The ATO has issued a stern warning to taxpayers against entering illegal tax schemes. It emphasises that while tax planning within the law is acceptable, schemes that attempt to exploit the tax system will not be tolerated. Tax schemes, which can range from mass-marketed arrangements to bespoke setups for specific taxpayers, often promise benefits that are not legally available and carry significant risks, including the loss of the original investment and hefty penalties.
The hallmarks of these dubious strategies include artificially reducing taxable income, inflating deductions and misusing rebates and refunds. Such schemes may involve complex financial manoeuvres designed to misclassify income, exploit tax rates or obscure financial transactions, all in a bid to evade obligations.
Promoters of these schemes can be anyone from financial advisers to shopping centre salespeople, and the ATO cautions the public to be vigilant. Warning signs include guarantees of zero risk, secrecy requests, incentives for tax savings, absence of a product disclosure statement (PDS) or prospectus, fees or commissions based on tax saved, and promoters who dissuade taxpayers from obtaining independent advice on the arrangement.
The ATO notes that the way an arrangement is structured could indicate an unlawful tax scheme. For example, beware of any schemes that involve deferring income to a later tax period, using offshore locations to hide income, changing the nature of income or expenses (ie changing capital into revenue expenses or changing private expenses into business expenses), creating an entitlement to a tax offset or credit, moving income to a trust or partnership to split income with individuals in a lower tax bracket, inflating or creating deductions, moving taxable income to a lower taxed entity, or setting up a business for the sole purpose of obtaining tax benefits.
In addition, unlawful tax schemes may be promoted to meet financing needs of participants, including round robin financing, non-recourse or limited recourse loans, and investments primarily funded through tax deductions.
Taxpayers are urged to ensure their arrangements are legitimate by using the ATO’s early engagement advice service, seeking independent advice and checking for taxpayer alerts and product rulings. Private rulings can also be applied for in circumstances where an arrangement has a particular set of circumstances unique to the taxpayer and assurance is needed that it is not a tax scheme. The ATO also advises verifying the credentials of tax agents and ensuring financial advisers hold a valid Australian Financial Services (AFS) licence.
Those involved in or aware of a tax scheme are urged to report it to the ATO, potentially reducing penalties by coming forward before an investigation begins. Reports can be made confidentially online or through the ATO’s phone hotline. Tax professionals are advised to take a proactive approach to any clients which may be caught up in schemes, either intentionally or inadvertently. According to the ATO, it will take action against any alleged promoters of tax exploitation schemes regardless of the firm’s size, occupation, position of the organisation or standing in the tax community. The ATO’s message is unequivocal: tax planning should be conducted within the bounds of the law, and those attempting to subvert the system will face significant consequences.
