New penalties for managed investment scheme promoters

Managed investment scheme promoters who exploit the tax system will be open to civil penalties in the Federal Court if a new bill is passed.

Changes to the Tax Act allowing civil penalties against investment scheme promoters (Tax Law Amendment Bill 2006) were introduced into the House of Representatives.

The Assistant Treasurer Peter Dutton said in the house yesterday that the bill will ensure promoters are liable for penalties where they expose investors to managed investment schemes that are designed for tax avoidance.

The bill will also allow the Australian Taxation Office (ATO) to seek injunctions and voluntary undertakings against promoters. But before any of these moves can be put in place, the promoter will have to market a scheme, be paid for these efforts and have a substantial role in promoting a scheme, Dutton said.

Previously, investors in managed investment schemes were penalised by the ATO, the largest example being participants in the Budplan scheme in 2001.

Treefarm Investment Managers Australia executive director Alan Cummine welcomed the bill, but with some reservations.

“While we generally argue for less regulation, we have spent more than a decade advocating that the ATO should have these powers to weed out unscrupulous promoters,” he said.

“However, there are some risks for genuine managed investment schemes and it is vital the ATO be constrained from acting hastily against a legitimate project that could later be proved in the Federal Court to have been wrongly taken off the market.”

Cummine said these risks should be managed by a binding agreement with the ATO, which would commit the tax commissioner from not acting rashly.

“This will allow a legitimate promoter to respond to any ATO concerns and thus avoid an undeserved injection or penalty,” he said.

The new amendment to managed investment schemes is not aimed at those with product rulings or those that comply with Australian Securities and Investments Commission regulations.

“It’s the ATO’s clearly stated opinion that projects with product rulings are not tax avoidance schemes,” Cummine said.

“It is vital for people to understand the clear distinction between the ‘outlaw’ projects that are the target of this legislation and the well-established agribusiness grower projects that are now helping to revitalise rural Australia.

The new bill will now be subject to debate in the House of Representatives.