ATO Concerned About End Of Year Tax Schemes

by Mary Swire, Tax-News.com, Hong Kong

20 May 2003

The Australian Tax Office (ATO) has issued a series of 'taxpayer alerts' concerning a number of aggressive tax planning schemes that have recently come to light, including superannuation schemes, foreign life assurance policies and living away from home allowances.

The ATO stipulates in its taxpayer alert concerning superannuation that "access to such funds prior to retirement is only allowed in very limited circumstances where the individual is considered to be in severe financial hardship or there are strong compassionate grounds for allowing release. Individuals do not need the assistance of an adviser to access superannuation on these grounds. Rather they should contact their superannuation fund directly or the Australian Prudential Regulation Authority."

The tax office went on to add that "payments made by a Superannuation Fund to a person under these arrangements are subject to tax. It appears that in some of these arrangements the individual is not paying the appropriate tax."

"A breach of the in house asset, sole purpose test or financial assistance rules can result in penalties of up to $220,000 and/or jail terms of up to five years," according to the ATO. The fund involved could also lose its taxation status as a complying fund, resulting in higher taxation applying to the fund.

Another taxpayer alert describes an arrangement which has as one of its features the purchase of a life insurance policy from a life insurance company based offshore. The ATO describes a scenario whereby an investor "borrows money to indirectly invest in the life insurance policy, via a trust and a company. The investor seeks to earn tax-free income outside Australia on the investment and income tax deductions for interest payments on the borrowings."

"It would seem that the only economic benefit achievable by an investor entering into this arrangement is through the claimed tax savings," the ATO explained.

The tax authority is also warning of employment arrangements schemes involving "a labour hire firm, a special purpose company and a foreign national employed in Australia. The arrangements attempt to re-characterise a substantial amount of the foreign national's Australian sourced salary as a tax-free living away from home allowance."

Other current concerns of the ATO include Education and Scholarship Trust Arrangements, Remote Area Housing Benefit Arrangements and the deductibility of contributions and derivation of income regarding mutual associations.

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