ATO Issues Tax Warning Over 'Arranged Partnerships'

by Robert Lee, Tax-News.com, London

28 March 2002

As part of its continuing Taxpayer Alert initiative, the Australian Taxation Office has issued a warning on the use of sham partnerships to reduce taxes.

In a statement released on Wednesday, Australian taxpayers were cautioned against signing up for schemes which promise to lower their tax burden through the use of sham partnership structures.

The ATO said the schemes, which are primarily targeted at IT, engineering, and drafting professionals, work by allowing taxpayers who receive personal services income from the provision of professional services to enter into a partnership with other taxpayers, who earn unrelated personal services income. The earnings are then recharacterised as the income of the partnership, which allows the taxpayer to split their income with their spouse or a related party.

Although the schemes are still under investigation, the IRS has issued a dire warning to taxpayers considering entering into this type of sham partnership, threatening heavy fines in addition to denial of claimed deductions.

'On the information presently available to us, we doubt the arrangements are effective,' the tax department explained.

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