Financial advisors take heart: ATO loses ‘promoter penalty’ case, but expert warns vengeance on its way

Financial advisors have been given some mixed news this morning.

Although the Australian Taxation Office has suffered the rare result of actually losing a case against a company while trying to clamp down on tax evasion, experts warn the Tax Commissioner will be back – and may not make the same mistake twice.

The case, which was the first brought to the Federal Court pertaining to the ‘promoter penalty’ laws introduced in the mid-2000s, may just be a precursor to harsher enforcement, one expert warns.

“These provisions potentially have a lot of teeth, and the Commissioner will learn from this experience to potentially lead the evidence in a different way next time – which may increase his chances of success,” BDO tax partner Mark Molesworth told SmartCompany.

The Commissioner took action against financial advisors Andrew Ludekens and Peter Van De Streeg over an investment they were offering to customers. It was the first case under the ‘promoter penalty’ laws, which are designed to catch advisers either evading tax, or promoting ways to achieve a tax benefit through illegal means.

The deal itself is complicated. Both men had invested in a type of agricultural scheme operated by timber company Gunns. This investment had a product ruling from the ATO, which outlined what was allowed within the investment and also the types of deductions available.

Then, the two men started selling off – or “sub marketing” – the scheme to investors, and also said these investors would be able to access the specific deductions outlined in the ATO’s product ruling.

The ATO took issue with that.

“What the ATO took action against was not so much the Gunns scheme itself, but it was about the on-sale of the scheme and then the purported claims anyone investing would have access to all these tax benefits and deductions,” Molesworth says.

But the more interesting part of the case is the comments the court made on what constitutes a ‘promoter’. Financial advisers have feared simply giving advice could make them a promoter and put them in a position to be prosecuted.

But Molesworth says that isn’t the case. Federal Court judge Justice John Middleton found the two advisors weren’t put in such a position just because they were giving advice.

“Simply being involved in the design and the implementation of the scheme without doing more isn’t promotion,” Molesworth says of the court’s ruling.

“If you take steps to market it to people and take steps to get people interested, it may. This gives advisors some comfort, because our concern was that if we’re just providing advice and we saw there are tax benefits that would lead to prosecution.

But all isn’t well.

Molesworth says just because financial advisors finally have some clarification about the scheme doesn’t mean they can rest easy. The ATO may be back, he warns.

“The court also found that on the facts, or on the evidence, the Commissioner hadn’t made out his case,” he says. “In the way the evidence was led, there were difficulties.”

“The message here is that these provisions have potentially a lot of teeth, and the Commissioner will learn from this experience and potentially lead the evidence in a different way next time which may increase his chances of success.”



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