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With a substantial increase in maximum fines, exemptions for the provision of advice will have to work effectively.
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Why revised promoter penalties need clear boundary maps
29 September 2023
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15 minute read
As I outlined in last week’s article, the current promoter penalty (PP) provisions have remained largely untouched since their introduction and have been applied only six times in their 17-year existence.
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They were introduced – in Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA) – with effect from 6 April 2006 to deter the promotion of tax exploitation schemes and realign risk exposure that previously saw promoters of tax exploitation schemes obtain substantial profits while subjecting investors to penalties under the TAA.
The Albanese government’s announcement on 6 August that it would “oversee the biggest crackdown on tax adviser misconduct in Australian history” was followed by a substantial package of draft legislation on 20 September that covers three priority areas:
- Strengthening the integrity of the tax system.
- Increasing the regulators’ powers.
- Strengthening regulatory arrangements to ensure they are fit for purpose.
Proposed changes to the PP regime relate to the first priority area identified for action in the package of reforms: Strengthening the integrity of the tax system.
The government has indicated that legislation to implement the PP reforms will be introduced this year following consultation on the draft legislation. The amendments are proposed to apply from the later of 1 July 2024 or the first day of the first quarter following royal assent of the enabling legislation.
What are the proposed changes?
- Extension of time limit to commence civil penalty proceedings
The current PP provisions enable the Commissioner of Taxation to make an application to the Federal Court to commence civil penalty proceedings within four years of an entity last engaging in conduct that resulted in the entity or another entity being a promoter of a tax exploitation scheme or a scheme being implemented in a way that does not conform with a product ruling (ie: materially different from the way described in the product ruling).
The draft legislation proposes to increase the time within which the Commissioner can commence proceedings in the Federal Court to six years from the last time the entity engaged in the conduct. The unlimited period that applies to the promotion of schemes involving tax evasion will remain unchanged.
- Rules to apply to unimplemented schemes involving rulings
The current provisions dealing with the promotion of tax exploitation schemes expressly distinguish between schemes that are implemented and those that are not, making it clear that penalties can still apply even if a scheme is not implemented. In contrast, schemes that involve non-conformity with an ATO product ruling do not expressly distinguish between implemented and unimplemented schemes.
The draft legislation proposes to make it clear that the PP provisions can apply to a scheme that involves non-conformity with an ATO ruling (see below), whether implemented or unimplemented.
- Rules to be extended to include all ATO rulings
Currently, to the extent that the PP provisions apply to schemes not conforming with ATO rulings, they apply only to product rulings. This leaves persons who promote schemes not conforming with other ATO rulings beyond the scope of the provisions and the reach of penalties to hold them accountable.
The draft legislation proposes to broaden the scope of the provisions by removing existing references to schemes that do not conform with an ATO product ruling and replacing them with those that do not conform with an ATO public ruling, private ruling or oral ruling. A public ruling includes rulings that apply to entities generally, a class of entities (class ruling) or a particular scheme (product ruling).
- Broadening of the meaning of “promoter”
One of the conditions for an entity to be a “promoter” of a tax exploitation scheme requires the entity or an associate of the entity to receive, directly or indirectly, consideration in respect of the marketing or encouragement of the scheme.
The draft legislation proposes to broaden the meaning of “promoter” to include those who receive “benefits” from promoting a scheme. The term “benefits” is intentionally broader than the current “consideration” requirement and will enable the Commissioner to seek a penalty order from the Federal Court where the promoter has received a benefit from promoting a scheme that is not necessarily received directly from a client, such as increasing their client base. The broader meaning of benefit will include the receipt of consideration.
No changes are proposed to be made to the current exemption that excludes an entity from being a promoter of a tax exploitation scheme merely because the entity provides advice about the scheme.
- Broadening of the meaning of “tax exploitation scheme”
The current law does not expressly provide for circumstances where an entity has entered into or carried out a scheme falling within the requirements of the multinational anti-avoidance law (MAAL) or the diverted profit tax (DPT) provisions. Broadly, these provisions apply to a scheme if a person entered into or carried out a scheme for a principal purpose of obtaining a tax benefit, or both obtaining a tax benefit and reducing a tax liability under a foreign law.
The draft legislation proposes to broaden the meaning of “tax exploitation scheme” to include schemes that breach, or would breach, the MAAL or the DPT rules.
No changes are proposed to be made to the Commissioner’s inability to seek to apply PP to an entity where the scheme is based on the tax law applying to an arrangement in a particular way that accords with either advice given to the entity or the entity’s agent by or on behalf of the Commissioner, or public advice and guidance provided by the Commissioner.
- Stronger penalties
The government explains the strengthening of PP by stating that they “have not kept pace with other developments in the law”, namely the maximum civil penalty under the Competition and Consumer Act 2010 (Cth) and the Corporations Act 2001 (Cth).
Currently, the maximum civil penalty the Federal Court can impose under the PP regime is the greater of:
- 5,000 penalty units (equal to $1.565 million, based on the value of one penalty unit currently being $313) for an individual or 25,000 penalty units (equal to $7.825 million) for a body corporate; and
- Twice the consideration received or receivable, directly or indirectly, by the entity or its associates in respect of the scheme.
The draft legislation proposes to increase the maximum penalty and extend the penalties applying to corporate entities to also include non-corporate significant global entities (SGEs), irrespective of their legal structure. All partners in a partnership are proposed to be jointly and severally liable for a contravention by any partner acting in their capacity as a partner of the partnership.
The two components of the existing maximum penalty for bodies corporate (and SGEs) will increase from 25,000 to 50,000 penalty units and from a two-fold multiple of the benefit received to a three-fold multiple. Additionally, a new element based on 10 per cent of the entity’s aggregated turnover for the most recent income year ending before the breach occurred will be introduced.
Accordingly, the new maximum civil penalty under the PP regime is proposed to be:
- For individuals other than SGEs the greater of:
– 5,000 penalty units ($1.565 million) and
– Three times the consideration received or receivable.
- For bodies corporate and SGEs (whether incorporated or unincorporated) the greater of:
– 50,000 penalty units ($15.65 million)
– Three times the consideration received or receivable, and
– 10 per cent of aggregated turnover — where this exceeds an amount equal to 2.5 million penalty units ($782.5 million), this is capped at 2.5 million penalty units.
The maximum civil penalty may look eye-watering, enough to bankrupt most Australian businesses. However, this amount should be considered in the context of the practical operation of the proposed penalties. The maximum penalty of $782.5 million would apply only where 10 per cent of the entity’s aggregated turnover:
- Is greater than both 50,000 penalty units and three times the consideration received; and
- Exceeds $782.5 million.
In this circumstance, the entity’s aggregated turnover would need to exceed $7.825 billion. By way of example, assume an incorporated entity with an aggregated turnover of $2 billion received consideration of $10 million for promoting an arrangement. The maximum penalty imposed would be the greater of 50,000 penalty units ($15.65 million), $30 million (three times the consideration) and $200 million (10 per cent of aggregated turnover) — that is, $200 million. It is ultimately within the power of the Federal Court to determine whether the maximum penalty should apply, and the proposed amendments do not limit this power.
Closing comments
Modernising the provisions (together with the proposed post-implementation review) is laudable to ensure they remain abreast of evolving and emerging risks to the revenue and to taxpayers resulting from the conduct of promoters. As the government puts it, the reforms are directed at “rebuild[ing] people’s faith in the systems and structures that keep our tax system and capital markets strong”.
That said, it is imperative that the exemptions in the current law relating to the mere provision of advice to the client and reliance on advice and guidance provided by the Commissioner to the entity or the entity’s agent continue to work effectively. Given the substantial increase in the maximum civil penalty, greater public guidance on the meaning of the mere provision of advice is needed to ensure practitioners clearly understand the boundaries.
The proposed changes are substantial but are intended to apply only to promoters who engage in conduct that undermines the fair operation of our tax system to ensure these operators are accountable for their conduct. These reforms should not affect the vast majority of tax practitioners who uphold high ethical standards and conduct themselves with honesty, integrity and in accordance with the Code of Professional Conduct in the Tax Agent Services Act 2009 (Cth) and that of their professional associations.
The Tax Institute, together with the other professional associations, will be working actively through the consultation process to help ensure the reforms are implemented with appropriate consultation, transparency and scrutiny. Taking decisive action to respond to professional misconduct is understandable, but this must be finely balanced with ensuring the proposed reforms do not disrupt the vital role that tax professionals perform in advising, guiding and navigating clients through our complex tax system.
Robyn Jacobson is the senior advocate at the Tax Institute.
This is the second of two articles on promotor penalties. Part 1, Why adviser misconduct crackdown must focus on miscreant minority, was published last Friday.
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