Self-managed superannuation fund retirement planning schemes and the healthcare industry are at the top of the Australian Taxation Office’s watch list for aggressive tax planning.
It must be tax time. The ATO sent a heavy-duty warning last week to financial planners to be alert to the risks of aggressive tax planning, for their clients and their professional reputations.
Patricia Sampathy, assistant commissioner of taxation, private groups and high wealth individuals at the ATO, said in an exclusive Association of Financial Advisers member webinar that financial planners “are a trusted adviser providing expert services to help Australian business to succeed and they’re a very important intermediary to us”.
The ATO’s approach to aggressive tax planning risk is to act quickly, Sampathy advised. “We want to stop the proliferation of potential tax-avoidance schemes and disrupt the model, from both the supply and demand side, for these products.”
Aggressive or legitimate?
The difference between legitimate and aggressive tax planning boils down to intent, Sampathy confirmed. Financial planners can assist clients in arranging their financial affairs and maximising their investment outcomes “in a way that is consistent with the intent of the law and in doing so, keep their tax to a minimum,” Sampathy said. In contrast, aggressive tax planning schemes, also called “tax avoidance schemes”, involve the deliberate exploitation of the tax system. Sampathy clarified, “They frequently have little or no economic substance, they’re often contrived, and they may even border on fake.”
Current arrangements of concern
With the explosion in financial advice to Baby Boomers, the ATO is predictably taking a particular interest in retirement planning schemes. These might involve encouraging individuals to channel money inappropriately through SMSFs. Meanwhile, the ATO has launched Super Scheme Smart to educate taxpayers and financial advisers about these schemes and traps.
Also on the retirement planning scheme watchlist is the refunding of non-concessional contributions to reduce taxable components.
“These are arrangements where members deliberately exceed their non-concessional contributions cap for the sole or dominant purpose of altering the taxable and tax-free component of their super account balance,” Sampathy explains. There are concerns some individuals are employing this strategy to reduce the taxable component of their super interest and ultimately lowering the amount of tax payable, the ATO commissioner noted.
The involvement of SMSFs, directly or indirectly, in property development or other business ventures is another red flag to the Tax Office. Sampathy advises, “These arrangements are fine but we do caution that they may give rise to significant income tax and regulatory risk.”
The healthcare industry is also on the ATO’s radar. Some healthcare providers operate from centres run by third parties. As a carrot to set up shop, some third parties may offer lump-sum payments to providers, some of whom have incorrectly treated this payment as capital, rather than income, Sampathy explained.
Schemes involving spilt loans have also caught the attention of the ATO. These seek to make interest payments on home loans tax deductible.
The unitisation arrangements related to Division 7A are also an arrangement of concern for the ATO. A payment or other benefit that a private company provides to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A, even if the participants treat it as some other form of transaction such as a loan, the ATO website states. Sampathy explains, “We are currently looking closely at arrangements that attempt to move profits from a private company to a related non-fixed unit trust in a form that seeks to avoid the application in Division 7A.”
What are the risks of aggressive tax planning?
Through aggressive tax-planning schemes, the clients of financial planners can attract the unwelcome glare of the ATO through audits, civil investigations where promotional conduct is involved, unpaid taxes, and extra interest payments and penalties.
There are also perils for financial planners. Sampathy cautions: “Apart from costly penalties for your clients, there can also be a risk for your own reputation as a professional adviser, through breaches of the applicable legislation and breaches of professional standards that may be mandated by your association.”
She continued, “Association with these sorts of schemes [may] also generate scrutiny from other regulatory bodies, such as ASIC or the Tax Practitioners Board, and ultimately damage your long-term relationship with the client.”
Advice for planners
Sampathy offered some suggestions for ways planning firms can protect their practices from exposure to tax-avoidance schemes. These safeguards include publicly disclosing tax advice services and tax products, providing detailed information about any financial products, marketing materials and processes, and the use of external intermediaries.
“We also ask [financial planners] to ensure that the remuneration methods for tax advice services for members of your firm or employees, and the fee structure for products, do not generate exposure to aggressive tax stances,” she urged.
How planners can assist the ATO
The ATO commissioner conducted several polls during the webcast. One survey question asked, “If you have seen any of these schemes or other aggressive tax planning, would you report it to us?” Of the webcast audience, 89 per cent agreed that they would, raising the question what the remaining 11 per cent thinking?
As an impartial observer, it’s hard to say whether Sampathy was surprised by the survey revelation, although she continued, “To help us, it would be valuable to know from you, if you encountered this, who came up with the idea of a tax planning arrangement?”
Typically, a promoter is behind an aggressive scheme, Sampathy offered. “They have a vested interest in securing you or your client’s involvement in the arrangement and are generally quite active in marketing the arrangement, charging substantial fees and receiving a payment, including commissions from your client’s investment,” she explained.
When a client approaches a financial planner with something that may cause concern, doesn’t look or feel right, or appears too good to be true, it’s important to question it, Sampathy advised.
“We see your role as helping to protect your client and, by association, your business reputation, from the scheme promoters,” she said. “If you have clients who are caught up in an aggressive tax scheme, we encourage you to engage early with us so that we can work together to resolve any problems.”
