53
It is undoubtedly the case that a number of
schemes and investors now having Part IVA applied, entered into non-recourse
financing arrangements. This subsequently leveraged a tax deduction to the
investor and limited their overall financial risk. However, so did a number of
schemes marketed in the mid to early 1980s.
Infrastructure Borrowings and Part IVA
1.54
On the 14th of February 1997 the
Federal Treasurer Peter Costello issued a statement, which said in part:
“ a number of measures [are being introduced] to prevent abuse
of the infrastructure borrowings (IB) taxation concession instituted by the
Labor Government, which if left unchecked would pose a major threat to the
revenue.”
1.55
At the time IBs approved by the Development
Allowance Authority (DAA) had an estimated value in excess of $4 billion
dollars. According to the Treasurer, the DAA had been monitoring applications
and found that:
- schemes being proposed are exploiting the concession for tax
minimisation schemes; and
- these additional taxation benefits are principally being accessed by
financial packagers and high marginal tax rate investors.
1.56
Essentially, a legitimate process designed to
encourage infrastructure development was being leveraged and aggressively
marketed to such an extent that the Treasurer felt legislation had to be
implemented to curb the abuse. The Treasurer alluded to this abuse in the same
Press Release saying that:
“As a result of this transaction (i.e the re-engineering of the
accepted model), for an investment of $36,000, they (the investor) get $85,000
worth of tax deductions.”
1.57
The fact that Part IVA was never applied to
infrastructure investments, despite such evidence of aggressive leveraging,
must seem remarkably unjust to those investors in mass marketed schemes who
have had deductions disallowed and Part IVA penalties applied. This is
particularly so, given that many invested in projects that are still operating
and in many instances making good profits.
1.58
From a legal perspective the abusive
developments of IBs and the associated concerns raised by the Treasurer bring
into question the ‘dominant purpose’ of investors. Did they invest to see
infrastructure projects developed or to gain a tax deduction? This question is
answered by the Development Allowance Authority’s findings that IB schemes were
being exploited for tax minimisation purposes and taken up by high marginal tax
rate investors.
1.59
Lastly, it could be argued that the abusive
concerns in regard to IBs raised by the Treasurer himself in 1997, trigger all
7 points which facilitate the application of Part IVA, as identified by Second
Commissioner Mr Michael D’Ascenzo in his speech to the Taxation Institute in
2001. Why then were the Government and the ATO content – in the case of IBs –
only to implement legislation to curb tax abuse but not address whether Part
IVA applied as it does in the case of mass marketed schemes?
1.60
In fact, First Assistant Commissioner Kevin
Fitzpatrick, in written evidence to the committee on June 15 2001, said that in
one particular IB scheme, Part IVA did apply. He said:
“I am advised that we obtained advice from Senior Counsel in
respect of one [IB] project in which counsel concluded on the facts of that
case that there were reasonable prospects for the operation of Part IVA to some
of the retail investors.”[13]
1.61
To my knowledge, however, the ATO did not apply
Part IVA penalties to any of the retail investors alluded to by Senior ATO
counsel. Furthermore it must be noted that given the sheer size of many
infrastructure projects, one IB scheme alone could involve hundreds of millions
of dollars worth of investment capital. Again why was Part IVA not applied
either to scheme designers or retail investors in this instance? This argument
gains momentum when one considers the fact that investors involved in IBs could
in most instances be considered ‘sophisticated investors’, unlike the great
bulk of investors in the mass marketed schemes.
1.62
In many respects the inconsistencies in
treatment between IBs and mass marketed schemes goes to the heart of the self
assessment tax system and what the ATO constitutes as due diligence.
MMS and Part IVA
1.63
The inconsistencies in applying Part IVA have
engendered a serious public image problem for the ATO, as well as confusion in
the market. For instance, Colin Thomas from Hudson Croft and Thomas Accounting
firm in Sydney argued in evidence to the Committee:
“In my view no tax professional with specialist knowledge in
this area believed that Part IVA would apply to genuine business transactions
where limited recourse or indemnified loans were used to finance the
transactions. This is on the basis that the loans were properly documented and
the funds flowed to evidence the transactions. The existing rulings and tax
cases gave a clear indication.”[14]
1.64
In support of this view Robert K. O’Connor QC
argued in evidence provided to the Committee that:
“In my opinion, the ATO failed to ensure that new laws were
introduced to amend the Tax Act to overcome tax schemes. At law, the Courts had
held that round-robin transactions are valid. Similarly, non-recourse funding
was accepted in Lau’s case (1984) 84 ATC 4929.”[15]
1.65
Other aspects that need to be raised in regard
to the inconsistencies and vagueness of the ATO’s action are the following.
1.66
In October 2001, the Committee asked Assistant
Commissioner Peter Smith why Part IVA was never applied to a plantation timber
company which, in offering investors investment opportunities, clearly
exhibited a round-robin financing structure.
1.67
In answering the Committee’s concerns Mr Smith
said:
“In considering the application in respect of the year ended 30
June 1997, it was evident that the loans involved a round robin arrangement but
due to the size of the fees and the full recourse nature of the loans this was
not considered to be a problem at the time.”[16]
1.68
According to tax ruling TR 2000/8 a round robin
arrangement “includes any mechanisms employed to effect the discharge of
liabilities...”.[17]
Furthermore TR 2000/8 questions the use of round robin arrangements by asking:
“Are mechanisms of this kind commercially explicable and not part of
arrangements to inflate, or artificially create, tax deductions?”[18] In conclusion, the answer
given by Mr Smith raises the question that if the up-front fees had been
higher, or, in the ATO terms, were ‘Grossly Excessive’, would the ATO have
applied Part IVA in regard to this project? The answer to this question is
clearly NO and the following section demonstrates why.
Grossly Excessive Fees
1.69
The ATO has been repeatedly asked by the
Committee to verify what it considers to be grossly excessive in regard to
commercial rates and fees described in TR 2000/8. The Committee has also asked
the ATO to explain how it determines, through Product Rulings, the validity of
claimed tax deductions and, therefore, how it assesses the question of Part
IVA’s application and the investors’ dominant purpose. The Chair of the
Economics Committee asked Senior ATO representatives:
“I would specifically like to know how you determine what are
commercial rates, fees and charges.”[19]
1.70
Mr Bersten (former Deputy Chief Tax Counsel of
the ATO) answered:
“Senator if I can refer you to paragraph 134 of the ruling
itself, it says: A commercially realistic rate is usually fixed by looking at
fees charged by bona fide operators in respect of the actual activity and range
of services to be provided.”[20]
1.71
In addition, Mr Peterson (Assistant Commissioner
for Small Business) pointed to such things as ‘a fair margin’, or ‘what
you would normally expect to find in the market place’ and so forth.[21] However, in discussing the
level of management fees and up-front charges and the associated deductibility
of these fees, Mr Peterson emphasised that the ATO assesses such fees within a ‘fairly
broad band width’.[22]
1.72
This ‘band width’, in regard to vineyard
investments, according to Mr Peterson:
“is probably anywhere like several hundred thousand dollars.”[23]
1.73
In other words, the ATO will allow claimed
deductions for an investment in a vineyard anywhere from the average fee, let’s
say $40,000 to $340,000!
1.74
Of greater concern was Mr Peterson’s
suggested ‘band width’ for an investment in Paulownia plantations. He
argued that the band width acceptable in this area was as narrow as $500 or
$600.[24]
1.75
However, the ATO has issued Product Rulings for
Paulownia plantations with subscriptions ranging up to $52,500 per hectare,
which is clearly outside the band width set by the ATO. This amount would also
seem to fall into the grossly excessive fees category, as it in no way reflects
normal market rates.
1.76
Given that the ATO has, on numerous occasions,
used ‘grossly excessive fees’ as a justification for applying Part IVA, it is
puzzling as to why they have issued Product Rulings for projects, such as
Heritage Paulownia, which appear to have fees which exceed the market norm.
1.77
Moreover, it demonstrates that failings continue
to exist in the ATO when it comes to dealing with mass marketed tax effective
schemes.
1.78
It also highlights the major failings that
existed within the ATO’s risk assessment process in regard to earlier scheme
deductions now the subject of Part IVA action.
Additional Concerns
1.79
Throughout this saga the ATO has sought to lay
the blame squarely at the feet of promoters, advisers, scheme developers and
investors. However, and as previously stated, the evidence simply does not
support that position.
1.80
The ATO and some members of the Committee
promote a view that to allow deductions for investors involved in mass marketed
schemes to stand would be unfair on the rest of the community. There are two
things that need to be said about that view.
1.81
Firstly, the general community were never
offered the opportunity to participate but had they been offered, most would
have probably taken the offer given the approach taken in the promotion of them
and the type of professional people involved in the process.
1.82
The reality is, though, that the great bulk of
the community does not have the level of income necessary to attract these
types of investment offers.
1.83
It is my view that this approach is simplistic
and seeks to avoid the real issue behind the problem.
1.84
The culture of tax professionals and taxpayers
has been drawn more into focus as a result of the ATO’s actions relating to
mass marketed schemes. A number of issues need to be considered in this
context.
1.85
As stated in the main report, the ATO has turned
its attention to the attitudes of the culture of tax professionals.
1.86
In speeches to the community of taxation
professionals, Mr Carmody and other ATO officers have asked that community to
consider its role in maintaining the integrity of the tax system and have asked
for its help in monitoring and controlling the activities of aggressive tax
planners.[25]
1.87
In addition, a speech to the Taxation Institute
of Australia by Assistant Commissioner Michael O’Neill concluded with the
following exhortation:
“If taxation is the price we pay for civilisation, we tax
advisers, lawyers and accountants, each have a key role in advancing our
community. Your advice will assist clients when considering the legal and
financial benefits of investing in year end schemes.”[26]
1.88
Mr Carmody told the Committee that:
“In my view, the community’s tax system would be best protected
by others supporting the tax office in meeting this objective. In particular,
the tax profession, which is at the coalface on a day-to-day basis, could
provide a valuable role in bringing developments to our attention. There are
mixed views on this in the profession, some preferring the view that their only
responsibility is to their client and that this would be compromised by taking
a community responsibility. This view raises for me a number of
responsibility issues that are worthy of considering. In saying that, is it
saying that tax professionals know or knew the schemes were ineffective but,
because the tax office had yet to act, they would recommend our support claims
made for them? Otherwise, why not make them available to us? If so, is there no
responsibility to the community for the integrity of the tax system, even when
they know or expect the arrangements will not pass muster under the law?” (emphasis
added)[27]
1.89
Additionally, Mr Carmody told the Institute of
Chartered Accountants:
“It is one thing to approach an interpretation of the law from
the perspective of advising a client, particularly where the whole objective is
to minimise tax payable. It is another thing to approach the law from the
perspective of a responsibility to the community for the integrity of the law.”[28]
1.90
The statement in this last paragraph is
interesting in that it seems to seek to confuse the responsibility of the tax
professional to their client and an act of breaking the law.
1.91
Under the self-assessment tax system, it is the
responsibility of the tax professional to advise their client of every
deduction to which the client is legally entitled – that after all is what they
are paid for.
1.92
Responsibility to the rest of the community and
the integrity of the law can only be at issue when the tax professional advises
the client to break the law.
1.93
These are clearly two different things and it is
simply not good enough for the ATO to endeavour to muddy the water by mixing
the two together.
1.94
If the Commissioner and the ATO believe that tax
professionals have knowingly advised clients to break the law, then they should
prosecute them or support action by taxpayers for breach of duty against the
tax professionals so involved.
1.95
The self-assessment system also allows for a
reassessment of a taxpayer’s affairs for up to four years in general terms and
up to six years if the ATO deems that Part IVA applies and indefinitely in
cases of fraud. Where the law is clear and concise, these measures should
suffice for the ATO to collect the revenue to which it is entitled.
1.96
Any effort to employ morality as a solution to
the interpretation of tax law is doomed to failure as has been witnessed over
the life of the self-assessment tax system. Two witnesses to the Committee made
important points in this regard.
1.97
Mr Robert O’Connor QC stated:
“If morality had to be taken into account in interpreting the
meaning of the law, whose morals should be applied? The answer to what the law
is would vary and depend on the morals of the particular person giving the
opinion.”[29]
1.98
Mr Richard Gelski of Blake Dawson and Waldron
said:
“...not only is it our obligation to advise on the law as it is –
we can be sued if we do anything else – but if we fail to advise a client that
a transaction can be carried out in a more tax effective manner we can be sued
for negligence by that client.”[30]
1.99
The Committee Report draws on a submission by Mr
Michael de Palo from Deloitte Touche Tohmatsu as contrast to the above
views. In my view, Mr de Palo’s comments are not at odds with these remarks,
but represent another way of stating the same thing.
1.100
Moreover, no number of reviews into the nature
and extent of the public interest responsibility that tax professionals should
adopt for the integrity of the tax system will adequately replace clarity in
the law.
1.101
Clarity in the law is the key solution, and
where clarity does not exist then it should be sought or determined by the
Courts or legislation.
1.102
In the case of tax effective investment
products, the law should be amended to require ATO approval for the products
prior to their public marketing and sale.
1.103
If this had been the case in the past the thousands
of investors now caught in the ATO action would not be in that position and at
least $1.5 billion of tax revenue would not be at risk.
Summary
1.104
As has been highlighted in earlier parts of this
report, abusive tax activity is not a new phenomenon and the ATO has had plenty
of experience in dealing with it.
1.105
What is interesting is how the ATO have dealt
with past problems. In areas such as Unit Trusts and Infrastructure Bonds, the
ATO, Government or both moved to end abusive activities but in both cases they
did it prospectively, not retrospectively.
1.106
When this was raised with the ATO, they argued
there were important differences between Unit Trusts and Infrastructure Bonds
and Mass Marketed Schemes.
1.107
The ATO stated that in relation to afforestation
schemes, the ATO public position was that deductions would not be allowable if
Part IVA applied, but that it had not made any comparable statement in respect
of Unit Trusts and as such a clear signal existed in one area and not in the
other.
1.108
The ATO also stated that the prospective
decision on Unit Trusts was based on the arrangements being implemented in line
with the information provided to the ATO on which it based its advanced
opinions.
1.109
In contrast, the ATO allege that in the case of
Private Binding Rulings for Mass Marketed Schemes, the promoters neither
provided all of the facts nor implemented the arrangements according to the
facts presented.
1.110
However, the ATO never produced any evidence to
support these claims and it was remiss of myself and the Committee not to have
pursued this matter further as it is fundamental to the equitable application
of our tax laws.
1.111
Moreover even without greater scrutiny, the ATO
position is found wanting. For example, in the case of one Private Binding
Ruling issued to an investor in Main Camp Tea Tree Oil, the investor provided
what can only be considered as all relevant information, including information
that the investments involved limited/non-recourse financing. Indeed, the
applicant asked the ATO if they needed any further information to which they
responded in the negative.
1.112
Moreover, if the ATO felt that it didn’t have
all the relevant information, why didn’t it ask for it?
1.113
Why didn’t the ATO – given their alleged concern
about financing arrangements - specifically ask about them?
1.114
To try and hide behind a position that a clear
signal existed in one area over another simply because you have mentioned Part
IVA does not hold water.
1.115
There is no requirement for the mentioning of
Part IVA for it to apply, indeed Part IVA is there for the purpose of dealing
with breaches of the tax law, the “general anti-avoidance provision”.
1.116
In addition, I doubt the ATO ever investigated
all of the arrangements associated with Unit Trusts to determine whether or not
they were implemented exactly in accordance with the advance opinions issued.
1.117
As is cited earlier in this report on
Infrastructure Bonds, the government took prospective action in bringing to an
end the rorts occurring in that area, which given the nature of the abuse as
highlighted by Treasurer Costello, makes the ATO action in the Mass Marketed
area even more questionable. In my view, it smacks of the old ‘Animal Farm’
theory.
Concluding Remarks
1.118
There is no doubt that many features of the Mass
Marketed Tax Effective Schemes were tax abusive and needed to be stopped.
However there is also no doubt that such activities developed and flourished as
a result of identical or similar practices in other areas of the market place.
Add to that a systemic failure by the Tax Office to clarify their position ‘at
law’ and therefore their application of the law, and you have a recipe for
disaster which is what happened.
1.119
One could be forgiven for concluding that the
ATO’s action in the Mass Marketed area had more to do with the Government’s
February 1997 decision in regard to Infrastructure Bonds than anything else! It
is also a fact that – from a historical perspective - where the ATO has not
formulated a view on the application of the law, or where the ATO or Government
have changed their view in regard to particular taxpayer action, they have
consistently acted prospectively!
1.120
The ATO and its Commissioners have an obligation
under the Taxpayers Charter to treat all taxpayers equally and equitably, and
it is my view that this obligation must be upheld at all cost. It is also my
considered view that the ATO is seeking to treat one group of taxpayers (the
Mass Marketed group) in an entirely different fashion to those involved in the
same or similar activities in other areas.
1.121
Consequently the ATO’s action should be
condemned and viewed as unjust, and the Government should request the ATO to
refrain from taking any further action against these taxpayers. The ATO’s
action goes to the very heart of the integrity of the tax system and if allowed
to continue, will only increase the distrust in both the tax system and ATO now
so evidently clear.
The Managed Investment Industry – Product
Rulings
Protecting the Commonwealth Revenue
1.122
Over the past 22 years threats to the tax
revenue have operated in various forms, with the use of certain financing
structures and high management and lease fees perhaps the most prominent
examples. It is now clear that high wealth individuals have consistently been
able to gain large net cash benefits through a range of varied investments by leveraging
tax deductions through the use of limited and non-recourse financing.
1.123
Such activities occurred in the issuing of
Infrastructure Bonds (IBs), Unit Trusts as well as Mass Marketed Agribusiness
and Franchise schemes. Of most interest is the fact that in 1997 the Government
moved to block abuses in the IB area where investors were leveraging large tax
benefits and in some instances gaining a net cash benefit after tax. Similarly,
in 1998 the ATO moved to end exactly the same problems evident in the MMS area.
It is clear that limited and non-recourse financing and excessively high
management and lease fees were the more common tools used for leveraging large
tax deductions.
1.124
In June 1998 the ATO introduced the Product
Ruling system which was designed to better protect the revenue base while
providing greater certainty for taxpayers. Whether this has been achieved is
highly questionable and is an issue now canvassed by this report.
Commissions
1.125
Even though the Corporations Act clearly
stipulates that commissions must be disclosed this area of corporate governance
still exhibits many transparency related concerns. The Australian Securities
and Investment Commission (ASIC) told the Committee that out of 91 prospectus
documents investigated by ASIC:
“30%
did not disclose the commissions payable or the percentage of commission
payable.”[31]
1.126
A further illustration of this is found in a
2000-2001 Prospectus for one of Australia’s largest plantation timber companies
where the percentage or level of commissions paid by the company to associated
entities is unclear. The prospectus says:
“In addition, from their own funds, the responsible entity or
other companies within the same group of companies might pay additional fees to
licensed dealers in securities who have provided particular assistance of an
administrative or promotional nature in connection with the projects.”[32]
1.127
It is difficult to sustain a legal argument that
this vagueness over fees breaches Section 849 of the Corporations Act. However,
it does go to the heart of mandatory disclosure and the right of an investor to
know exactly how the responsible entity spends or uses their money. The
investor should be entitled to know exactly how much the company is paying in
commissions to outside entities. Is it 10% or 25% in total? Only then can an
investor make an informed judgement as to how much of their money is actually
going into the project.
Recommendation
1.128
Legislative changes need to be implemented which
force responsible entities and directors etc to clearly disclose the total
amount of commissions payable. It is clear that in a number of circumstances
the softer parts of the law are exploited by promoters to hide the true extent
of fees and commissions paid.
Large Up front Fees
1.129
Concerns with disclosure and transparency are
similarly evident with the use of large up-front management and lease fees by
companies. In the first instance, while classified as ‘Management and Lease
fees’, close scrutiny shows that in reality only a very small proportion of the
up-front fee exhibits a management and lease fee component. In fact, a
significant proportion of the fee – sometimes in excess of 40-50% – is used by
the company to purchase land or other assets to establish the project. This is
rarely disclosed to investors and raises a number of serious concerns.
1.130
In regard to blue gum plantations, some
plantation companies charge investors an up-front fee in excess of over $9,090
per hectare. Credible research from Government agencies such as the Department
of Conservation and Land Management (CALM) in Western Australia, and academic
departments such as ANU Forestry, show that it should cost no more than about
$3,000 (maximum) to establish one hectare of blue gums on leased land over a
10-12 year rotation period.[33]
1.131
Allowing large up-front management and lease
fees to be charged poses a number of problems. In the first instance, there is
significant drain on the Commonwealth revenue by allowing scheme promoters to
classify the funds contributed by investors as management and lease fees, when
in most instances nearly half of the money is used to purchase land as a
capital item. Consequently scheme managers use someone else’s money in the
guise of management and lease fees, to buy land which they can sell and take a
profit.
1.132
In essence the whole arrangement is an
inefficient mechanism by which the Commonwealth helps facilitate investment and
therefore is not dissimilar to the concerns and comments made by the Treasurer
in 1997 when putting a stop to the abuses found with IBs. On this point the
Treasurer said:
“Now,
I want to make it clear that the Government is not being critical in any sense
of the projects. The vice, however, with infrastructure borrowings is that the
taxpayer is not getting value. This is a very expensive way of getting money
into those projects. It’s tax expensive because instead of, as was the original
plan, the borrower foregoing their right to have a tax deduction and the tax
foregone by the borrower equalling the tax benefit received by the lender on
some kind of symmetric one-to-one ratio, you’re getting in these sorts of
examples ratios of one-to-seven or higher. That is, the benefit to high
marginal taxpayers in terms of their ability to save themselves tax is extreme
multiples of the tax rights foregone by the borrowers. What that means is that
this is not an effective scheme for taxpayers.” [34]
1.133
The concern with this arrangement should, in
theory, be picked up by the Managed Investments Act. However, scheme promoters
are able to smartly side step the legislative provisions. Under the MIA Act any
land bought by the scheme or through investments by investors in the scheme
should be classified as ‘Scheme Property’. However, scheme managers (ie, the
responsible entity) are able to circumvent Section 601 FC, Duties of responsible
entity, of the MIA Act. Section 601 FC states:
- In exercising its powers and carrying out its
duties, the responsible entity of a registered scheme must:
- ensure that scheme property is:
- clearly identified as scheme
property; and
- held separately from property of
the responsible entity and property of any other scheme.
Diagram 1
![As per diagram 1, to circumvent Section 601 FC the responsible entity – or directors of the parent company running the scheme – divert investor funds into a sister company, of which the Directors of the parent company are themselves the principal shareholders. The directors then use these funds to buy land to establish the project.](/~/media/wopapub/senate/committee/economics_ctte/completed_inquiries/2002_04/massmark/third_report/d01_2_jpg.ashx)
1.134
As per diagram 1, to circumvent Section 601 FC
the responsible entity – or directors of the parent company running the scheme
– divert investor funds into a sister company, of which the Directors of the
parent company are themselves the principal shareholders. The directors then
use these funds to buy land to establish the project. While technically the
company complies with the law and there is no scheme property, the ethics of
the transaction are questionable because of the lack of transparency. In most
instances, it is nearly impossible to find acknowledgment of this process in
any prospectus. Investors are therefore unlikely to be aware that up to 50% of
their funds are going into the purchase of land which they do not own or have
any control over. Consequently, the tax system is essentially paying for scheme
managers to accumulate land assets which only they own.
1.135
The ability of scheme managers to circumvent
legal obligations in this manner raises concerns about the adequacy of the
rules for disclosing what a company does and does not do with investors’ money.
ASIC Policy Statement 56 ‘Prospectuses’ in section 56.119 says:
“Subsection 1021(6) specifies a more substantive information
requirement, that is, the prospectus must disclose the interests of directors,
proposed directors and experts in the promotion of, and the property to be
acquired by, the corporation (s1021 (6)).”
1.136
Furthermore, ASIC general disclosure
requirements state that, except when s1022AA applies, a prospectus must contain
all information investors and their professional advisers would reasonably
require and reasonably expect to find in the prospectus. It is obvious that
investors would ‘reasonably’ expect to know how every dollar of their
investment monies is spent.
Registration and Review of Prospectuses
1.137
ASIC in evidence to the Committee said:
“We have power to review prospectuses but, practically, we do
not have the resources to look at all of them. The Government specifically
removed the requirement to register a prospectus so our ability to stop
prospectuses at the registration stage was removed.” [35]
1.138
Currently ASIC vet only a small proportion of
all prospectuses lodged with them and assess prospectuses only in regard to
their compliance with the Corporations Law. ASIC therefore do not verify the
forecasts and projections contained in prospectus documents or the validity of
expert opinions.
1.139
This is a serious shortcoming which will
inevitably get worse once the reforms initiated under the Financial Services
Reform Act are implemented in March 2002. Under the new laws the responsible
entity of a managed investment scheme will not be required to lodge a
prospectus with ASIC. Instead the onus to comply with the law will rest solely
with the responsible entity. This is a serious problem, especially given that
under the current regime ASIC say:
“ASIC found that some RE’s had inadequate compliance monitoring
and reporting systems that, in some cases, led to breaches of the law by the
RE. Our findings demonstrated a lack of active implementation of compliance
arrangements and a lack of strong management commitment to implementing them in
some organisations.”[36]
1.140
In analysing the FSR Act it is clear that the
legislative changes were adopted to appease large financial institutions with
diverse investment portfolios. However, the legislation has failed to clear up
a number of anomalies at the lower end of the investment market that rely on
issuing prospectus documents.
1.141
It is clear from ASIC statements that they
simply do not have the resources to adequately monitor this sector and
therefore provide investors with adequate protection. Without a significant
increase in resources it can be predicted that the problems currently
experienced by the regulator will get worse.
Recommendation
1.142
It is therefore recommended that the law be
changed, or the implementation of the Financial Services Reform Act be delayed
for a further 2 years until a review of compliance is conducted.
‘Experts’
1.143
Another anomaly which must be addressed is the
use of expert opinions in prospectus or offer documents. Investors
understandably place a great deal of trust in not only the financial forecasts
and projections included in a prospectus but also in the expert reports
contained in them. However as the Business Review Weekly reported on
August 30 2001:
“Few investors would suspect, for example, that some promoters
of investment products shop around for sympathetic professional opinions for
their prospectuses.” [37]
1.144
ASIC Practice Note 55, ‘Prospectuses – citing
experts and statement of interests’, sets out clear guidelines on the use of
expert opinions in prospectuses.
1.145
Practice Note 55 states that the expert is
accountable for their advice cited in a prospectus,[38] and that the expert must give
their written consent for their opinion to be cited.[39] If such consent is withheld
but the expert opinion is nevertheless cited in the prospectus, then the directors
are liable to indemnify the expert.[40]
1.146
While Practice Note 55 is fairly extensive, a
number of serious concerns remain. First, the Practice Note does not stop
promoters from shopping around for a favourable opinion. Second, ASIC do not at
any stage verify whether the expert cited in a prospectus is in fact an
‘expert’. Consequently, ASIC say:
“If a prospectus mentions a person’s view on a matter, the ASC
will normally take the prospectus as holding the person out to be an expert on
that matter.” [41]
1.147
This raises serious questions as to the validity
of claims of expertise. Who is an expert and how qualified are they to make
judgements?
1.148
In the case of plantation forestry, this is a
serious problem, particularly as nearly all ‘experts’ will endorse the Mean Annual
Increment (MAI) growth rates reported in prospectuses. The MAI’s underpin the
forecasted returns to investors. The concern is that most plantation companies
forecast returns to investors on an average MAI of 30/c.m/ha/yr. This is
extremely misleading, firstly, because an average MAI of 30 means that some of
the trees will grow at a MAI of around 40. These figures are inflated. Sound
evidence shows that in even the best growing conditions an average MAI of
around 20-22 is achievable but very unlikely.[42]
If the lower figure were used, the forecasted return to investors would be
seriously diminished. However, so-called experts still sign off on average
MAI’s of 30. This is why some tax specialists argue that:
“...independent expert opinions are so heavily qualified that
their conclusions are almost meaningless.”[43]
1.149
In short, reliable evidence demonstrates the
misleading nature of many projections in prospectuses, which in turn casts into
doubt the credibility of ‘expert opinions’ used to support the claims of such
prospectuses.
Recommendations
1.150
Like most aspects of the managed investment
industry the area of expert opinion lacks integrity. It would seem that often
experts are ‘friends’ or close business associates of the RE and therefore paid
to give a favourable opinion. The entire system requires stronger measures to
improve independence and objectivity. It is therefore recommended that ASIC
consider either establishing a board of experts or a system for registering
experts. Under this regime it should be mandatory for experts to disclose any
conflict of interest in relation to the schemes for which they provide
opinions. For investors these measures would provide a greater degree of
certainty that the expert is indeed an expert. Currently no one including ASIC
is in a position to assess claims to expertise.
1.151
It is further recommended that ASIC be given
statutory responsibility for issuing expert opinions for all Mass Marketed
investment schemes. The onus will be on the scheme promoters, designers and/or
managers to provide ASIC with the investment proposal so that the proposal can
be independently and ‘expertly’ assessed. An ASIC report on the proposal should
include advice on general market conditions, the going market rates for
establishment of the project, the yields and returns that could be
realistically expected and the projections for the future of the industry.
Furthermore, the ASIC report must be included in the final prospectus, or any
other marketing information related to the project, and a copy must be provided
to the ATO.
Product Rulings and Grossly Excessive Fees
1.152
A further concern is that the PR system is
unable to support credible business investments and at the same time protect
Commonwealth revenue. This is because the process by which the ATO determine
whether management and lease fees are ‘Grossly Excessive’ is seriously flawed.
As a consequence the PR system is unable to prevent schemes which are extremely
expensive and which exhibit unrealistic or un-commercial fees and charges from
going ahead. Investors are then afforded tax deductibility for outgoings and
the Commonwealth props up overly expensive schemes.
1.153
It is not the role of the ATO to determine how
much a company can charge or how much an investor should outlay. Nevertheless,
the ATO does have a responsibility to clearly assess whether scheme managers
are charging fees that are, as the then Deputy Chief Tax Counsel Mr Bersten
said in evidence, ‘commercially realistic rates’.[44] The Part IVA anti-avoidance
provisions require the ATO to examine the level of fees in arrangements with
tax benefits. Grossly excessive fees are one of the eight factors that can
trigger the application of Part IVA.[45]
The problem is, however, that while the ATO cites grossly excessive fees as the
reason for applying Part IVA in some cases, it continues in other cases to
provide product rulings for schemes with management and lease fees far above
the market norm.
Product Rulings and Business
1.154
The ATO has argued consistently that the PR
process is primarily concerned with protecting investors not facilitating the
needs of business. At the outset this position is accepted in that investors
need greater protection and certainty. However, the fact that the PR process is
not overly responsive to business requirements is of concern.
1.155
There are delays in processing PR applications
which vary from 28 days to 2 years. Such inconsistencies pose considerable
problems and frustration for businesses particularly those involved in the
agri-business sector which rely heavily on planting regimes aligned to seasonal
conditions.
1.156
The delays experienced by business from the
application date of a PR to finalisation are exacerbated by the structure of PR
drafting. The best way to explain this is to provide an example of what can
occur.
PR Process Example – the 28 day clock
Example 1
- Promoters/Managers apply for a PR;
- Forward PR
application to Melbourne ATO office;
- Application is
assessed;
- Further
information may be sought;
- Further
assessment;
- Melbourne office
forwards the application to Perth for peer review;
- Further
information may be sought;
- Perth office
sends the application back to Melbourne for changes;
- Peer reviewer may well
require to view changes before the Melbourne office sends the application to
Brisbane for review by the Centre for Excellence;
- The Centre for
Excellence may require more information and changes to be made;
- The Brisbane office
then sends the application back to Melbourne with accompanying recommendations;
- Melbourne then send it
to the applicant for their approval;
- For the PR to be gazetted in Canberra on a Wednesday the Melbourne office will
have to have the application finalised in Melbourne the previous Tuesday.
Example 2
- Scheme has
already been granted 2 PRs for the previous 2 years;
- Manager applies
for an additional but identical PRr to expand the existing operation;
- Applicant has to go through the entire process again as listed in
example 1.
1.157
The above two examples actually occurred to a
medium to large agri-business company during the years 1999, 2000 and 2001. It
is clear therefore that the PR ‘sausage machine’ is antiquated and very
inefficient. In addition to delays is processing applications, the PR system
suffers from serious communication breakdowns often experienced between the ATO
and PR applicants, chronic staff shortages – our estimate is that the PR system
has no more than 30 ATO staff working on PRs nationally. Serious questions need
to be asked about the PR system and it’s ability to respond to Australian
business.
Time taken to produce PRs
1.158
The systemic inconsistencies and time delays
experienced between the initial application date and the finalisation of the
requested PR are unacceptable. As a consequence the entire PR system lacks
credibility with the business sector because on many occasions the ATO give
verbal guarantees to finish a PR within a set period of time but nearly always
fail to deliver. This is exacerbated by the ATO consistently requesting new
information from the PR applicant. On many occasions the applicant would
question the ATO as to why they failed to ask for the information at the
outset.
Structural concerns - The need to centralise the PR Process
1.159
The argument for centralising the PR system
must, as a consequence, be seriously addressed. One solution would be to have
two main offices, one in either Sydney or Melbourne and one in Perth dealing
specifically with PRs. While specific locations can be negotiated and discussed
at a later stage, the main objective should be to improve the integrity of the PR
process for investors, with a greater commitment to designing a system which
better responds to the needs of modern business.
Concluding comments
1.160
The constant delays evident in the PR process
cause a number of problems. It unnecessarily constrains business and inhibits
investment to the extent that investors – particularly international investors
– may view the consistent delays as evidence of non-compliance with tax laws by
scheme managers, rather than a sloppy bureaucratic process. As a consequence, schemes
often lose investment capital and investor confidence.
1.161
There is no reason why the PR process cannot be
redesigned to better facilitate business while continuing to provide investors
with excellent protection. If the ATO addresses the time delays, communication
and resourcing issues, there is no reason why the PR process could not be one
of the best in the world in providing investors with protection and business
with certainty.
Recommendations
1.162
It is recommended that the ATO adopt a similar
time frame or commerciality approach with PRs as they have done with Private
Rulings. The ATO gives an undertaking to provide a Private Ruling within 28
days from the application date. With PRs 28 days is simply not long enough.
However, the ATO could realistically in most cases draft a PR from application
to finalisation within a period of 3 to 4 months. The time period in essence
however is irrelevant. What is relevant to business is that they are given some
sense of certainty. As it stands they are inundated throughout the process with
requests for more information and have absolutely no idea at all when the PR
will be finalised. For most businesses it wouldn’t matter if each PR took 6-8
months as long as they knew. Only then can they forward plan their PR application
according to the investment market and seasonal planting regimes.
1.163
Furthermore, it is recommended that the ATO be
given a 28 day period starting from the application date to request further
relevant information. As it stands the ATO consistently return to scheme
managers with requests for more information some 6 months into the process.
Most find this terribly frustrating particularly when they apply for back to
back PRs for exactly the same investment project.
1.164
It is recommended that it be an offence, under
the Trade Practices Act, to market and sell an investment product involving
tax benefits without first obtaining a Product Ruling from the ATO.
1.165
It is recommended that the ATO disallow any part
of a claimed deduction which relates to the purchase of a capital asset i.e.
land – irrespective of whether that land is purchased for the investor or
another party.
Senator
Shayne Murphy
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