In a case that is important to all tax and financial services professionals, the Tax Commissioner has succeeded in the Full Federal Court to have the Promoter Penalty Regime recognised to have far reaching impact and the potential to catch a very broad range of behaviour.
Significant civil penalties apply for promoters of tax exploitation schemes; up to the greater of $850,000 for an individual or $4.25 million for a body corporate, and twice the consideration received or receivable by the entity and its associates in respect of the scheme.
In the worst cases, criminal sanctions may also apply. Most recently, the ATO has successfully prosecuted a Gold Coast accountant for fraud arising from promoting tax avoidance schemes in a case brought under Project Wickenby. On 20 September, the individual was sentenced to 6 years' imprisonment.
As Commissioner of Taxation v Ludekens  FCAFC 100 is the first promoter penalty case since the amendment to the provisions in 2006, the Full Federal Court systematically addressed each criteria of the promoter penalty provision in Subdivision 290-B of the Income Tax Assessment Act 1997.
The facts of the case are lengthy and detail each dealing between the respondents, Ludekens and Van de Steeg, and each of the investors. It is a compelling account of the intensity with which the respondents engaged in soliciting investors to the scheme, the questionable representations they made to secure them, followed by how this part of a suspected Ponzi scheme spectacularly unravelled.
The facts may be briefly stated as follows. Ludekens and Van de Steeg were engaged to secure investors in the 2006 Gunns Woodlot Project, a managed investment scheme. They took steps to secure the acquisition of the woodlots by the first investors and the subsequent on-sale of those woodlots to secondary investors. These woodlots were fully financed and the loan repayments were to be funded by another entity (in which Van de Steeg had an interest) which was engaged in foreign currency trading. That entity's source of its loan repayments was the GST refunds from acquisition of the woodlots which the investors were told they would be entitled to, the funds from subsequent on-sale of those woodlots and the commissions received by Ludekens from all sales which he would contribute to that entity.
The Full Court held that Ludekens and Van de Steeg were both promoters of a tax exploitation scheme and has remitted the matter to the single judge Federal Court to determine the amount of the penalty to be imposed.
Ten key lessons for practitioners
- Examine and document the purpose of the arrangements as a whole
Profit-making will almost always be the purpose of any scheme – the question is whether there is also a taxation advantage for someone arising from the scheme and whether this is the dominant purpose. There might be a number of scheme benefits which comprise the "integrated whole" so properly understanding and documenting the commercial rationale to any transaction is critical together with balancing the reasons why the client enters into the transaction.
- The provisions are very broad and aim to catch a wide range of behaviour
Even if the tax benefit is a relatively small proportion of the overall financial benefit arising from the scheme, this will not save the promoter. Again, some other non-tax purpose needs to drive the transaction.
- Carefully analyse and document your reasonably arguable position
If commerciality of the arrangements and a non-tax benefit dominant purpose other than mere profit making cannot be readily demonstrated, a reasonably arguable position as to the application of the law will be your key point of defence. This should include consideration of Part IVA (general anti-avoidance) and any specific anti-avoidance provisions.
- One-off structures for a single client can also be caught
While Ludekens was concerned with a marketed scheme with over ten investors, the provisions do not only apply to mass-marketed schemes; structures for single clients can be caught.
- The provisions have broad application as to the type of conduct and it applies regardless of when the conduct occurred in the scheme timeline
A promoter is the person or entity marketing or otherwise encouraging the growth of the scheme or interest in it, receiving consideration in respect of that and having a substantial role in the marketing or encouragement. Conduct may be judged at a variety of times or periods of time both prior to and after implementation (regardless of whether the scheme is not implemented, partly or wholly implemented).
- Ask whether someone has a substantial promotional role
Compare the entity's role with the role played by others. For example, one person devising the scheme and giving instructions would have a substantial role (in this case, Ludekens and Van Steeg) and another merely acting in accordance with those instructions (in this case, perhaps, the investors) may not. The substantial role must be in respect of the marketing or encouragement to enter into the scheme and not merely the implementation.
- Ask whether the Commissioner is within time
The Commissioner cannot make an application under the promoter penalty provisions if more than 4 years has passed since the conduct. So long as some of the contravening conduct occurs within the 4 year time limit, then all related conduct that occurred prior to that date may be relied upon.
- Remember that protection is afforded by ATO Rulings only if the arrangement falls squarely within it
Understand the difference between implementing a scheme different to that which is the subject to the product ruling (not covered by the promoter penalty regime) or implementing a scheme the subject of a product ruling in a different way (which the promoter penalty regime would catch).
- Ask whether an exception applies
Exceptions from the penalty regime exist for providing advice about the arrangement, employees who distribute information or material prepared by another entity, reasonable mistake or reasonable precautions and entities relying on a public or private binding ruling.
- For clients that are victims of a promoter and tax exploitation scheme, consider alternative remedies
Consider whether an action may be available against the promoter in contract (such as misrepresentation), consumer protection (misleading and deceptive conduct), negligence & professional indemnity claims. Matters may also be referred to the DPP for criminal prosecution.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.