Australian Tax Shelters Wilting In Glare Of Government Hostility

by Mary Swire, Tax-News.com

13 June 2001

In a closed-doors hearing, the Australian tax office has told the Senate Select Committee on Superannuation and Financial Services that it is energetically pursuing the promoters of tax shelters known as 'employee benefit arrangements', particularly controlling-interest super schemes.

Previously it had been supposed that only taxpayers who went into tax-driven agricultural schemes were at risk from investigations. Now it has become clear that the tax office considers many other types of 'largely artificial' scheme are in the tax office's sights. Large fees were earned by promoters of these complex schemes, which saved some clients hundreds of thousands of dollars in tax.

Most of the schemes were implemented in 1997, 1998 and 1999, with only a small number of cases implemented before 1997. By last year the adverse publicity had all but killed them. Tax office evidence said that of the $1.5 billion of tax deductions claimed under the schemes about $500 million was associated with controlling-interest super schemes.

The most popular schemes involved the "investment" of six- and seven-figure sums by employees into non-complying super schemes set up in New Zealand which "lend" back the money to the employee. The process enables the contributor to avoid income tax, fringe benefits tax, super surcharge, and tax on investments and on end-benefits. Promoters charged a percentage of the amount invested in such schemes or a fixed fee of tens of thousands of dollars.

The tax office has provided the committee with two lists, one of which includes details of the promoters, the number of controlling-interest super schemes promoted by each firm, and the number of taxpayers involved in each scheme, as well as the dollar deductions. The other list contains details of the number of entities identified as being the key drivers of controlling-interest super schemes, together with the names of the individuals known to be associated with the promotion of schemes.

The tax office told the Committee that it was in the process of issuing revised tax assessments to the 2,700 individuals it knew aout, and would complete that task by the end of the year. It was not immediately clear what action was threatened against scheme promoters.

Tax shelters are like annual weeds, though (or flowers, depending on your perspective). As soon as one dies, another one springs up to take its place. Forestry has long been a popular object of tax-planning, and interest in them continues to run at a high level despite adverse publicity and rumous that the tax office was planning to crack down on tree-based tax minimisation schemes.

The Government's forest policy - which aims to treble the area of plantation forests to 3 million hectares by 2020 - is in fact founded on the success of the tax-effective tree plantations, and it has become known that the Tree Farm Investment Managers (TIMA) association met Government officials in April to ask them to announce their continued support for the schemes.

Accounts of what took place at the meeting differ, with the TIMA representatives saying the Government agreed to maintain its support, but the Government side using more cautious words.

The Government is concerned that prospectuses issued to market schemes contain idealised pictures and unrealisable projections for returns. The Government doesn't directly monitor prospectuses, but it does have the power to stop their publication if they don't comply with guidelines. TIMA claims that the Government relaxed these guidelines as a result of the April meeting.

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