ATO Warns Over Wealth Creation Schemes

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

11 April 2002

In a taxpayer alert issued on Wednesday, the Australian Taxation Office warned investors to be wary of end of year financial 'service warrant' schemes, which promise large tax deductions for small investments.

In a statement, the ATO explained that the schemes are usually marketed via wealth creation seminars, particularly in rural and regional areas, and taxpayers are often warned not to inform the tax office of the scheme, or asked to sign secrecy agreements which make it difficult for them to seek independent advice.

Service warrant schemes usually involve an investor purchasing a warrant from the offshore seminar provider for 'services' such as the future provision of a financial education and wealth creation seminar.

The investor then becomes a partner in a partnership which claims to be in the business of aquiring and disposing of such warrants, the 'partnership' claims a loss on the full face value of the warrant (often up to $50,000), and the taxpayer can then claim a share of the partnership loss in order to reduce their taxable income and receive a large refund. According to the ATO, the unused service warrants are then purchased back after 12 months for an amount which offsets the investor's outstanding liability.

However, Tax Commissioner, Michael Carmody, has warned that investors buying into such schemes may end up with larger, rather than reduced, tax bills as a result.

'Like many of the mass-marketed schemes disallowed by the Tax Office, this scheme warrant arrangement appears to make no sense without the tax benefit and appears to have no underlying business activity,' he observed.

The Australian Taxation Office has advised investors considering any form of tax-effective investment to check that it has a Tax Office ruling, and to seek advice from an independent tax professional.

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