Clearing the air on aggressive tax planning

The Australian Taxation Office (ATO) has fired the first shots in its war against what it calls "aggressive" tax planning strategies, which promises to become bloodier over the next year. But advisers haven't yet lost the tax-effective investment battle, as Annamaria Carey explains.

The ATO is currently involved in what many regard as a sabre-rattling exercise by expressing public concerns about what it regards as a growing culture of aggressive tax planning amongst taxpayers. Its view is that there is currently a mass marketing of tax planning advice which is regarded by taxpayers as merely another commercial product or commodity.

It fails to understand, though, that most taxpayers operating businesses regard tax as merely another cost.

There are constant disputes between the ATO and taxpayers as to what is the exact amount of tax payable. But both sides must accept that the correct amount is the amount of tax a taxpayer is legally obliged to pay.

As part of the ATO's campaign, it recently established a Strategic Intelligence Network to help identify and respond to emerging aggressive tax-planning techniques. Its roile is to identify trends in tax planning and develop an appropriate ATO response. The unit gathers information from articles, seminars and the famous tax grapevine, as well as tax advisers and the business community.

The unit gained publicity (some might say notoriety) after the recent release of draft ruling TR 98/D12 on employee benefit trusts. This targets arrangements under which employers provide employee remuneration in a non-salary form. Under this arrangement, the employer obtains a tax deduction and avoids any fringe benefits tax (FBT) liability and the employee receives the benefit in a tax-free form. The ruling states that such benefits will be subject to FBT.

The ATO has also released a ruling (TR 98/22) on the tax effectiveness of split or linked loan facilities, which were being heavily marketed by many financial institutions 18 months ago.

These involve credit facilities where there are either two or more loans with a separate account each or where there is a single loan with sub-accounts. The loan amount is allocated between two or more accounts; one is private while the other is used for investment purposes. Payments are first applied against the private account whilst interest is capitalised on the investment account.

The interest component on this account is then claimed as a tax deduction.

The ATO view is that a deduction is allowable for only the amount of interest payable if interest had been equally apportioned against the private and investment accounts. So a portion of the total interest previously claimed by many taxpayers will not be allowed as a deduction and penalties could apply.

The ATO has indicated it will run a test case on the effectiveness of these accounts early in 1999.

In addition, the ATO will be paying particularly close attention to structured-option arrangements - commonly marketed to taxpayers with a potential CGT liability - under which a loss is created regardless of market movements.

The ATO is also studying products offering tax deferral, expected to be popular in the lead-up to personal income-tax cuts due from July 1, 2000. The focus here will be on investment in research, films and primary production.

The ATO's concern is that these schemes offer a tax benefit exceeding the cost of the direct investment. One film scheme has already been the subject of adverse determinations by the tax office.

The ATO will also scrutinise certain employee benefit arrangements, structured financial products and overseas superannuation funds. A proposed crackdown on the use of overseas superannuation funds has been the subject of legal action by two professional firms seeking privilege on behalf of clients, one of which was successful.

The firms involved, Deloitte and Deacons Graham and James, have had mixed success in the Federal Court - Deloitte was successful while Deacons won its argument for privilege.

But the battle is not yet lost for taxpayers wishing to invest tax-effectively.

The ATO is attempting to help taxpayers choose "ATO-acceptable" investments via a product ruling system, which will give "tax clearance" on tax-effective products as requested by promoters.

Taxpayers and advisers will need to ask about the existence of such a ruling from any promoter who offers such a product. The ATO should also publicise the product-ruling concept, particularly leading up to the end of the financial year.

Of course, the fact that the ATO disagrees with an arrangement will not finally determine many of these issues. There are usually complex questions of law involved and eventually many of these arrangements may well be tested in the courts.

<I>Annamaria Carey is tax principal at Greenwood & Freehills.