commonwealth of australia official committee hansard · 2001. 5. 17. · charles, mr robert gerard,...

COMMONWEALTH OF AUSTRALIA

Official Committee Hansard

SENATEECONOMICS REFERENCES COMMITTEE

Reference: Mass marketed tax effective schemes and investor protection

TUESDAY, 3 APRIL 2001

CANBERRA

BY AUTHORITY OF THE SENATE

INTERNET

The Proof and Official Hansard transcripts of Senate committee hearings,some House of Representatives committee hearings and some joint com-mittee hearings are available on the Internet. Some House of Representa-tives committees and some joint committees make available only OfficialHansard transcripts.

The Internet address is: http://www.aph.gov.au/hansard

To search the parliamentary database, go to: http://search.aph.gov.au

SENATE

ECONOMICS REFERENCES COMMITTEE

Tuesday, 3 April 2001

Members: Senator Murphy (Chair), Senator Gibson (Deputy Chair), Senators Chapman, Conroy, Cook andRidgeway

Participating members: Senators Abetz, Boswell, Brandis, Brown, Calvert, George Campbell, Coonan,Crane, Eggleston, Faulkner, Ferguson, Ferris, Harradine, Harris, Knowles, Lightfoot, Mason, McGauran,Murray, Payne, Sherry, Tchen, Tierney and Watson

Senators in attendance: Senators Gibson, Murphy, Murray and Watson

Terms of reference for the inquiry:For inquiry into and report on:

(i) The adequacy of measures to promote investor understanding of the financial and taxation implications of taxeffective schemes;

(ii) The conduct of, and the adequacy of measures for controlling, tax effective scheme designers, promoters andfinancial advisers; and

(iii) The ATO’s approach towards and role in relation to mass marketed tax effective schemes.

WITNESSES

ANDERSON, Mr Iain Hugh, ATO Solicitor, Assistant Commissioner, Office of the Chief TaxCounsel, Australian Taxation Office ...........................................................................................................469

CHARLES, Mr Robert Gerard, Assistant Commissioner, Client Account Management,Australian Taxation Office...........................................................................................................................469

FIELD, Miss Cheryl-Lea, Assistant Commissioner, Small Business, Australian Taxation Office ........469

HOLLAND, Ms Erin Kathleen, Acting Deputy Commissioner, Client Account Management,Australian Taxation Office...........................................................................................................................469

OLIVER, Mr Nick, Assistant Commissioner, Senior Tax Counsel, Australian Taxation Office ..........469

O’NEILL, Mr Michael Gerard, Acting First Assistant Commissioner, Australian Taxation Office ....469

SCANLAN, Mr Gary Brian, Director, Receivables Policy, Australian Taxation Office ........................469

SMITH, Mr Peter Gerard, Assistant Commissioner, Small Business, Australian Taxation Office ......469

Tuesday, 3 April 2001 SENATE—References E 469

ECONOMICS

Committee met at 4.16 p.m.ANDERSON, Mr Iain Hugh, ATO Solicitor, Assistant Commissioner, Office of the ChiefTax Counsel, Australian Taxation Office

CHARLES, Mr Robert Gerard, Assistant Commissioner, Client Account Management,Australian Taxation Office

FIELD, Miss Cheryl-Lea, Assistant Commissioner, Small Business, Australian TaxationOffice

HOLLAND, Ms Erin Kathleen, Acting Deputy Commissioner, Client AccountManagement, Australian Taxation Office

OLIVER, Mr Nick, Assistant Commissioner, Senior Tax Counsel, Australian TaxationOffice

O’NEILL, Mr Michael Gerard, Acting First Assistant Commissioner, Australian TaxationOffice

SCANLAN, Mr Gary Brian, Director, Receivables Policy, Australian Taxation Office

SMITH, Mr Peter Gerard, Assistant Commissioner, Small Business, Australian TaxationOffice

CHAIR—Welcome. I declare open this hearing of the Senate Economics ReferencesCommittee and I apologise to the officers of the Taxation Office for the late start. Thecommittee will continue its hearings into the inquiry into mass marketed tax effective schemesand investor protection. The terms of reference for the inquiry direct the committee to consider:

i. The adequacy of measures to promote investor understanding of the financial and taxation implications of taxeffective schemes;

ii. The conduct of, and the adequacy of measures for controlling, tax effective scheme designers, promoters andfinancial advisers; and

iii. The ATO’s approach towards and role in relation to mass marketed tax effective schemes.

Before we commence taking evidence I wish to reinforce for the record that all witnessesappearing before the committee are protected by parliamentary privilege with respect toevidence provided. Parliamentary privilege refers to the special rights and immunities attachedto the parliament or its members and others necessary for the discharge of the parliamentaryfunctions without obstruction and fear of prosecution. Any act by any person which operates tothe disadvantage of a witness on account of evidence given by him or her before the Senate orany of its committees is treated as a breach of privilege.

The committee prefers all evidence to be given in public, but under the Senate’s resolutions,as you know, you have the right to request to be heard in private session. Mr O’Neill, do youwish to make an opening statement?

E 470 SENATE—References Tuesday, 3 April 2001

ECONOMICS

Mr O’Neill—Not at this stage, Mr Chairman.

CHAIR—We will proceed to questions. I assume that the tax office has made the Perth andKalgoorlie Hansards available to itself and has studied them?

Mr O’Neill—Yes, Mr Chairman. We had a look at those and we have had regard to thesubmissions and other correspondence between your office and ours. I think we have got peoplehere to answer, hopefully, most of the questions you put to us.

CHAIR—With regard to the administration of the tax law, I presume the ATO takes theapproach that all taxpayers are treated equally regardless of their financial status. Is that a fairassumption on my part?

Mr O’Neill—Yes, that is right. I think the ATO’s approach is diagrammatically presented interms of a compliance model which has regard to indicators of risk and taxpayers’ attitudes toaggressive tax planning or not. It does not have factors about people’s financial position andstanding in the community. They are not relevant for those sorts of decisions.

CHAIR—With regard to mass marketed schemes, is it not true that they have been aroundbasically since the early 1980s?

Mr Smith—They have been around. There have been a number of schemes that havedifferent features, a lot of them back in the 1980s and early 1990s. Most of them in those yearswere associated with some form of agricultural activity. The deductions that were being claimedin respect of them relative to later years were not all that high and did not represent a substantialrisk. What we saw happening in around 1995 and 1996 was a move away from types ofactivities that were more or less restricted by access to some sort of property to grow the tea-tree or whatever primary produce they were growing. What we saw in 1995-96 was a moveaway from those tangible activities to more intangible activities.

We saw that with the Budplan scheme, which emerged out of a tea-tree plantation to be asupposed business carrying out research into the use of tea-tree oil. At about the same time thatemerged, the franchise schemes that were prevalent in Western Australia also emerged. Thoseparticular schemes were also not constrained by the need to have some form of agriculturalproperty behind them. That combination of factors resulted in a surge in these activities in 1996and 1997. It was in 1997 that we noticed that considerable increase, and that increase wasenough for us to then try to determine the level of risk—in fact to determine whether there wasa risk—and to try to find out what was generating these deductions.

When we did that in 1997, we not only noticed that there was a substantial increase overthose years; the nature of the arrangements also caused us concern, in that they attemptedincreasingly to gear up the level of deduction, to give people deductions well and truly in excessof the amount that they had outlaid or had at risk.

CHAIR—I asked my question about mass marketed schemes or investment schemes havingbeen around since the early 1980s, particularly when the 10BA law came into effect in 1981—isthat the case?


ECONOMICS

Mr O’Neill—I could not tell you the exact date.

CHAIR—From all accounts it would appear that there were problems throughout the 1980swith regard to investment schemes that sought to gear up to gain tax benefits. There are anynumber of newspaper reports and statements by the then Treasurer, even on 2 January 1982, thatwent to the problem associated with investment schemes that would be deemed to be tax effec-tive. What I have some difficulty with is understanding the tax office’s submission to us thatthese things really only came to notice in the early 1990s.

Mr O’Neill—I think Mr Smith was saying that there would have been schemes of differenttypes in existence in the tax system for as long as we have had a tax system. For example, goingback to the UK cases, there were estate planning schemes way back in the 19th century.Certainly, it is right to say that there were schemes that were prevalent in the 1980s. The typesof schemes we are looking at today are not necessarily the schemes we were looking at in thosetimes.

CHAIR—My next question was about the financing arrangements in particular or themechanisms that were used by investors to claim deductions. What were the mechanisms usedin the 1980s?

Mr O’Neill—I could not tell you off the top of my head the description of the financing of aparticular scheme, except to say that leveraging has always been an important issue in schemefinancing. The stripping of assets was also a common feature of schemes in the 1970s and1980s.

Mr Smith—I also need to make the point that it was not just in 1997 that we started doingthings in this area.

CHAIR—I understand that.

Mr Smith—In 1997 we started to coordinate our activities and there was a whole range ofwork that was being done in relation to 10BA film schemes, overseas films and even some ofthe agricultural schemes. That was being done in individual projects. We have had a presence inthe area of aggressive tax planning, but it has been since 1997 that we have stepped that up andhad a more coordinated approach towards it.

CHAIR—When did the activity start?

Mr Smith—We have looked at these types of arrangements as part of our complianceprograms, going back any number of years. I could not tell you an exact date.

CHAIR—In doing that, wouldn’t you have made some assessment of the practices that wereemployed in terms of people making claims for deductions?

Mr Smith—We were doing that, Senator, yes.


ECONOMICS

CHAIR—As a result of those inquiries—field work or whatever form they took—you wouldhave and develop some understanding of the practice that was being employed by investors interms of seeking to gain deductions?

Mr Smith—We were getting that understanding in relation to individual projects, but—

CHAIR—What do you mean, getting to understand?

Mr Smith—As I mentioned before, it was in 1997, when we saw the surge or the growth inthe level of deductions, that we actually brought that together and had a more holistic look at it,rather than approaching it on a scheme by scheme basis.

CHAIR—But there was a whole range of things. Division 10BA, which goes to films andwas in part designed to assist the Australian film industry, covered a whole range of other areas,as I understand it. You can correct me if I am wrong. Is that the case?

Mr O’Neill—Division 10BA was particular to Australian films; 10B was a related provisionaround industrial intellectual property. Some film schemes took comfort under 10B, but thatwas not dedicated to films.

CHAIR—In terms of people getting into those investments, your research would have shownyou what types of financing arrangements were being used, would it not?

Mr O’Neill—Almost certainly. I can honestly say I do not know what the precise details ofthose financing arrangements were.

CHAIR—But you would be able to find that out?

Mr O’Neill—Yes, certainly, Senator.

Mr Smith—Some of those film financing schemes were around a technique that we calledguaranteed return, where an amount supposedly going into the production of a film was grosslyinflated. The inflated proportion went into certificates of deposit and then was returned to theinvestor five to seven years later as a 100 to 101 per cent of the amount invested.

CHAIR—Were any of them financed through limited or non-recourse loans?

Mr Smith—As far as I am aware—I would have to check that out—most of them used thisguaranteed return technique. There could be some that used a non-recourse loan, round robintechnique.

CHAIR—In your submission, at page 2, you say:

In the early 90’s ATO field activities were undertaking individual investigations into a range of schemes underDivision 10BA (Australian Films) of the Income Tax Assessment Act 1936 (ITAA 1936), overseas film schemes, livetheatre schemes, schemes promoted by the Sentinel Group, prepaid interest schemes, afforestation schemes and cattleembryo schemes.


ECONOMICS

I have questions with regard to those that relate to afforestation and cattle embryo schemes.Let’s just deal with afforestation schemes. What were your findings in the early 1990s in respectof those schemes?

Mr Smith—I am unfamiliar with the specific afforestation schemes that were mentionedthere. I would have to take that on notice.

Mr O’Neill—Just to clarify the question: when you say the ‘findings’, do you mean how theparticular afforestation schemes were financed, or how they were structured?

CHAIR—Yes, in part how they were structured, how they were financed. You undertookthese in the early 1990s, which I assume to be 1991-92-93. What actions were taken as a resultof those investigations?

Mr Smith—Some of those investigations were ongoing at the time that our projectcommenced, as with some of the other projects relating to cattle embryos, films, et cetera.

CHAIR—I am particularly interested in the afforestation schemes, for instance.

Mr O’Neill—If we may take that on notice, we can get you some picture of what the schemeslooked like, how they were financed and what we were doing about them at the time.

Senator WATSON—Some of the financial arrangements for incentives that have beenavailable in the past for infrastructure bonds, film incentives and research and development,have involved non-recourse loans. The question is whether it is reasonable to assume that thecommissioner down the track will suddenly revisit them and declare non-recourse loans subjectto part IVA and disallow the deduction? Is the word ‘non-recourse’ loan the cause of theproblem or is there more to it than that?

Mr O’Neill—I think there is more to it than that. The issue for tax administrators would be toask on the one hand, ‘Have they implemented a legal form which is sufficient to finance thearrangement?’ In some cases people do not pass that threshold. Secondly, if the legal form isestablished, does it satisfy the ordinary provisions, the deductibility provision in section 51 or insection 8-1? The third level is the anti-avoidance provisions. Thrown amongst those tiers is thisnotion of a sham if I conspire with another to implement what appears to be a legal structure butdoes not, in fact, establish that structure; that will not be held against the revenue. So there areprobably several levels. Non-recourse finance is a shorthand way of describing some of themischief associated with those levels.

Senator WATSON—Can you assume that they are all mischief? In other words, are you justdisallowing those which are none other than a sham, or that have some mischief, and what is theelement of mischief that triggers or crystallises implementation of a part IVA?

Mr O’Neill—My understanding is that the non-recourse funding, in the part IVA sense, goesto the issue of the eight objective factors that are taken into account in making thedetermination. One of those eight factors is the form versus the substance of the scheme. Inform it might look like I borrowed a million dollars from the financier to invest in the schemebut in substance I have not exposed myself to any debt like that. The sorts of indicators we


ECONOMICS

would look for would be that, contrary to the usual way in which I would get finance, I do nothave to fill in a statement of my income, assets and liabilities and that there is no recourseagainst my own assets, my home or my car in the event of a default on the loan. So thosefeatures would be important for the substance of the scheme.

Senator WATSON—What are the others? You said there were about eight factors.

Mr O’Neill—I do not know them off the top of my head, but I can get those for you.

CHAIR—Before we get to those factors, there are some issues I want to pursue about wherethe tax office is at with regard to whether or not they have allowed these types of financingarrangements in the past and whether or not—

Senator WATSON—That is what I was trying to determine: what the thresholds are.

CHAIR—I do not want them wandering off into some other areas of what other aspects thereare to this. I just want to come back to this issue of what the financial arrangements were formany of these schemes, particularly in the 1980s and when you started your field investigationsin the early 1990s. I think Senator Watson put the question to you as to whether or not youallowed these financing arrangements, be they limited or non-recourse loan arrangements, to bedeductible.

Mr Smith—There is a difference between allowing them under a self-assessment system andactually going out and having a look at the financing, doing a full audit and then coming to aview. In a self-assessment system there is no doubt that there would have been some claims thatwent through in the 1980s that we did not subsequently come back and revisit.

CHAIR—I would have thought it would have been the case—and I would think that thepublic record would state that it was the case—that, from a tax administration point of view, thetax office had concerns throughout the 1980s with regard to a range of investment schemes. Iassume it would have audited different taxpayers, that it would have had investigations into thefinancing arrangements and that it would have set about determining a course of action for itsapproach in the application of the tax law. I am interested in your approach over a period oftime. You say in your submission to this committee that you undertook field activities, and I putthe question to you: what was the result of those early investigations? I think Mr Smith said thatsome of them were ongoing. During the course of time I assume somebody would have had aclose look at the financing arrangements of many of those schemes. Is that not true?

Mr O’Neill—Almost certainly that is true. I can honestly say I do not have particularknowledge of the financing arrangements of those schemes.

CHAIR—Who does? Somebody must.

Mr O’Neill—As I said to you before, we can take that on notice. I am sure I can provide youwith a very detailed description of types of schemes.

CHAIR—I find it a bit difficult, insofar as the work of this committee is concerned, whenyou know that there are some fundamental issues being questioned as to the tax office’s


ECONOMICS

actions—and it goes to the question of financing— and that you appear before this committeeand say, ‘None of us here know.’ It is very difficult for us to operate and formulate an opinionon whether the assertions and the claims against the tax office are correct, incorrect ormisguided. These are pretty fundamental questions. That is why I asked whether the tax officewas aware of or has read the transcripts from the Perth and Kalgoorlie hearings. A lot of peoplehere are feeling a lot of pressure. We are trying to deal with this issue as best we can. At themoment, it is not being helped by people appearing before this committee and saying, ‘We don’tknow. We have to take it on notice.’

Mr Smith—The question you have asked is: what were we aware of of the action that the taxoffice took in the 1980s? I personally was not in that particular area in the 1980s.

CHAIR—Let us go to the early 1990s. It is in your submission; I did not write it. I am askingyou about your submission to this committee.

Mr O’Neill—In the usual course, the tax office would be conducting field and audit programswhich would identify schemes in the large, medium and small end. At the large end, we wereidentifying schemes that we say had features of tax mischief in them around leases and rights. Ican talk to you very specifically about the financing associated with those schemes. But inrespect of the very specific question about the financing arrangements on a 10BA scheme or onan afforestation scheme, I do not know the answer to that question. Many people in the taxoffice have been preparing in order to hopefully answer all your questions this afternoon. Icannot answer that question, I apologise, but I can back to you fairly shortly with the answer tothat.

CHAIR—You also say that you identified ‘increasingly significant compliance’ risk. Whatdoes that mean? Was there a compliance problem? When did you identify this complianceproblem?

Mr Smith—In early 1997, we first identified that there was substantial growth in these typesof schemes. We had not quantified it at that stage.

CHAIR—I do not like interrupting your responses, but in the fourth paragraph, on page 2,you say:

The information from our field work and our ongoing analysis of section 221D applications made it evident, in early1997, that there was an increasingly significant compliance risk.

That says to me that there was a compliance problem in the first place but it just increasedsignificantly in 1997. When did you identify that there was a compliance risk? When did the taxoffice formulate an opinion?

Mr Smith—There are a number of compliance risks out there, but relative to others somerequire a dedication of resources while others require less dedication of resources. It was in1997 that we started seeing signals that there was substantial growth here that warranted anincrease in the resources relative to other work that we could be doing in this particular area. Aswas mentioned in the submission, that became evident from 221D variations and analysis of taxreturns, plus other information we were getting in the field. When we identified that there was a


ECONOMICS

growing risk, we did some analysis of that over the period from about May 1997 to December1997. We also undertook audits and took other action, but at that stage we tried to quantify therisk. We did find that it had grown substantially from the order of $180 million that we hadidentified in about 1993-94 to over $800 million that we identified in 1996-97. That analysistold us that this was an increasing risk and that therefore, relative to other compliance risks thatwe were facing, we needed to put further resources and further work into it.

CHAIR—With regard to your early 1990s work—given that I do not know that muchchanged from 1992 onwards, at least from what I can gather—the problem would have beenevident then, would it not?

Mr Smith—It was evident that there were some schemes out there, but as I mentionedearlier, the substantial growth in 1996-97 largely arose from a move away from tangibleactivities like farming, et cetera, into more intangible activities. It was that that sent the signal tous that we needed to look more closely at this whole area.

CHAIR—Insofar as the application of the tax law is concerned, what you seem to be sayingto me—and I am taking very much a layman’s view here—is that ‘We looked at this, as we didthrough the 1980s and in the early 1990s activities were undertaken to do investigations intovarious things.’ It seems that you accepted what was happening until such times as it reachedsome magical figure that it became too significant. You then took a view that you had todetermine a position on that. Why wouldn’t it be fair for me to assume that?

Mr O’Neill—If I can try to explain what happens in the tax office it would shed light on thatvery question, but I need to answer your question in a little bit of an indirect fashion. Businesslines were established in the tax office so that particular markets could be better understood andanalysed. Within each of those business lines they would perform risk assessment processes toidentify respective risks and it would be the responsibility for the deputy commissioner of thatbusiness line to tackle the highest risks in that line. Most resources would be dedicated to thehighest risks, which is not to say that nothing is done about other risks, but it is a question ofbalancing resources towards that which is going to be most conducive to protecting the taxsystem. There will never be enough people in the tax office to address every issue which isidentified.

CHAIR—Which really brings me to the administration of the tax law. Again, it goes to thispoint about resources or insufficient resources, or whatever the case might be, and I canappreciate that. I at least try to understand to some degree the significant task that the tax officehas in administering the law. It does go to the question of administration and my very firstquestion about equitable application of the tax law. It seems to me that, in the administration ofthe tax law in these circumstances, there has been an acceptance on the part of the tax office fora reasonable period of time—I would suggest going back to the 1980s—that certainarrangements, financing or otherwise, were acceptable to the tax office and that it was onlywhen the quantum of the deductions changed significantly in the mid-1990s that the tax officereally sought to address the issue.

That may be justified, but if I then look at that I ask: how do you treat taxpayers in thatrespect? I have looked at some cases from the past where the tax office has reached aconclusion, or indeed has found probably not dissimilar circumstances. I might go to some


ECONOMICS

cases where I think that, insofar as the administration of the tax law is concerned, the tax officehas taken an approach which was probably fair and reasonable but is different from theapproach that has been taken to current taxpayers and investors. In terms of financing unittrusts, for instance, it is stated:

On 20 December 1988, the ATO issued tax ruling IT 2512 dealing with taxation implications of payments received orreceivable by financiers under financing unit trust arrangements. Broadly, under such arrangements, a financier (or groupof financiers) or entity controlled by a financier provided funds for a particular project, such as a property invest-ment/development, by way of subscription for units in a unit trust. The tax issue in such arrangements was whether pay-ments made by way of distribution by the trustee constituted assessable income in the hands of the finance unitholder(s).

In the three years or so prior to the issue of IT 2512, the ATO handed down a very limited number of favourable rulingson financing unit trust structures relating to real estate projects involving tens of millions of dollars. It became apparentto the ATO that these rulings had received wide circulation and were being used to underpin projects worth severalbillions of dollars.

The eventual result was the ATO’s views of the law in IT 2512, which adopted a revised basis of the application ofsection 25(1) of the ITAA 1936 (the general assessing provision), effectively denying the availability of the favourabletax consequences sought to be secured through the utilisation of financing unit trust structures.

The ATO applied the view set out in IT 2512 on a prospective basis. In that regard, paragraphs 27 and 28 of the rulingnoted:

The view contained in this ruling as to how the law operates in relation to financing unit trusts is at variance withadvance opinions that this office gave in a small number of particular cases. From representations made byinterested parties including those consulted in the course of preparing this Ruling, it appears that the advanceopinions given in those cases were disseminated in the financial/building industries and among their taxationadvisers as evidencing a general Taxation Office approach. Although not authorised to be used in that way theresult was that some parties entered into these arrangements believing that they generally had a form of officialclearance.

In view of these special circumstances, this Ruling will not disturb any prior advice given by this office as to thetax implications of a particular case where the arrangement is carried into effect on the factual basis on which theadvice was formulated. Nor because of the special circumstances will this Ruling disturb arrangements enteredinto on or before 18 August 1988, the date on which Taxation Ruling No. IT 2500 was issued, where there are nomaterial differences between those arrangements and those on which particular private rulings were given. Therewould of course be the need to examine these cases before ruling accordingly.

I go back to my first question, in terms of administering the tax law equitably for all taxpayers.That is just one case; there are others I can refer to insofar as the administration of the taxationlaw is applied. Do you think your current approach is consistent with previous approaches inthese other examples? I can give you the other examples. One relates to retirement villages andone relates to the discretionary trusts.

Mr O’Neill—I think a bit of historical context around financing unit trusts is important. Atthe time 2512 was issued in 1988, we did not have a statutory rulings regime, so there is a pointof distinction between what happened then and now in respect of that scenario. That is not apoint of distinction in respect of, say, the retirement villages issue. What is common amongstthose issues is that, around the date of effect, for as long as I have been involved in the taxscheme, our policy has always been that where the ATO has issued a number of rulings into themarketplace such that the marketplace has an impression that we are giving an imprimatur to aparticular type of transaction, then when we change our policy—if we change our policy—generally the policy change will have prospective-only effect. That policy is set out in one ofour tax rulings—I think it is TR92/20—and is referred to a little bit in IT2500. The issue thenbecomes—


ECONOMICS

CHAIR—Mr O’Neill, I am not a tax expert in terms of the law. I think you said TR92/20.

Mr O’Neill—Yes.

CHAIR—Can you explain to me how that overrides the point of my question?

Mr O’Neill—It does not at all. It confirms the very pretext of your question, which is: has theATO acted in a fashion such that the market is following the ATO and then the ATO changes itsmind? That is as I understand the underlying essence of your question. I am just confirming thatthat has always been our policy and still is our policy. In circumstances where we are changingor issuing our policy—for example, in respect of employee benefit arrangements—we asked,‘What had we issued to the marketplace before?’ There were a number of pieces of advice thatwe had issued—private rulings, advance opinions and some correspondence. Some of that is ofa controversial nature, as you know. We said, given that palette of advices, we do not think thatwe have acted in a consistent way such that the market has been driven by ATO activity. It isalways a question then for the taxation commissioner to ask, in the circumstances of theparticular issue—take retirement villages or financing unit trusts—has there been, in thecommissioner’s judgment, action by the ATO to lead the market in a particular way, or not?

CHAIR—I put to you then, with regard to unit trusts, that there were a very small number ofadvanced opinions that were issued, which were, in effect, private binding rulings. That is thenet effect of them.

Mr O’Neill—The predecessor, yes.

CHAIR—Therefore, in respect of its rulings, the tax office said that, although not authorisedto be used in that way, some parties entered into these arrangements believing that theygenerally had a form of official clearance. The tax office accepted that. So why wouldn’t it bereasonable to accept that private binding rulings issued for a number of these mass marketedschemes would not be disseminated? Why is this different?

Mr Smith—As far as I am aware of the agriculture schemes, there are five private bindingrulings.

CHAIR—But it does not matter.

Mr Smith—Four of them on one particular scheme and the full facts, particularly the factsrelating to the financing, were not made available to us when we gave that ruling. We made anumber of assumptions in the rulings when we ruled.

CHAIR—On each and every one of those, you are saying that the full facts of the financingarrangements were not made available to you?

Mr Smith—As far as I am aware. The full details—

CHAIR—I suggest you check that.


ECONOMICS

Mr Smith—I will, but as far as I am aware, the full financing, the round robin and themanagement fee were not made available for use in the underlying agricultural activity. Theother point is that we did not rule on part IVA in two of those and the other two we specificallymade—

CHAIR—We will come to part IVA shortly. My question was: why would it not be accepted,as the tax office accepted before, that there was a potential for these things to be disseminated?

Mr Smith—There were five private binding rulings. There was also one—

CHAIR—I think there were only about five of these advanced opinions.

Mr Smith—There was also one public ruling in the marketplace. I think it was number 2195.

Mr Oliver—That is correct.

Mr Smith—It made it clear that we did not rule out the application of part IVA in situationswhere there was a non-recourse loan and round robin financing. That goes back to the earlyeighties. That public ruling was on public record, as distinct from the five very qualified privatebinding rulings that applied only to two particular agricultural arrangements, not to the ones thatevolved from those—the ones that did not have an underlying agricultural activity but that hadless tangible type activities.

CHAIR—I understand that. With regard to the unit trust, the tax office said that it had issuedadvanced opinions that were in breach of the law in effect, and that the claims being made andthe process being used in those arrangements were in breach of the law. My question at theoutset was about the administration of the tax law equitably. That is the underlying approachhere. I put the question again to you: has the tax office accepted that, despite the fact that thesethings were issued to individuals and were for that purpose no different to a private bindingruling, they were disseminated widely? The tax office said, ‘We accept that, and nothing in thisnew ruling will do anything to change that, save that we will consider it on a case by case basisprobably.’ I ask you: why doesn’t the tax office now accept that, despite that a private bindingruling is issued to an individual for that purpose and should not be disseminated et cetera, that isa possibility that occurred and did occur?

Mr O’Neill—There is no doubt that promoters of private binding rulings were using someprivate rulings and other bits and pieces of ATO correspondence as promotional tools. Can I justfinish—

CHAIR—That is the very point here. All of the prospectus based companies going back to1985 and coming right through to 1997 had their prospectus out. It was available to the publicand available to the tax office, and many of them contained reference to rulings that had beenprovided by the tax office. That is why I have difficulty understanding, from an administrationpoint of view, the tax office’s approach as to where it is coming from here. I have given you anexample, and I will give you the other examples with regard to how you administered the law incertain cases. You had not formulated an opinion, as far as I can ascertain, as to what theapplication would be in respect of a lot of these mass marketed schemes. You did that, in effect,


ECONOMICS

in 1997. From memory, I think it was TR97/17 or D17, and then subsequently in TR2000/8which took effect from June 1998. Is that right?

Mr Oliver—No, I think if you read the date of effect paragraph, potentially to years beforethe date of issue.

CHAIR—I appreciate your advice on that.

Mr Oliver—I can refer you to the paragraph; it is paragraph 81, I believe.

CHAIR—While you are looking for that, I go back to this question of your approach on theapplication of the law.

Mr O’Neill—What I was saying before was that we would understand that some promoterswould use a private ruling issued to X as a marketing tool. As you said yourself, they would beacting outside what they understand to be the terms of that private ruling. We have tried tointroduce public rulings to deal with some of the issues associated with that, and product rulingsis a subset of that. We can come to those later if you wish. The issue in any change of policy isan assessment of the facts—weighing up what we have done in the past with what we are sayingin the present circumstance. If we were issuing a public ruling, for example, it would be up tothe ATO to say, ‘What have we done in the past and have we led the market into error or into amisunderstanding by what we have done?’ In those circumstances, we would make a decisionon the date of effect of the ruling.

It seems to me a balancing question between the interests of those who have done the rightthing throughout the period of time and those who may have taken advantage of a glitch in thelaw, a misunderstanding by the tax office about how the law applies. If we said that any newannouncement of policy would have only prospective effect, that would have a very deleteriouseffect on the confidence in the system because any taxpayer who had always been doing theright thing would thereby suffer disadvantage and it would, in fact, encourage people to alwaysbe seeking the lowest common denominator.

CHAIR—Why did you do that in respect of the unit trusts, why did you do it in respect ofthe retirement villages case and why did you do it in respect of the discretionary trusts? In fact,why did you do it in the case of some of the employee benefit arrangements?

Mr O’Neill—As far as I know in respect of the last category, our position on the employeebenefit arrangements was issued in final form in 19 May 1999, and in respect of employeebenefit arrangements we have said that our policy position will be both retrospective andprospective in effect.

CHAIR—I am just looking for the press release that came out about that. I may be reading itincorrectly. With regard to the retirement villages one, for instance, why a different administra-tion practice?

Mr O’Neill—I was not involved in the issue of that particular ruling, and I do not know whatthe answer to that is.


ECONOMICS

CHAIR—I am not accusing you of being involved. I am just wondering why the tax officetook a different administrative approach.

Mr Oliver—Can I offer an observation? In relation to the situation, as I recall, with financingunit trusts, it became quite well known to the commissioner that these advance opinions werebeing used in a particular way—effectively, to drum up more business, if you like. They wereout there as a known stated position. In relation to a type of scheme that you mentionedpreviously—afforestation schemes, in the ruling that Mr Smith mentioned, IT2195, thecommissioner says he does not think deductions in relation to an afforestation scheme areallowable if part IVA applies. That was the public position that the commissioner had. Youmight have said—and we would undoubtedly agree—it would have been far nicer if thecommissioner had said at that time in 1986, ‘Just when do you think part IVA does apply? It isno good saying if it does; you have to tell us a bit more than that.’ But the public positionnevertheless was—and it might only appear as a matter of degree, but I think it is an importantdistinction—that we were saying publicly if part IVA does apply, then your deductions will bedisallowed. That was the public position.

CHAIR—When you administer the law—as I go back to my first question—do youadminister it equally to all Australians? I understand that there have been determinations andthat the tax office may have formulated an opinion, but it is how you applied the law—what youdid to some taxpayers versus what you are doing to others. With the unit trusts, these thingswere allowable. They were advanced opinions that the tax office determined at a later date werecontrary to the tax office’s real view of the law, yet you said, ‘Okay, we will only move forwardnot backwards.’

Mr Oliver—The important distinction still is that, for example, in relation to financing unittrusts, we were not saying at all that that was not our view at the time at a senior level.

CHAIR—But that does not matter.

Mr Oliver—But we were saying in relation to afforestation schemes that, if part IVA doesapply—and we have said that consistently since 1986—then your deductions will bedisallowed.

CHAIR—There is more than afforestation schemes out there in the ether. There is a wholerange of schemes. TD2195 did make specific reference to afforestation schemes, but we aretrying to deal with a whole range of schemes, not just afforestation schemes.

Mr Oliver—I certainly appreciate that.

CHAIR—The unit trust thing is a question about administration of the law and treating tax-payers equitably. As you did in the retirement village owners’ matter and as you did with thediscretionary trusts issue where there were clear problems and people were seeking to getaround the application of the tax law, when you finally took a decision to do something you didit prospectively.


ECONOMICS

Mr O’Neill—I am not sure if I can state much more than that. The commissioner would havea look at the circumstances in each case and decide, based on his best judgment and the bestinformation available, whether the community has been led into error by the ATO conduct.

CHAIR—That is my point, Mr O’Neill. These prospectuses were public documents; theywere out there for everyone to see. Even if we went to your research activities commencing inthe early 1990s, it would have had to have been the case that the tax office was aware that theseprivate binding rulings or reference to them was being used to promote a lot of these massmarketed scheme arrangements. That must have been the case.

Mr O’Neill—I have already said that we were aware that private rulings were being used as amarketing tool for mass marketed schemes.

CHAIR—When were you aware of that?

Mr O’Neill—I couldn’t say exactly when that information came to us first.

CHAIR—Could you check that?

Mr O’Neill—Senator, I could. Probably the answer to the question is: in the same way thatadvanced opinions were misused in that an advanced opinion was only ever issued and intendedto apply to the person it was issued to, they were sent more broadly. One of the reasons why weintroduced a statutory regime around private rulings was to give more integrity to the system. Itwas to give people certainty as to tax outcomes based on two things: full disclosure of the factsand implementation of the facts in respect of that taxpayer. There would not have been anyonein the tax community who misunderstood that. People who abused those rules were promoterswho then sought to say that a private ruling or an advanced opinion was effectively an umbrellaunder which lots of taxpayers could get a shelter from taxation. That has never been the positionhere or in any other tax administration, as far as I understand.

CHAIR—I am not saying that it is; I am just looking at this issue from the point of view ofhow the tax office has administered the law in respect of the taxpayers of the country. I am nottrying to reflect on the general administration. It just seems to me that if your principal modusoperandi is to treat all taxpayers equally then you surely must do that in respect of yourapplication of the law. Where there have been cases where there have been breaches of the law,which there were in respect of at least those three matters—the unit trusts, the retirementvillages and the discretionary trusts—you took a different approach to the one that you arecurrently taking. I think you referred to TD2195 in respect of afforestation schemes, but there ismore to it than that.

Mr O’Neill—Yes. Senator, inherent in your question is whether we are treating all peopleequally based on the circumstances in which we find them. So, in circumstances in which theATO has led the community, or a particular section of the community involved in financing unittrusts, into the error that they thought that they were safe in respect of those investments, ourpolicy has always been that a change of ATO view on the tax implications of that arrangementsshould be prospective.

CHAIR—That is my point.


ECONOMICS

Mr O’Neill—In circumstances where we think that there may have been one or two opinionsissued, some of those opinions may have been widely circulated, some of them may not havebeen, and some of the opinions are predicated—for example, they are based on assumptionsaround the implementation of the arrangement or they are conditional upon issues such as MrSmith raised about part IVA—it seems to us to be a very different situation. In those situationswe are treating people based on the circumstances they are in. Indeed, the equity issue, in mymind, arises as to whether it would be fair to the majority of the taxpaying community who hadnot entered into these arrangements to draw a line in the sand today and say that for everybodyit will only have prospective effect.

CHAIR—If we go into equity issues in terms of the treatment of high wealth individuals andsome of the companies of this country that do not pay much tax at all, we could ask whether ornot they pay their fair share and whether or not that is equitable as well. There are a whole rangeof equitable issues. What I want to deal with is the administration of the tax law in respect ofwhere there have been breaches of the tax law and the approach taken by the tax office. Thatdoes not bring into my mind the question: ‘What about the poor people who did not get in therein the first place?’

Mr O’Neill—I am not talking about the poor people who did not get in there in the firstplace.

CHAIR—I understand the logic of what you say.

Mr O’Neill—I am talking about the broad community. Most of us say that, whether we likethe tax laws or not, we abide by them. Some people take a more aggressive interpretation of thetax law. That is the situation I am talking about. If you would like to talk about the high wealthindividual area, then we are happy to talk about that.

CHAIR—On this point where you say, ‘Where the tax office accepted—and that was thecase in respect of some of these other matters—‘that its administration and its actions had thepotential to lead taxpayers to believe that they were acting within, or conforming to, the taxlaws as those laws were applied at that time,’ why would it not be fair of me to say to you thatthere were private binding rulings issued and there were prospectuses that contained most of theinformation—or at least would have led you to seek information, I would hope—about a rangeof matters that would assist you in concluding that something had to be done earlier than 1997?

Mr O’Neill—Sure. That is a very broad question in respect of a whole range of schemes. It isnot the case that we only started acting in 1997. I hope that you understand that that is thetime—

CHAIR—I refer to your activities beginning in the early 1990s.

Mr O’Neill—That is right; but that was at a time when we geared up a particular task force tofocus on these schemes. It was not the case that we were doing nothing about these schemesprior to that time.

CHAIR—Prior to the early 1990s?


ECONOMICS

Mr O’Neill—Prior to 1997, we were also doing work on these arrangements. In 1997, wegeared up a particular task force to focus on these schemes. In a different period of time, wecommenced a high wealth individuals task force to focus on that particular market segmentwhen our intelligence was telling us that there were some high risks associated with thatpopulation.

CHAIR—But all the while taxpayers’ assessments and 221D applications were beingapproved.

Mr O’Neill—Which is the very nature of the tax system under self-assessment.

CHAIR—That is right.

Mr O’Neill—Generally, assessments issue with very little vetting in the initial instance.There is a post-review period of four or six years, or an unlimited period in the case of fraud, inwhich the ATO can come back and revisit the schemes.

Senator GIBSON—You have persuaded us that, since you brought out TR2000/A, theproduct ruling has cleared the air. The evidence before us is that there is a good understandingabout that situation—from whatever date that came up. The trouble is that, in recent times, wehave been hearing from tens of thousands of taxpayers—there are a particularly great number inWestern Australia—who have inundated this committee with emails, letters and personalappearances et cetera. They are basically saying that, from the mid-1990s on, they were underthe impression, due to the marketing that was done—in particular, to a large number ofunsophisticated people, mainly from mining towns, who were on high incomes—that they weresafe and so signed up to these things. Because there were tens of thousands of people involved,the query from us is: was the tax office aware that there were tens of thousands of peopleenrolling in these schemes prior to the product ruling that has cleared the air? If you were awareof them, the query that is coming our way is: why wasn’t the tax office more proactive incommunicating with those actual taxpayers and warning them that this was dangerous stuff theywere getting into? Would you care to give us advice?

Mr Smith—The growth that I referred to before in the dollars that were associated with thesewas mirrored by the growth in the number of taxpayers as well. I do not have the numbershandy at the moment, but those years, 1996-97, also saw a substantial growth in the number oftaxpayers that were being associated with the Budplan schemes and the franchise schemes,which really escalated matters.

Budplan’s first prospectus was in December 1995, so deductions were claimed in 1996 re-turns. Less than 12 months later it was identified that there was an issue—something that weneeded to be dealing with. In that same year the franchise schemes exploded. It was in the 1996year that they first started on the market and in 1997 that they grew larger. Relative to thatgrowth we were not all that far behind in dealing with it. It was in May 1997 that we first set upthe task force, and it was in the 1996 and 1997 years that the substantial increase occurred.

Senator GIBSON—You were aware of this tremendous growth in some of those products,and it would appear to us from the evidence of taxpayers who got caught up in this that a highproportion of them did not understand what they were doing.


ECONOMICS

Mr Smith—Senator, one of the other difficulties we face in looking at one of theseschemes—at face value, without further investigation, they might appear to us to be notdeductible under the law, but the promoters are out there running a business promoting thesetypes of arrangements—is that, if we make our call too early we can leave ourselves subject tocommercial damages if we happen to be wrong. So we do have to make sure, before we get outthere and announce our position, that we have a strong position. In all this there is the questionof balance.

Senator GIBSON—I understand that. But because we are talking about tens of thousands ofpeople—sure, they had been pushed by promoters, and a lot of people did not understand whatthey were doing—looking back with hindsight, which is an easy thing for all of us to do, it is apity that there were not more warnings to those communities in particular about what the hellwas going on. A lot of people would have avoided the trouble that they have got themselvesinto. Is that a fair comment?

Mr O’Neill—Certainly, Senator. If you are saying that we need to be more real time,unconditionally the answer is yes. One of the answers to your question is to take the scenario ofwhat happens in respect of one of these schemes. It would be the case in not just one but in verymany arrangements that, if we have a look at the arrangement on paper, in the glossy prospectusthat is used to sell the scheme it may at face value look reasonable.

What actually happens on the ground is often a very different thing. In some cases what ishappening on the ground is nothing. An example would be a piece of intellectual property, afranchise scheme, which on paper looked like it was a tremendous thing that anyone of uswould say was a great idea and a good investment. But the reality is that there is nothing ofsubstance underneath. The tax office looks at the documentation and provides rulings in respectof the documentation. Subsequently, we do some follow-ups—investigatory processes. Thoseoperational details do not extend to checking every arrangement that is put to us in a privateruling or public ruling product ruling scenario to ensure that what was told to us has actuallybeen implemented on the ground.

So we have a situation where the promoter says X is going to happen; in some cases X doesnot happen—nothing happens—or in other cases Y happens. When you combine that piece ofmischief with very heavy marketing, as the evidence indicated when you took evidence inWestern Australia, it seems to us that one of the key issues is that the ATO can never reallyaddress that issue unless it focuses more on the promoters, which is certainly what we are doingat the moment.

Mr Smith—Senator, the point needs to made also that the messages do not necessarily haveto come from the tax office. There were messages out there at the time being put out by ASIC—the ‘too good to be true’ type message, when you look at these things where you are getting a$30,000 or $40,000 tax deduction for a $10,000 cash outlay. When you look at the prospec-tuses—I have one here that has a tax opinion. In fact, this is one of the two that has a privatebinding ruling. This explanation of how the tax act applies, under the heading of ‘General anti-avoidance provisions’, goes through nine paragraphs.

CHAIR—What was the date of issue of the prospectus?


ECONOMICS

Mr Smith—It was 1997. It adds:

77. In light of the above, no assurance can be given to individual Growers and Part IVA will not apply to them.

78. Having said the above, a favourable ATO ruling of 21st February 1997 was issued to a participant in the GoldenVintage Project in respect of the year ended 30th June 1996. This ruling was issued after the decision of theHigh Court in the Spotless case.

79. In considering whether interest and management fees were allowable as deductions for the particular Grower,the ATO considered paragraph 13 of Income Tax Ruling 2195 which deals with the requirements to be satisfiedbefore a Grower is held to be carrying on a business. Deductions are denied, inter alia, where the former Section260 or Part IVA applies.

80. In reaching the conclusion that the interest and management expenses were allowable deductions, the ATOnoted that from the information provided the taxpayer has not failed any of the above tests and can therefore beconsidered to be carrying on a business. Although the ruling deals with afforestation schemes, thecircumstances of the vineyard scheme are similar enough for the principles to apply.

81. I must again caution that the ruling is not binding in relation to any person other than the individual Growerconcerned and cannot be relied upon by other Growers. The ruling was also dependant upon the individualGrower’s subjective motivation and circumstances and does not specifically address Part IV4A.

The warnings were in the prospectuses as well. Most of the prospectuses were very heavilyqualified, as that one is.

Senator GIBSON—The other thing that stands out from the evidence in WA is theallegations from taxpayers that the tax office is being very tough on the people who get caughtup in these schemes. There were allegations about some people being forced to sell homes andthat there was no distinction between taxpayers who had locked into schemes with full recourseloans or non-recourse loans. Could you outline for the committee the tax office’s approach tothese people with regard to the problems they have got themselves into?

Mr Smith—We need to divide this into two sections: one is dealing with the assessment side,which I will try to deal with, and then my colleagues over here from Client AccountManagement will deal with the collections.

Senator GIBSON—Yes. It is useful at this point in time to run through where it is at andwhat is going on.

Mr Smith—On the fairness question, we have examined the law and we have taken a lot ofcare in making sure that our position is strong. We have taken these matters to the part IVApanel, which includes internal and external experts on part IVA. We have come to a view withrespect to these arrangements that deductions are not allowable. In coming to that view, as taxadministrators, we are obliged to apply the law. Because part IVA does apply, the penalty provi-sion imposes a statutory penalty of 50 per cent. We recognise that in most cases that statutorypenalty of 50 per cent would not be appropriate for these taxpayers and we looked at opportuni-ties of being able to reduce that. The way we did that was to give them the opportunity to makevoluntary disclosures and in some cases we also exercised the statutory discretion to reduce thepenalty to five per cent. We also invited taxpayers to present their individual circumstances.That may be relevant in some cases.


ECONOMICS

Senator GIBSON—Are each of the points you have just made widely known, in your belief,amongst these tens of thousands of taxpayers who are caught up in these schemes?

Mr Smith—Yes, Senator. In the letter we sent we explained why we were asking them to fillin the schedule and we said that that will have the effect of reducing the penalty. The issue youmentioned of some taxpayers with non-recourse loans and some with full recourse loans is anissue in the application of part IVA. It may be, however, that some of our primary arguments ofnot carrying on a business capital apply and the deduction is nevertheless still not allowable.But, generally, if a taxpayer has not taken up the non-recourse loan round robin financing, wewould accept that part IVA would not apply. I mention there that there are very few instanceswhere that has occurred. For example, in Budplan where there are almost 10,000 investors, onlythree of them put in their own money.

Senator GIBSON—Really?

Mr Smith—But where that happens, we will consider those individual circumstances andthey may also be relevant in determining whether there are grounds to further remit any penaltyor to not impose any penalty at all.

The other area where we are considering fairness to taxpayers is the release of the addendumto the settlement guidelines. We have given taxpayers the opportunity to make an offer ofsettlement to us. Particularly in those arrangements where there is a real underlying agriculturalactivity and where some cash actually went through to that activity, we have adopted a cashbasis, which is essentially a substance over form approach where we say, ‘Some money hasgone through, much less than the amount that has been claimed, but we are willing to settlethese matters on a cash basis, and in respect of some of the older schemes to also remit thepenalty further and also to remit the interest.’ In most of those we have agreed to remit theinterest accruing up to 31 December 1997. Those, very broadly, are the types of approaches wehave tried to take on the assessment side. Unless you have any further questions of me on thatside of things, I will ask Ms Holland to explain what we are doing on the debt collection side.

Ms Holland—We manage debt collection on a case by case basis taking into account theindividual circumstances of the client. We try to take a fair and reasonable approach. We takeinto account the personal and financial attributes of the taxpayers, particularly in the disputeddebt situations, and the expectations of those taxpayers who have met all their obligations,taking into account the issues around long-term compliance. We have a different approach forthe cases in dispute where they are at an objection stage as opposed to an appeal stage. Theobjection stage is where the taxpayer has sought an independent review of the assessment. Atthat stage we do not take action to collect the tax payable as such but we do offer anarrangement whereby they can pay 50 per cent of the tax and then we in turn halve or reduce thegeneral interest charge owing by 50 per cent on the amount remaining. Our action there is toencourage people to make that 50 per cent payment. Where they do not, we do not take furtherrecovery action where the matter is at the objection stage.

At the appeal stage, we do require them to make a payment of at least 50 per cent of thatamount. The GIC is again halved on the remaining amount. Where the taxpayer cannot makethat 50 per cent payment, where there are some issues of hardship, at the appeal stage we look


ECONOMICS

to enter into some other arrangements with those taxpayers. We believe we can actually makesome reasonable arrangements with taxpayers around their payment.

On the issue of bankruptcies and the issue you raised about people’s homes, where thetaxpayer is genuinely cooperating with us and the only tax that is outstanding is disputed, wewill not take bankruptcy or liquidation action, nor will we require the sale of a person’s home orassets. If the taxpayer is genuinely cooperating with us, that is not the avenue that we would godown. Where there is genuine hardship involved in relation to a taxpayer being able to makethose payments, we suggest that they approach the Tax Relief Board for release of that debt.Basically, the criterion there is one of hardship. A fundamental interpretation would be wherethere would be some inability to pay for the necessities of life.

CHAIR—How do you define ‘cooperating with the tax office’?

Ms Holland—That is if the taxpayer is prepared to meet with us, talk to us about theirfinancial situation and the difficulties they are having and come to some arrangement with usaround the payment of their debt.

CHAIR—Have you read Mr Lawrence Ryper’s submission to this committee in Perth?

Ms Holland—Sorry?

Mr Smith—I have read it, but I am not too sure which one it was. I do not know the namesassociated with the particular points that were being made.

CHAIR—I mention it with regard to your approach to him. The evidence of the investors isstarkly different to what we are getting at the minute.

Mr O’Neill—We have set out in a diagram what the process is. If it would be helpful we cantake you through that; it is probably a simpler way of discussing the concept you asked for,Senator Gibson. Would that be helpful?

Senator GIBSON—That would be useful. But the more important issue is that there seemsto be a big gap in communication, going by what you are saying to us tonight—we believeyou—and the first-hand evidence that was put before the committee. I have got to own up: I wasnot there, but the others were.

Mr Smith—We are aware of that, we are aware that there are a number of people out therespreading misinformation and we are aware that there is a very clear need for us to improve ourcommunication. We have made a 1800 number available to taxpayers for them to ring if theyhave any questions about the assessment side of things and a 1300 number if they have anyquestions about the debt side of things. We are now trying to improve that communication strat-egy. Miss Field might be able to take you through what we are trying to do there.

Miss Field—We have taken note of the feedback we have received and realised that some ofour communication was difficult for people to understand. What we are keen to do is get somebalanced information out into the community. One of the initiatives we are looking at is gettinga newsletter to the investors outlining, in a plain English format, what their rights are around


ECONOMICS

objections, details about the recovery and what their rights are around a relief board—in a formthat is easy to understand rather than a thick document.

We are also looking at participating further with some of the professional associations so thatthey are aware of our processes and meeting with other representative agencies. I know that themining industry particularly has got some concerns, so we are looking at some avenues there.We are working through some of the community groups to get some balanced information outto individual people so that they know what support mechanisms are available for them andwhat their rights are. At the moment there is a little bit of confusion about what their rights areand what actions they take.

Senator GIBSON—It seems to us that there is a lot of confusion, not just a little bit.

Miss Field—That is true.

Senator GIBSON—We are talking about tens of thousands of people. It is a major issue and,obviously, a very unusual one. It therefore calls for some fairly drastic action to bridge thisinformation and communication gap between your office and the people who are affected. In theevidence—which we had had prior to Perth last week, and it was consistent through that—thatwas given in WA there was so much emotion involved that it is obviously a very seriousproblem, and it has got to be tackled urgently.

Miss Field—We are very concerned about the emotion and the pain that people are sufferingand what actions we can do to ensure that they have got enough information so they are able tomanage their affairs and be aware of what their rights and obligations are. There is concern thatsome of the actions may not help the individual people that have participated in these schemes,who want to make sure that they have a balanced opinion of what they can do.

Senator GIBSON—It would help the committee, as soon as you have firm plans about whatyou are going to do in the communication area, to let us know of them. The sooner this messageis spread here in the parliament the sooner it will help the process in the field where theproblems lie.

Miss Field—Part of that communication strategy is to provide some support for you and oth-ers around the activities that we are doing.

Senator MURRAY—Going back to the hardship thing before I begin pursuing the line ofquestioning I want to, I want to give you a real life example. If a retiree in Kalgoorlie owned a$200,000 house which was unencumbered and had a disposable income of $25,000 a year, theycould probably get by quite nicely. If as a result of your action they were forced to mortgagetheir home and the cost of mortgaging that was $10,000 a year, so their disposable income wasreduced from $25,000 to $15,000—and you can imagine the stress for somebody who is 65years old—would that be regarded as a hardship case or not?

Mr Charles—We would advise the taxpayer to refer that to the Tax Relief Board forconsideration. They would take the facts that you have just outlined into account.

CHAIR—How many taxpayers have you advised about hardship?


ECONOMICS

Mr Charles—Any taxpayer—

CHAIR—Not ‘any’; I want to know how many. You can take it on notice and provide aresponse to the committee. How many times have you issued advice to taxpayers that they areeligible for hardship provision?

Mr Charles—I will take that on notice.

Senator MURRAY—I think this is quite a good real life example of a very stressful situationwhere somebody still remains with an asset but would feel very stressed by the action. You aresaying it automatically would fall within the hardship criteria?

Mr Charles—No, not necessarily automatically, because you have outlined that theindividual in question has equity in a property and from a strict financial perspective that mightsuggest that they have a capacity to pay. That would come into question as well. I advise thiscommittee that to date we have not taken action to bankrupt or to force the sale of the house ofanyone involved in any of these schemes.

Senator MURRAY—This is not a bankruptcy and this is not a forced sale; this is obligingsomebody to take out a mortgage to meet a tax debt.

Mr Charles—Our policy and our advice to our staff in the scenario that you have outlinedwould generally be to talk to the individual taxpayer and take all of those factors that you havejust outlined into account. If they were unable to meet that mortgage and they were suggestingto us that they did not have the financial capacity to make the repayments against that mortgage,we would discuss with them longer term arrangements. If that debt was still in dispute, theywould probably be able to present a case to us where we would not even require payment of thatamount and that would not require them to take out that mortgage.

Senator MURRAY—I must make it clear to you that when I listened to Ms Holland’s outlineI drew the conclusion that the tax office has a very hard hardship view, and hardship in manypeople’s minds is a relative thing, as you will appreciate. I surmised that where anyone has as-sets you will actually go after them almost to the extent where they will feel obliged to putthemselves into personal difficulties. That is how I reacted to what Ms Holland said.

Mr Smith—Could I clarify a point there, again drawing this distinction between theassessment process and the collection process. This hardship issue is an issue at the collectionprocess. Compassionate grounds and hardship grounds are not relevant to making a decisionabout whether a deduction is allowable or not.

Senator MURRAY—I think you misunderstand me. I am entirely dealing with collection.

Mr Smith—I thought that point needed clarification. I am sorry if I have misunderstood.

Senator MURRAY—I understand.


ECONOMICS

Ms Holland—To clarify the point I made in relation to bankruptcy or the sale of a home orassets, the statement I made was: where the only tax debt that is outstanding is in dispute andthe taxpayer genuinely cooperates with us, we will not take that action.

Senator MURRAY—Is there a tax office in Kalgoorlie?

Ms Holland—No.

Senator MURRAY—That person in our example would have no face to face meeting withyou. There are no circumstances by which the file could be noted, ‘I have met this person. Theystrike me as honest and reliable.’ They are the kinds of personal judgments you make when youmeet people. It is entirely different to the view you would take on correspondence. You seewhere I am going. Much of your discretion relies on experience and making a judgment out ofexperience. The people in your profession develop experience. How do you give taxpayers thefull benefit of your policy if in fact part of that circumstance, which is the face to face meetingand interaction, is not possible and does not occur?

Mr O’Neill—Partly the answer to that is that the new communication strategy is opening upopportunities for people to interact with us face to face. There are geographic issues about taxoffices being in particular areas and the fact that there are only X number of tax offices in thecountry, but we are getting our call centres to contact people directly to explain to them theprocess that the ATO is going through and the reasons why. We are trying to get the message tothem without the filter that is associated with some promoters who are spreadingmisinformation. We are sending letters to them to say that this is an opportunity for you toexplain your personal circumstances. We are putting together a newsletter for investors, whichMiss Field was talking about in terms of that strategy, to say, ‘These are the sorts of processeswe are going through in the tax office—objections, appeals, recovery, hardship. If you arethinking about investing in these schemes, these are some checks you might want to considerbefore putting your money into the scheme.’ We want to tell people about the rulings processes,to give them another level of certainty.

Senator MURRAY—I am concerned about the difference between theory and practice. Inyour own personal circumstances you have all—like we all have—met countless people whoexpress themselves quite well face to face, but in writing or in trying to formalise their thoughtsthey express themselves very badly. Staying with Kalgoorlie, a very effective miner may haveearned such a reasonable income that he wants to pursue investment schemes. If he were writtento on the basis you outlined, unless he went to somebody who could assist him he might be veryinadequate in writing, feel threatened and express himself badly. As a result, the person receiv-ing the letter forms an opinion which does not meet with the reality of the person’s approach.The evidence that the committee has received again and again from people affected by theseschemes is that they feel unfairly done by. That must have, as part of its dimension, the differ-ence between good policy as outlined by you and actual practical practice as outlined by theircircumstances and the particular officers dealing with them.

CHAIR—In respect of Senator Murray’s point, an investor gets 11 pages of technical claimsfrom the tax office and is asked to fill out a schedule at the end of it. I think his point is veryvalid. I have read a number of these and I have to say that I would have to seek advice as towhat it all means. If they fail to comply within a period of time, they then receive a further


ECONOMICS

notice that goes to the question of a penalty tax of 50 per cent. It does not seem like a very user-friendly approach to me.

Mr O’Neill—There are probably two categories of people there. There are some people whowould genuinely find that information to be confusing. You are quite right; we need to workharder to get that message across.

CHAIR—You have not got a tax office in Kalgoorlie so the taxpayer in Senator Murray’sexample would seek advice from an accountant as to what they should do. The accountantmight be the same accountant or financial planner who advised him in the first instance to gointo the scheme. He might say, ‘We will challenge the tax office in respect of this venture,therefore, do not do anything.’ There is a big gap in this whole approach.

Senator MURRAY—I believe we have to do two fundamental things in this inquiry. Thefirst is to separate out the schemes—whether they were allowable under the law, or aninterpretation of the law. That, as you know, can be resolved by courts if there is a dispute. Thatis the one side, and there are issues about how you would manage that—your private rulingsand all that stuff. But it is essentially to do with allowability. Were any of these schemesallowable?

The second issue concerns the penalties and interest that apply to those that are disallowed. Itseems to me that either the law is inadequate—in other words, you use a different shape put tothe law—or tax office practice is inadequate. It seems to me as if the drug users are beinghammered and not the drug suppliers—if you follow the analogy—and that the law reallyfocuses on banging at the user and not the provider. There is not much I have seen in theevidence that indicates that promoters of schemes have come off too badly in all this.

It seems a basic of law, of legal precedent and of the common law, that a person who actsresponsibly and is entitled to rely on advice is dealt with more leniently than those who actirresponsibly, recklessly or, indeed, illegally. It seems to me that nearly everyone involved inthese schemes, from an investment point of view, believed that what they were doing was legal.Many of them, given the state of their ignorance as investors—that is, not accountants or peoplewho would know better—were entitled to rely on the advice they were getting from promoterswho were quoting things.

It does not take away from the view that the tax deduction might be disallowable, but it doeslead to a view as to how the tax office should exercise discretion, where it has it, on penaltiesand interest.

The Ombudsman has already indicated, with regard to the Budplan and Main Camp cases,that discretion should have been exercised leniently. I think it was a 5 per cent penaltyrecommendation, which was quite different from what the tax office was applying.

I am giving you a long lead-in to my next question, so that you understand why I am thinkingthis way. What procedures do you have to accept these circumstances as mitigatingcircumstances: where an investor has exercised due diligence, taken advice, and acted withregard to a prospectus, where the scheme was not identified as illegal at the time and where theinvestor could have no knowledge that it might be disallowed. Why are you still determined to


ECONOMICS

apply a high level of penalties and interest? Are there cases where you have no discretion, or areyou, in most cases, able to exercise discretion?

Mr O’Neill—The legislation gives penalties appropriate to particular classes of scheme. Ifthere is an anti-avoidance provision invoked by part IVA, a 50 per cent penalty is a startingpoint and there is always a discretion for the commissioner to remit penalties, depending onpersonal circumstances. In most of the schemes we are looking at, the starting point is at 25 percent to 50 per cent. Those levels of mischief are taken into account at two levels. One is in theassessment of the scheme—our addendum to the settlement guidelines deals with levels 1, 2 and3 of what we call tax mischief: we also take into account the individual circumstances of theparticular investor in the scheme.

The short answer to your question is that the legislation sets a level of penalty, and then thecommissioner has discretion. In most cases the discretion was exercised such that the ATOoffered people safe harbour opportunities so that they could get very concessional penaltytreatments, reduced from, say, 50 per cent to five per cent in some of the cases that youmentioned. In employee benefit arrangements, in our early 1990 announcement there was asimilar sort of arrangement. In respect of other cases, where there is no safe harbour, we invitepeople to make settlement offers to us. We have accepted settlement on the basis of a penalty of10 per cent in many cases. So, whilst the legislation is striking at a fairly high level of penalty inlaw, the practice is very different.

Mr MURPHY—Are you automatically putting people into the part IVA net before you havespoken to them about the possibilities? It would seem to me that your primary job is to protectthe revenue, and you achieve that by disallowing the tax deduction so that a tax deduction doesnot occur. Your primary job in this instance is not to earn money out of penalties and interest.Therefore, I would assume, the proper approach might be to advise the taxpayer that you aregoing to disallow their deduction and, if they do not squeal, you will keep them out of part IVAand they will not have to pay penalties and interest.

Mr Smith—The issue of part IVA is an issue that we looked at with each of these arrange-ments. It is an objective test. Generally, the individual circumstances of the taxpayers will notaffect the conclusion that part IVA applies. There might be some instances, as I mentioned be-fore, of where taxpayers put their own money in rather than use the round robin non-recourse orwhatever financing technique was used to inflate the deductions. But having come to a view thatpart IVA does apply, the statute imposes the penalty at 50 per cent. As I mentioned earlier on,we sat down and believed that, in these cases, it was reasonable to give taxpayers the opportu-nity to have those penalties reduced. When we sat down with the Budplan scheme, we thoughtthat an appropriate level of penalty was five per cent.

We debated that. We did think: should we be imposing penalties here? Again, it comes downto the issue of fairness in our administration in this area: trying to balance fairness to thetaxpayers who are caught up in these arrangements with fairness to the general community—those taxpayers who did not get involved, particularly those taxpayers who may have had theopportunity to enter into them and, even more particularly, those advisers who warned theirclients against going into them. So we have had these competing issues of fairness, and webelieve that the point that we reached with Budplan of five per cent and the later position of 10per cent balances those issues.


ECONOMICS

Senator MURRAY—I am not really asking you about fairness; I am asking aboutreasonableness. Let me give you another analogy. In Corporations Law, if a director actsresponsibly and reasonably, they cannot be judged at law to be delinquent, even if there is anunfortunate outcome. I would have thought that, in tax law, you require or you should have aprinciple that, if an investor acts reasonably, there should not be an automatic judgment of thekind that seems to be made in some of these circumstances. Is part of your framework forexamining an issue in regard to an investment scheme to ask whether the investor actedreasonably, given the nature of the scheme that he or she was investing in?

Mr O’Neill—Can I take the abstract case, because it is fairly difficult to talk about aparticular taxpayer. We would look at the scheme arrangement and answer the first question inthe way you put it: is it allowable or not? In answering that question, we would need to gothrough those steps of: did they establish legal relations; is it okay under the general law; doesthe anti-avoidance provision apply? After answering those questions, the law automaticallyspits out the penalty provision—50 per cent, say, of part IVA applies. We would then write aposition paper to say, ‘This is our understanding of the law.’ Generally, we would write that tothe person who is associated with the scheme and give them our views, and they would comeback to us with different views. We would consider that and then we would settle on a position.Often the settlement of that position is with external bodies, et cetera, part IVA panels.

Senator MURRAY—You are still not saying to me that you have any set of criteria as towhether the investor behaved reasonably. Is the answer yes or no?

Mr O’Neill—The answer is that we do consider individual circumstances of people and theirparticular actions.

Senator MURRAY—Is there a statutory requirement or is that an internal requirement?

Mr O’Neill—The penalty provisions impose 50 per cent for part IVA and then require thecommissioner to turn his mind to whether he should exercise the discretion to remit. It is veryclearly implied in the legislation that the individual circumstances must be—

Senator MURRAY—Yes, but I want to know whether its stated. I have used theCorporations Law example deliberately because directors can act in a way which results inmillions of dollars of loss. But the Corporations Law specifically says that providing a directorhas acted in good faith, honestly—I am not using the exact words—responsibly and so on, theycannot be held liable for that.

Mr O’Neill—In the tax law there are similar provisions in the criminal jurisdiction.

Senator MURRAY—In the jurisdiction whereby you have to determine whether a person isgoing to be subject to penalties and taxes—I have got no problem on the disallowance side, Iunderstand that—do you have that legal guideline?

Mr O’Neill—I do not have the penalty legislation in front of me, but my understanding isthat the commissioner needs to turn his mind to whether he will exercise the discretion. In theusual way, a discretion can only be exercised having regard to the individual circumstances ofthe case. In the usual process, the legislation imposes 50 per cent. The commissioner has to go


ECONOMICS

to the next step: are there grounds for a reduction in the penalty? Should I exercise mydiscretion to take it to 10 or five per cent? In going to that step, he has to have regard to whathappened, what did the taxpayer do? We would have rulings which set out the way we applypenalties in particular circumstances. It is probably worth while us providing those rulings toyou that set out that process of taking into account the individual circumstances.

Senator MURRAY—If somebody has acted reasonably in the understood meaning of thatterm—taken advice, used prospectuses, gone to a professional adviser or whatever—would thatbe regarded, therefore, either as mitigating or allowing the penalty or the tax interest to bereduced or done away with? Unfortunately, I have to go.

Mr O’Neill—Generally, it would not have an impact on the interest.

CHAIR—While Senator Murray is here, it would be useful in terms of the approach of oneof these investors to the tax office—I ask the tax office whether you have taken the opportunityto read the transcript of the Perth hearings. Mr Ryper who invested in Satcom, said:

... I rang the ATO to discuss what the implications were. I discussed the scheme at length with a tax officer. The ATO toldme that they were not in the business of saying whether something was a legitimate deduction or not and it was up to meto seek a legal opinion. They explained the self-assessment and suggested that I check the viability of the scheme, legalopinions, accountants’ opinions, and the legal qualifications of the person giving the opinion. They also explained that if Idid these things and went though a CPA, this would be due diligence and if, at a later date, it was not found to be alegitimate deduction, there would be no penalty, but the deduction would be disallowed.

Mr Smith—As with all of these, the taxpayer has recounted a conversation. I do not haveaccess to a full record of that conversation. The position that we take on these arrangements, aswe mentioned before—

CHAIR—I rang the tax office myself to try to test some of these things. Let us go to the nextstep, because it goes to the very question that was asked earlier about the collection activities.We talk about the face to face activities. Mr Ryper, after getting his amended assessment, said:

I made numerous phone calls to the ATO in Cannington and was told there was no freeze on recovery action. I lodged anobjection through Wilson and Atkinson to the ATO, and in phone conversations with the ATO I have been threatenedwith recovery action if I did not pay regardless of my objection. I have been advised by ATO officers to contact the ATOif the bailiff arrives at my house to seize assets.

Mr Smith—I would be interested in following up that conversation.

CHAIR—You should have taken the opportunity to read this because I would have hopedyou would have had some response to it. Let me read this to you:

On 1 October 1999, I had an interview with tax officer Mr Mark Beadle from the ATO’s small business section inCannington. The ATO were extremely reluctant to see me in person. My wife, me and my two children aged six and fourhad driven the 1¼ hours from south Mandurah to the ATO in Cannington. When we arrived at the ATO the securityguards refused to let my son use the lavatories unless we were met by an ATO officer first. After some debate, my sonand I were escorted to the facilities by a security guard.

That does not lend itself well to the smiling face of the ATO. Moreover, I found it interestingthat the Ombudsman criticised you in respect of part IVA. In the Ombudsman’s report into theMain Camp investments, it states:


ECONOMICS

Part IVA requires the commissioner to make a determination on an individual basis. The participants were invited toprovide information about their individual circumstances which would help ensure the ATO resolved their case in a fairway.

I would put it to you that, in respect of most of the people in these schemes, you have taken ablanket approach. You have circulated part IVA letters to all of them regardless of thecircumstances. I have copies of them and I have found it extremely difficult to understand whatthe tax office’s claim is—if it is this, that or something else, up to 10 something elses that arealternatives. How is a taxpayer supposed to know, from an individual point of view, where theyare at fault? How are they supposed to know? These are all the same, I must say, Mr O’Neill. Itis not a case of ‘Taxpayer Billy Bloggs, here’s yours,’ and that is different from taxpayer BillSmith, taxpayer Tom Jones and taxpayer somebody else. They are all the same. Yet some ofthese people, if it is about the financing, have got full recourse loans or put in cash for the totalamount. Yet you refer to the part IVA allegation as being one of financing arrangements. How isthe taxpayer supposed to know?

Mr O’Neill—Senator, you have raised a few questions there and I would like to answer thosein turn, if I may. In respect of Mr Ryper’s circumstances, we could provide you with a directbriefing. I am not in a position to do that tonight but I am in a position to do that in a couple ofcircumstances. It seems to me that it would be only fair to Mr Ryper that we do that in cameraor that we have discussions with him before we talk about his affairs in a public forum.

CHAIR—His evidence is on the public record. In defence of the tax office, he did say thatwhen he actually got to meet Mr Beadle, Mr Beadle was somewhat sympathetic. At the end ofthe day, it did not help him much because someone else, working in the tax office, seemed totake a different view. In his evidence to the committee he said that Mr Beadle said, ‘Well, don’tblame me, mate. I’m only acting on orders.’

Mr O’Neill—Senator, you would be aware that the general position is that we do not talkabout taxpayer details.


Mr O’Neill—Of course we can and we will, if that is what you ask us to do.

CHAIR—I would have thought it would have been useful if you could have responded to thecomments because they are fairly serious allegations which are totally contrary to what MsHolland was outlining in respect to the tax office’s approach. It is of fundamental importance tothis committee that we do get a response on those things.

Mr O’Neill—Sure. One of the processes that we have put in place since you have takenevidence in Western Australia is to look through large amounts of particular factional scenariosand to try to follow those up and take action directly with the taxpayer, to clarify issues ofuncertainty, et cetera. That is an ongoing process. As you would appreciate, there are lots ofpeople who gave evidence. We received the Hansard yesterday in respect of the Kalgoorliehearings. So there has been only a fairly limited amount of time in which to address particularcircumstances that arose in Kalgoorlie, but we will be following up those taxpayers where wesee there is an issue that we could help break through.


ECONOMICS

CHAIR—Mr O’Neill, when did you receive the transcript of Perth?

Mr O’Neill—The transcript of Kalgoorlie I received yesterday.

CHAIR—I was talking about Perth. Mr Ryper appeared in Perth.

Mr O’Neill—I received that some time ago, and that is the process that we have in play. TheKalgoorlie transcript is the transcript I referred to as receiving yesterday. The second issue youraised was about the part IVA circumstances. The way part IVA works is that it sets out theseeight factors, as you know, and it calls for the determination of an objective dominant purpose.In a sense, the person’s subjective intention is not the key trigger for the application of part IVA.So while individual facts are important, as Mr Smith has pointed out before, there is very littlein these standardised mass marketed schemes. It is very rarely the case that there is anyexception to the scheme—very rare indeed.

CHAIR—Mr O’Neill, part IVA—according to the Ombudsman, not me—requires thecommissioner:

... to make a determination on an individual basis. The participants were invited to provide information about theirindividual circumstances which would help ensure the ATO resolve their case in a fair way. Many of the participants haveadvised the Ombudsman that they did take up this offer only to find that the next they heard from the ATO was theissuing of a part IVA determination with an accompanying amended assessment, which did not appear to take intoaccount the information they had provided.

That is a very significant criticism.

Senator WATSON—That is a preliminary step to getting further information or identifyingthe area as a mischief, I would say. You send out a more generalised circular, you get yourfeedback and then you look at the particular circumstances where you think there is a mischief.I cannot see a thing wrong with that.

CHAIR—If you listened to what I said, Senator Watson, with respect to what theOmbudsman said, not me—

Senator WATSON—I am listening. I have listened for a couple of hours.

CHAIR—The Ombudsman said that the assessment did not appear to take into account theindividual circumstances. My point about the original initial letter going out was—

Senator WATSON—You are confusing the final result with the initial application.

Mr Smith—Senator, the issue in the Ombudsman’s recommendation, and one that we aretaking up, is that we should make it clearer to taxpayers just exactly what individualcircumstances might have an impact on whether part IVA applies. As I mentioned before, inBudplan, for example, there were only three investors who put in their own money. You saidthat there were a number of taxpayers who have told you that they had put in their own cash.

CHAIR—I am only talking about Main Camp. Sorry, there are a whole range of these.


ECONOMICS

Mr Smith—I realise that, Senator.

CHAIR—The First TrackNet project was another one. Just off the top of my head I cannotremember. They go across a range of projects where people have used either full recourse or putin cash for the investment in a whole range of them.

Mr Smith—We need to look more closely at those claims that the finance is full recourse, orindependent finance, as some people describe it. When you look more closely at it, it is notalways money out of the bank or money borrowed from one of the large banks; it is oftenmoney associated with the promoter’s entity. So we need to look at that closely. When thetaxpayer has put in independent finance—their own finance—that would generally sway us tothe view that part IVA does not apply. But it is not to say that deductions are still allowable. Youmentioned before that we put forward a number of arguments as to why we believe thedeductions are not allowable. Part IVA is one of those. But one of the other arguments—thecapital, not carrying on a business, those types of arguments—might mean they are not entitledto the deduction.

CHAIR—I understand the other aspects that might cause the thing to be disallowed. I fullyappreciate that. I am saying that when a taxpayer receives advice that says it is finance or whichgives other alternatives, if part IVA does require the commissioner to make a determination onan individual basis, I have not received any evidence from taxpayers that suggests that wastaken into account. And the Ombudsman’s report suggests that those circumstances were nottaken into account.

Mr O’Neill—There would be cases where we could pay more attention to individual circum-stances where the system has not worked properly. But the system is designed to take a broadpicture of the scheme because the scheme is generally mass marketed. It is like buying a poundof butter—there is no difference between yours and mine.


Mr O’Neill—It might be a different circumstance if you financed yours genuinely and Ifinanced mine in a dodgy fashion. The system may fail us, even though it is designed to pick upthe individual circumstances. Where it does fail us, we have a problem resolution service or theOmbudsman or other processes to pick up those gaps.

CHAIR—In dealing with that issue of whether the system is failing us, in respect of part IVAitself, I refer to your submission to this committee. Unfortunately, I could not find a pagenumber on the page, but it goes to a section which is written about—and it appears to be a letterthat has been sent out to people—‘aggressive tax planning and rulings’. I cannot throw anymore light on it than that. It is after one of the attachments in your submission.

Mr O’Neill—We will find it, Senator.

CHAIR—It is attached to attachment A2. On the second page of the document, in the thirdparagraph, it says:


ECONOMICS

There is a further qualification here. These favourable rulings or advice letters did not generally cover the application ofthe general anti-avoidance provisions, Part IVA. Consistent with our longstanding practice, silence on Part IVA does notconstitute a Part IVA clearance.

If you go over to the next page, it talks about the integrity of the rulings system. It says:

Private binding rulings system performs an essential role in our self-assessment tax system.

In the next paragraph it says:

The private binding rulings system is there to give people certainty of the relevant tax consequences, including before thetransaction is entered into.

When you issue a private binding ruling, as was the case in some of these schemes, and you didnot rule on part IVA, how does that leave the private binding ruling in a position of providingcertainty of the relevant tax consequences?

Mr O’Neill—Ruling on general provisions is a lot more legally simple than ruling on partIVA, because part IVA asks the commissioner to turn his mind to those eight factors. One ofthose is, say, the form and substance of the scheme; one of them is the timing arrangementswhen the scheme is entered into. At the time before the scheme is entered into, there are notfacts on which we can base a part IVA determination.

There are situations where you would seek a private ruling on whether you can get a deduc-tion for subscription to Hansard and I would rule yes, and part IVA certainly could not apply tothat. But there would be other transactions where you say, ‘I want to enter into agriculturalscheme X, Y and Z that is to be implemented on 30 June.’ Today, I do not know exactly howthat arrangement is going to fall out, and you cannot tell me, the promoter cannot tell me, no-one can until it is implemented. In those circumstances there is a real statutory impediment onthe commissioner ruling on part IVA. There have been court cases, which have looked at theapplication of part IVA in private rulings.

CHAIR—Can you tell me what the tax office’s determination is in respect of the Main Campproject as it goes to part IVA? How have you ruled in terms of part IVA on Main Camp?

Mr Smith—Two of the four specifically ruled and that we were not ruling on part IVA.

CHAIR—No. What I want to know is, now having issued a process of going about amendedassessments and saying that part IVA applies, what is the reason for part IVA applying? I amsorry I did not ask the question correctly. I am still not sure I have asked it correctly, but I willkeep working at it.

Mr Smith—The reason is set out in that position paper and it is an objective test looking at it.That objective test will apply to those taxpayers who have received the ruling as much as theothers.

CHAIR—I do not have that one with me at the moment. Can you tell me the reasons as topart IVA having application for Main Camp?


ECONOMICS

Mr Smith—We have brought along some position papers.

CHAIR—Yes, I thank you for that—not that I need any more papers to read.

Mr Smith—There is a substantial amount. I have to tell you that they are not complete, butwe got what we could get for you this morning.

CHAIR—I am trying to understand what you are saying applies. Given that you have saidthat these schemes are generic in nature, therefore I am trying to understand whether theapplication of part IVA is generic.

Mr Smith—In relation to the Main Camp scheme for those taxpayers who took up and usedthe non-recourse round robin financing, we would say that part IVA does apply in those cases,including those taxpayers who have received a private ruling which did not rule on part IVA. Atleast two of those specifically stated that we were not ruling on part IVA. The other thing withthose particular private binding rulings is that they related to the 1992 and 1993 years, which wedid not amend. It was the 1994 and 1995 years that we were amending. If taxpayers in thoseearlier years were also in Main Camp in 1994 and 1995, we would look at the fact that they hadapplied for and received a private binding ruling in terms of whether it is appropriate to furtherremit penalty, et cetera.

CHAIR—In one of those rulings you said:

With respect to the possible application of part IVA of the Income Tax Act the Commissioner cannot rule on this mater.Part IVA of the Income Tax Assessment Act is an anti-avoidance provision, which operates to deny a tax benefit, whicharises from a scheme. In regard to the factors outlined in section 177D of the Income Tax Assessment Act theCommissioner must determine whether any of the participants in the scheme have entered into the scheme for thedominant purpose of obtaining a tax benefit for any taxpayer. A request for a ruling in respect of the application of partIVA of the Income Tax Assessment Act must contain all relevant information outlined in 177D of the Income TaxAssessment Act.

What is that information?

Mr O’Neill—The circumstances in 177D?

CHAIR—Yes.

Mr O’Neill—They are the eight factors that we talked about earlier. The first one is themanner in which the scheme was entered into.

CHAIR—What information would suffice to demonstrate that?

Mr O’Neill—I will not talk to the particular because it is a bit taxpayer specific. The mannerin which the scheme was entered into, which could rise to us thinking part IVA would beattracted, would be a scheme where there was a prospectus issued, the prospectus said that youcan get finance for 90 per cent of your contribution—you only have to pay $10,000—and thatthe way you get finance is to fill in this application form, there are no credit checks conductedin respect of that loan—say of $90,000 for this scenario—and that the $10,000 contributionmade in cash does not have to be paid until you actually get a refund from the tax office and


ECONOMICS

then it is taken out of the refund, and it is only the balance in excess of that which comes to youfrom the promoter after the refund is delivered. The $90,000 loan is a non-recourse loan or hasthe same economic effect as non-recourse finance. Those would be indicators which would berelevant to the manner in which the scheme was entered into.

The second indicator is the form and substance of the scheme—we discussed that issuebefore. Non-recourse finance is probably ambiguous in the sense that it is merely one tool bywhich I can get money without risking any of my assets. An issue there is about whether thefees are excessive relative to the work to be carried out. In respect of some of the film schemes,for example, the amount that is raised by the promoter of the film scheme is a very highamount; the amount that is contributed to the actual production of the film is a very lowamount—it might be only one per cent of the total contributions. The third factor is the time atwhich the scheme was entered into.

CHAIR—How would you identify that?

Mr O’Neill—Many of these schemes are entered into in the very last days of the financialyear.

CHAIR—If I were trying to get you to rule on part IVA for a scheme I was investing in,would you to say to me, ‘This is what we need’? Do you need the management agreement, theloan agreement and identification that it is, as you say, a non-recourse loan? Do you need adescription of the investment? What things would you want from me?

Mr O’Neill—All of those sorts of things. We would need the implementation—

CHAIR—A copy of the prospectus?

Mr O’Neill—A copy of the prospectus, yes.

CHAIR—The stated intention for me entering into the arrangement?

Mr O’Neill—I am not sure where that would fit in under the eight factors, but all thosedocuments necessary for you to finance the implementation for the promoter to actuallyimplement the scheme would be relevant to me.

CHAIR—If I gave you a description of the investment, a statement that the loan was non-recourse, a copy of a private binding ruling from another person made in a similar investment, acopy of the management agreement in terms of the implementation, how it was going to bedone, a copy of the initial agreement—that is, the management agreement—a copy of theproject agreement—that is, the links between the people involved, et cetera—the subsequentmanagement agreement, a copy of the loan agreement and a copy of the prospectus, would thatbe enough for you to rule on part IVA?

Mr Oliver—If I could supplement Mr O’Neill’s answer already and point to practical reallife examples where we have ruled about the operation of part IVA, product rulings classicallyare where we have gone into a fair amount of trouble in setting out the type of detail we thinkneeds to be set out to say whether or not part IVA does apply. That particularly goes to some


ECONOMICS

financing aspects, and there is a generic paragraph that talks about the specific aspects, which, ifyou have those, then you know that—

CHAIR—I know, Mr Oliver, I have read those. I am very interested in what you have doneunder product rulings and how that might differ from what I am asking you as an individualseeking a private binding ruling.

Mr Oliver—If you are leading up to the proposition that as an individual investor it is verydifficult to come up with all of that information, I do not think you are going to get anydisagreement from this side.

CHAIR—No, I am not. I am just saying that, if I provided all of that information, is thatsufficient or would you require me to provide something else in addition to those things,because those things are the sorts of things I think you have primarily dealt with under theproduct ruling system and approach? I am getting a nod, but am I getting a yes?

Mr Oliver—Can I respond at this stage—sorry to interrupt you—but specifically what I un-derstood not to be mentioned, which would be covered in a description that you would find in astandard product ruling, is the initial flow of moneys under what is contended to be the loanagreement.

CHAIR—I give you a statement that the loan was a non-recourse loan.

Mr Oliver—But I am talking about the initial flow of funds, and whether there is to beactually just a circular flow of funds under that non-recourse loan agreement or a real flow offunds that means that the manager is left with a real pile of cash, if you like, that is not takenaway from him at some later stage contemporaneously with that. That is fairly critical.

CHAIR—Can I assume then, from that statement, that I could have a non-recourse loan thatis fully repayable and the structure of it is such that I have got a commitment to repay it,regardless of whether or not you ultimately allow my deductions or this thing falls on its head—not necessarily, I should probably say, in a full non-recourse loan, but in a limited recourse loanarrangement? As I understand it, there are people who are in those circumstances that areactually being pursued by some of these scheme managers for money that have had limitedrecourse financing because the people entered into a commitment to repay the loan. Regardlessof what their first financial arrangement was or whether or not they were going to use theirallowable deductions to pay the loan, or make some of the repayments, they are now in asituation whereby they have an obligation to repay the loan.

Mr Smith—I think the specific loan you are talking about is not a non-recourse loan. I thinkthe situation you are talking about is where the finance company has provided, say, a $30,000non-recourse loan to the investor and has also provided the investor with a $10,000 personalloan. That personal loan is full recourse and the way it is designed is that you claim a deductionfor the 30 plus the 10 for management fees paid to the promoter and you sign over the $10,000to be repaid out of your tax refund when you get it. In some of those cases, we actuallydisallowed the deduction before the tax refund went out so the person still had a liability thereon the $10,000 personal loan. I think that is the distinction between those; it is not the non-recourse loans.


ECONOMICS

CHAIR—I will have to check it because it has been explained to me slightly differently.

Mr Smith—I do recall that one in the Hansard of the Perth or Kalgoorlie committeemeetings.

CHAIR—I think it was Satcom.

Mr Smith—Yes, I think it was in the Kalgoorlie meeting.

CHAIR—I am only going from memory as well.

Mr Smith—In that particular case, it was a $10,000 personal loan that the promoter set up. Inother circumstances too, with a non-recourse loan, there are some circumstances that mighttrigger it becoming full recourse as well. In which case the promoters may also—

CHAIR—Just going back to what Mr Oliver said, the only thing that you would want to see,over and above the things that I outlined that I could provide to you, would be a description ofthe nature of the financing arrangement?

Mr Oliver—Could I also add that, in terms of some of the product rulings and the list ofdocuments that have been taken into account in saying just what is the set of facts thecommissioner is ruling on, you will often find reference to third party contracts between themanager and a third party to do the work.

Mr Smith—I think another important point is that it is not so much what is provided, butwhat is not provided. In some circumstances, it may be that it is held out to us that alldocumentation has been provided to us when in fact there is other documentation that may havea bearing on the deductibility that is not provided. While we might be able to say that, on thebasis of the facts that have been provided to us, part IVA would not apply, it may be that furtherfacts that were not disclosed to us subsequently emerge which would change that view.

CHAIR—The only reason I ask these things is to understand how somebody, who has beengiven a ruling, goes into an investment and then finds themselves in deep trouble later, as aresult of somebody saying, ‘We didn’t have this information pursuant to this, so we didn’t ruleon that part.’ It seems to me to be a bit of a double jeopardy for a person who is looking to makean investment, particularly people that are on the lower end of the income scale. It is a doublejeopardy and I am just trying to get my mind around about how you might better address that inthe future. Senator Watson?

Senator WATSON—Could you please outline the progress if any, of advising governmentsof the option of instituting penalties for misleading information against promoters, particularly,for example, in circumstances where the products are implemented in a materially different wayto what has been originally suggested? Have other tax jurisdiction gone down this line?

Mr O’Neill—The commissioner has recently stated that he hopes to have by the middle ofMay advice to government about those sorts of issues. I can tell you some of the features ofoverseas regimes if that is helpful. Obviously, we are considering overseas experience in howthese regimes have worked. One of the issues for us and our counterparts in America and


ECONOMICS

Canada, for example, where they have these jurisdictions is regulation of the market ofpromoters. For example, licensed dealers are regulated under the Corporations Law, but thereare some people who act in the tax sphere who are not subject to regulation. There arepromoters who previously sold telephones and are now selling tax schemes.

Tax agents, of course, are regulated by the Tax Agents Board. The commissioner has someinvolvement with those. Accountants and lawyers have their own regulatory regimes. Financehouses are not regulated by the tax office. APRA and other bodies look at the issues aroundfinance companies, insurance companies, et cetera which are also promoters of some taxeffective schemes. One of the issues at the threshold is: who is included in a regime thatrequires there to be a code of ethics? In the event of a breach of the code, is there a disciplinaryprocess whereby the practitioner is banned from practising for a certain period of time or for lifeif it is a particularly egregious feature? That is the model, for example, for licensed dealersunder the Corporations Law. There would be issues about injunctions under the Trade PracticesAct. Injunctions can be issued by the courts in respect of activity which is false and misleading.We would be looking at overseas experience where they have that sort of injunctive power.

Another example which occurs in the Corporations Law is mandatory enforcement of under-takings. For example, if we saw promoter X who is involved in egregious activity and went tothat person and said, ‘We want you to stop that,’ and that person gave us an undertaking butthen continued to promote a scheme, we would then see benefit in the Corporations Law modelof being able to get that undertaking enforceable by the courts. If a promoter came to us andsaid that he was going to implement arrangement X and he actually implemented arrangementY, then overseas experience is that promoters should suffer the penalty. The penalty in the Ca-nadian example is levied through the civil system—it is not the criminal regime—as a propor-tion of the gross fees derived by that promoter.

Senator WATSON—Is there a penalty? Is there a prohibition under tax law for anunregistered tax agent to mass market a taxation scheme on the basis that they are getting someremuneration and are not a registered tax agent or equivalent?

Mr O’Neill—In short, there is not.

Senator WATSON—Why not? I thought only registered tax agents were in a position tocharge a fee, apart from the changed rules in relation to getting assistance from, say, abookkeeper to complete GST returns. So it is possible that an unregistered person could give taxadvice, collect a fee and market an aggressive tax planning scheme without being a registeredtax agent or an equivalent?

Mr O’Neill—That is right. Promoters of schemes are not necessarily just registered taxagents.

Senator WATSON—Isn’t this a weakness of the current law?

Mr O’Neill—One of the issues for us is who is incorporated in the net of regulation.


ECONOMICS

Senator WATSON—Why have one set of criteria which are particularly harsh for registeredtax agents and allow others to do a similar sort of work—collect fees and provide advice—andnot be subject to those same rigorous rules as registered tax agents are?

Mr O’Neill—It is a very good question, Senator.

Senator WATSON—It seems to me to be something of a breach. The other thing that hasconcerned me, listening to these discussions this afternoon, is that it appears we are in danger ofexpecting the tax office to pass a very high hurdle, where just about every prospectus has to beread, officers have to attend every seminar where there is likely to be an opportunity for sellingthese schemes and maybe the office should even be into tapping telephones to make sure it getsevery individual who might be mass marketing or selling an aggressive tax planning scheme.That does seem somewhat unreasonable. I understand there are only about a handful of privaterulings or advance opinions when the schemes may not have been 100 per cent according to thelaw but have been aggressively sent around. Can you tell me how many public rulings havebeen incorrect? I acknowledge there have been a handful of rulings that have been misconstruedor applied incorrectly, and one advance opinion. How many public rulings have fallen into thatcategory? I do not think there have been any.

Mr O’Neill—I would be very hesitant to say. I could not tell you off the top of my head. Icould take that on notice. We have issued many hundreds of public rulings over dozens of years.The number that we have had to withdraw would be, I imagine, less than 10. I do not knowwhether there would be any other views here on that.

Mr Oliver—Senator Murphy mentioned the retirement village public ruling and how that hadbeen withdrawn and the change in view operated on a prospective basis.

CHAIR—There were 15 in the EBA.

Mr O’Neill—They were private rulings.

CHAIR—Yes, I know. I thought Senator Watson also asked about private rulings.

Senator WATSON—No. The risk I see is that, with the way we are moving, we are reallychallenging the whole structure of the self-assessment system. The self-assessment system isthat the taxpayer has to take reasonable precautions. I do not think reasonable precautions aresuch as going to an aggressive tax planner and just asking him to check over the bona fides ofhis tax planning scheme even though he might have QC or a few letters after this name. If yougo to a couple of independent accountants, that may be adequate safe harbour. But if you just goto an aggressive tax planner and ask him about the alleged bona fides of his scheme, he is notgoing to destroy that in front of you at an interview. Mr Smith or Mr O’Neill, you might like tocomment on this. If we allow these sorts of challenges to go unheeded, it is putting the wholetax self-assessment system at risk and in the hands of aggressive tax planners.

Mr Smith—I agree with you. As I mentioned before, one of the difficulties we have had inthis process from day one is balancing fairness to the taxpayers who are involved in these thingswith fairness to the general community. We are trying to improve compliance in the future. Theproposition has been put to us: why didn’t you just draw a line in the sand and move forward?


ECONOMICS

That sort of approach creates an expectation that we will do that again next time, and I thinkthat is itself a driver of tax avoidance.

Senator WATSON—You would always be captive to aggressive marketers.

Mr Smith—Exactly.

Senator WATSON—And then there are the poor fools who get caught in with them.

CHAIR—Maybe if we had laws sufficient to deal with these matters in the first place itwould not be a problem.

Senator WATSON—It was your government, Senator Murphy, that moved us into the self-assessment regime. This is one of the consequences, and something that we have to live with.

CHAIR—I am not making any excuses for anybody. I am just saying that there is a problem.

Senator WATSON—The tax office is taking all reasonable steps—

CHAIR—I suggest you read Mr Lawrence Ryper’s submission and ask yourself whether ornot he conducted himself with due diligence in terms of the self-assessment system, given theadvice he received from the tax office.

Senator WATSON—There will always be cases of injustice in any tax system, there is nodoubt about it, because people take high-handed positions. Over time, these people getidentified. But you cannot judge the whole system by a few people who have been badlytreated. You have got to get justice for them, I admit.

CHAIR—Absolutely. I want to go back to where I started—administration of the tax law. Iknow we have got limited time. I want to go back to something the commissioner said in thatsame document I referred to earlier. Under the integrity of the ruling system, he says—and I donot want to use this out of context:

It is, however, equally clear at law that if a ruling was to issue for an improper or fraudulent purpose it cannot be binding,just as any assessment that might be issued in bad faith would not be valid. This is an application of a general principle oflaw. It is in my view a sound principle. It goes to issues about people benefiting from improper or fraudulent acts and,more generally, to the issue of inducements to fraudulent activity in the absence of such a principle.

I do not believe therefore that there are any grounds in law or, indeed, in administrative fairness to stand by a rulingissued for an improper or fraudulent purpose ...

I do not disagree with that. But I do say that there were examples—and I refer to the threematters that I outlined earlier—where the tax office did take a view in the application of the taxlaw where the tax office either had not made a determination, had changed its determination orhad issued incorrect rulings in terms of advanced opinions and then said, ‘We now act from thisday forward, not from this day backwards.’

I still have some difficulty understanding the procedural administrative fairness to taxpayersin a self-assessment system whereby they are expected to do the best they can. And this is the


ECONOMICS

problem. This is not necessarily a problem of the tax office’s making, but it would seem that theadministrative practice of the tax office was different in these cases. The Ombudsmanrecommended that interest should not be collected because of the slowness of the tax office toact in respect of many of these schemes. Rightly or wrongly, people were led to these beliefs—not unlike they were in respect of unit trusts, the retirement villages or the discretionary trusts—and people have alleged to this committee that the tax office has done nothing different to whatit did in those cases in that it allowed something to proliferate and it was slow in taking action.The Ombudsman was also critical to some degree of that. Regardless that at the end of the dayat law those matters are probably procedurally correct from the tax office’s point of view, whatled a lot of taxpayers into these things was the fact that there were promoters and financialadvisers out there, because they had blossomed over a period of time. There does seem to havebeen some defectiveness in the administration of the tax office in that respect.

Mr O’Neill—Let me first say that, in addressing this issue, before I set out what the processwas I thought I would leave it for you to decide whether or not that process is defective. Essen-tially, it really involves a judgment call. If I am responsible for saying, ‘Tomorrow we will notcall this piece of paper yellow,’ I then have to decide whether I have led the community into as-suming that this piece of paper was yellow up until this time.

CHAIR—That is what I am saying to you.

Mr O’Neill—And if I have—if, corporately, the commissioner has—then we say, as a matterof policy, our change will only apply prospectively. But the process is that, when I am sitting atthe precipice and deciding what will happen tomorrow, I need to have regard to what happenedyesterday, and in the last months and years, to say, ‘Do I think that we—that is, the tax office—have genuinely led the community to misunderstand what our view of the law is?’ In manycases, I do not think that that is the case. The document you refer to is Michael Carmody’sparticular report in respect of employee benefit arrangements and why he believes, in respect ofthose particular schemes, that we had not led the community into error about what the ATOview was.

CHAIR—I assumed it was talking about the employee benefit arrangements. That is why Isaid I did not want to quote it out of context. I will just go to a couple of other matters whichhave been raised. There is the question about court cases and getting cases before the FederalCourt to get some of these matters of law determined. The tax office has been accused of usingdelaying tactics, and the committee has sought to determine whether that is or is not the case. Iunderstand that the Budplan matter is due for another directions hearing shortly.

Mr Anderson—On Friday.

CHAIR—I understand there are additional affidavits to be issued. Are you aware of that?

Mr Anderson—The situation in a nutshell is that the taxpayers’ evidence was due to be filedin January and it still has not been completely filed. They were seeking further time, until lateApril. The court gave them until, I think, 20 April and said if they wanted to file furtherevidence after that date they would need a specific court order. That is an example of what weare facing.


ECONOMICS

CHAIR—I understand that. But, if they have filed that additional information by that date, isit your intention that you will still proceed with the hearing dates as set down for June—is it the6th to the 8th?

Mr Anderson—It is 1 to 8 June. Our intention is to proceed on those dates.

CHAIR—Regardless of the additional affidavits that will be or have been provided?

Mr Anderson—It is possible that there could be something in that additional material—theyhave foreshadowed some expert evidence, that sort of thing—that we need more time toconsider.

CHAIR—What does that do in terms of the case?

Mr Anderson—We really do not want to lose those dates, but at the same time the caseneeds to be properly determined. We have already accepted that our ability to prepare is goingto be reduced. We were going to have had the time from January until the hearing in June. Nowwe are going to have about a month to prepare our case, once we know fully what their case is.If we cannot proceed on those dates we will ask for different dates, and that is likely to meanthat we will have to ask for a different judge because the particular judge is not available for therest of the year. I believe we have already foreshadowed that to the court.

With regard to the orders the court made at the directions hearing, it awarded costs against theapplicants, which does not actually mean the individuals, it means the promoters, because of thearrangement we have for the funding of that case. Also, because of the court’s indication thatthey will not be allowed to file more evidence after 20 April, it accepts as well the importanceof getting these cases to an early hearing.

CHAIR—One of the other problems associated with this dragging out is that these people—as you would acknowledge—are facing significant financial pressure and what they might ormight not be able to do depends very much on the outcome of court hearings. Therefore, itwould be appropriate to get them to court as quickly as possible.

Senator WATSON—What are the issues that you are asking for a determination on? Whatare the principles that you are testing before the court? What do you want to find out and toprove?

Mr Anderson—The issues being tested are: whether the deductions being claimed by theparticipants in the Budplan scheme are actually available; whether they are carrying on abusiness; whether the quantum of the deductions that they have claimed for research,management fees—things like that—are actually allowable; and, in any event, whether part IVAapplies, so that it is actually something that they are doing for the primary purpose of obtainingtax credits.

Senator WATSON—Are you also looking at such things as the quantum of the first year’sdeduction and the technique of the round robin as to whether it is a legitimate deduction? Howmuch really has to be invested in the business? There are a lot of questions that really need to beasked here otherwise we will see people developing schemes around those issues that have not


ECONOMICS

been addressed. The thing that worries me is to make sure that the test case is wide enough interms of the principles that really have got to be satisfied in these mass marketing schemes.There are about six or eight issues that I think are very relevant.

Mr O’Neill—I think to the extent the facts allow we would be raising each of those issuesyou raise including the deduction, the business issue, the quantum and the financing of the partIVA issues. Some of the particular schemes do not allow us to agitate all of those issues andthen we have to go to the next case but, as much as possible and Mr Anderson could probablyexplain more, we are trying to get representative cases that take the whole bag together.

Senator WATSON—Thank you.

CHAIR—I move to other cases—and I apologise because I had some documentation thatwent to the particular cases and I gave it to my deputy chair to read and he has taken it with himso I do not have my reference material but I will do my best to try and represent it as I canremember—that have been taken up by Wilson and Atkinson from Perth, WA. Some of thematters that they have raised relate to some actions by the ATO which would appear to me to bedelaying actions particularly as they related in the first instance to allowing a collectiveobjection to be listed. The ATO objected to that, as I understand it, and you subsequently wentto court but withdrew the objection at the last minute?

Mr Anderson—There was a question about objections that were signed, not by the taxpayersbut by the solicitors.

CHAIR—I am just talking about them being represented from a collective point of viewwhich has been a bone of contention, as I understand it, with regard to Budplan initially as well.Given that you say these are all generic, what is your position now if there is another range ofpeople that want to get legal representation and look at their particular scheme, whatever thescheme might be? Is it that you will allow people now to have collective objections made bytheir representative?

Mr Anderson—We do have a practice statement which says that we require taxpayers toindividually sign their objection but we are reviewing that practice statement and I foreshadowwe will release a further one which will say that in fact it can be signed on their behalf by anappropriate representative.

CHAIR—When will you do that?

Mr Anderson—It is being reviewed at the moment. I cannot give you a precise time.

CHAIR—Can you provide me with some advice about that as to when you intend to actuallydeal with that?

Mr Anderson—Certainly. Might I continue slightly further, Senator?

CHAIR—Yes.


ECONOMICS

Mr Anderson—With respect to the allegation of delay, Mr Ryper is one who makes thoseallegations of our actions of delay with the test cases.

CHAIR—I am sorry. I did not realise he was.

Mr Anderson—Our experience continually is that the delay is actually on the side of thepromoters. When we get near to court we tend to find that they do not comply with the court ortribunal timetables. If we actually get close to hearing, our experience to date has been that allof the cases suddenly drop away.

CHAIR—You are talking about those cases that have gone before the AAT in the main, areyou not?

Mr Anderson—None of the mass marketed schemes of these varieties have actually gotclose to a hearing in the Federal Court; that is right. But even in the Federal Court—

CHAIR—Are the ones that have dropped off the individual taxpayers that have goneunrepresented before the AAT?

Mr Anderson—They were actually represented.

CHAIR—It was put to me that in some cases they were unrepresented taxpayers. I have gotto say that I do not know whether they were or not. It was just put to me that they wereunrepresented taxpayers. They may have been represented. I do not know but they dropped offat the last minute and I accept that. I am talking about with regard to the Federal Court—

Mr Anderson—With specific regard to the Federal Court in Wilson and Atkinson, there hasbeen delaying behaviour—they have failed to comply with some court timetables—and therewas also an arrangement that perhaps Mr Smith could talk about. We were seeking to identifyrepresentative cases so that we could get an outcome by way of a court decision which wouldresolve as many other cases as possible. Unfortunately, they did not do what we asked or whatwe thought they had agreed to do in identifying possible representative cases. As a result, timewas lost, and we regret that.

CHAIR—When I get my paper back I will take the opportunity to get the questions to you onnotice. If you could respond to those, I would appreciate that. I am sure Wilson and Atkinsonwould be interested in your comments just now. I do accept that in respect of the Budplanbecause I did inquire about who was at fault. I accept that in some instances it has been on theside of the investors or their representatives in that respect. The underlying issue is aboutgetting these matters to court as quickly as possible. That is the quintessential problem. TheATO can write to us and outline any problems they perceive and also to set down what theirposition is in respect of the legal proceedings.

Mr Smith—We totally agree with that. It is in our interests to have these cases heard asquickly as possible. The difficulty with these cases is that we are not the applicant. It is up to thetaxpayer to object, appeal and take the matter to the courts.

CHAIR—Are you funding any of the test cases?


ECONOMICS

Mr Anderson—There is one case that has been partially funded. I believe evidence wasgiven about that to the committee. It is a Budplan case.

CHAIR—That is the only one, is it?

Mr Anderson—It is a very unusual situation. With the other Budplan test cases that are go-ing to hearing the arrangement is that we will not seek to recover costs against the individualrepresentatives if we are successful—and we assume we will be. The costs have been guaran-teed by the promoters. We do not think that the individual test cases should themselves have topay those costs. At one stage when we thought we needed a broader profile of cases to get a rep-resentative set of decisions we invited other participants to come forward and said to them,‘Given we are selecting you, we think it is appropriate to offer you test case funding.’ One per-son did come forward very late in the day—it was roughly a year after we issued the initial in-vitation to them. At that point we said we did not think that they would actually assist anythingbecause this was just after Christmas last year and the cases were already so well advanced. Theonly thing that this might have done was delay the other cases. We said, ‘If you adjourn andawait the outcome of the other cases, we will stick to what we said and pay your costs to date.’But we certainly did not say, ‘We will pay your costs if you go away.’ That was not the case atall.

CHAIR—I know I have asked you this in part. Could you also provide the committee with abriefing in respect of the cases that you are going through with Wilson and Atkinson as to whereyou think you are up to?

Mr Anderson—If I can mention two other things about delay. The commissioner has metwith the President of the AAT and with the Federal Court, with the Law Council and otherparties present, to investigate case management procedures to see if there is a way of gettingrepresentative cases dealt with by the court and by the tribunal as quickly as possible. Certainlythe Federal Court has issued a practice direction about that.

The second thing is actually looking at what is perhaps a defect in the system. As Mr Smithpointed out, it is the taxpayers who get to choose whether they want to do something, when theywant to do something and in which forum. We do not have the ability to go before the courts toseek an advisory opinion at any stage. We are looking to see whether that would be a possiblerecommendation to government, but it is something that does not exist in other jurisdictionseither.

Senator WATSON—Tax agents are expected to know the law, including the law about thelimitation of private binding rulings and their applications, so I ask: how many tax agentprofessionals who have advised on private binding rulings that have been promoted as part of amass marketing scheme have been referred to the Tax Agents Board for disciplinary reasons?You can take that on notice if you like.

Mr Smith—Certainly.

CHAIR—I thank the tax officials for your time. I understand that you probably have adifficult enough task as it is, but this is a fairly significant issue. There are other matters we didnot go into today in terms of a longer-term approach on these issues, which we would like to


ECONOMICS

talk to the tax office about in the future when we determine our course of action. We have takena view that at this time we will try and deal with what seems to be a fairly urgent problem for alot of people and, I suppose, for the tax office. We appreciate very much that you have taken thetime to come here and respond. With the questions on notice, I will send you the material aboutthe court cases and it would be very helpful if we could get a response fairly quickly.

Mr O’Neill—Certainly. There is the question of the position papers. I do not want to prolongthings but you asked for a large number of those.

CHAIR—If you have some there we will take those now. If we determine that we need morewe will come back to you about that. Thank you for getting those.

Mr Smith—We have not had the chance to go through them, so could we pass them overconfidentially? If you need to put them on the public record we can take out any confidentialinformation.

CHAIR—Yes, we would undertake to do that in relation to personal information. I spoke tothe secretary about that.

Mr Smith—I do not think there is any personal taxpayer information in there, but there isinformation relating to some of the promoter entities, et cetera.

CHAIR—Okay. We will receive them on a confidential basis at this time and we will comeback to you if there is ever a need to make them public documents. Thank you very much.

Committee adjourned at 7.02 p.m.

commonwealth of australia official committee hansard · 2001. 5. 17. · charles, mr robert gerard,...

Documents