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Promoter penalties
(Clauses 72(4), 109, 113, 114, 115, 117, 120 and 121)
Summary of proposed amendment
The amendment will give effect to the proposal in the discussion document Taxpayer compliance, standards and penalties: a review that a new penalty on promoters of certain "tax arrangements" be introduced. A number of submissions on the discussion document raised concerns about the proposal. These concerns have been taken into account in developing the proposal further.
If an arrangement is offered, sold, issued or promoted to five or more people in an income year and it involves an abusive tax position, the promoter will be liable for a promoter penalty. The penalty will be 100 percent of the tax shortfalls of the investors, calculated using a 39 percent tax rate. The penalty is aimed at reducing the number of such investments by holding the people responsible for the design and sale of tax arrangements directly accountable for their actions.
The government is concerned that in many cases investors in such arrangements are not aware of the tax effects of their investment. It is also concerned that the abusive tax position shortfall penalty, which is intended to be applied to taxpayers who are not complying, is, in fact, being applied to taxpayers who thought that they were complying but were, in fact, misled by the promoters. The government has therefore proposed that if the taxpayer has less than $50,000 invested in an arrangement and has advice independent from the promoter that it does not involve an abusive tax position, the shortfall penalty on the taxpayer will be imposed at 20 percent rather than the normal 100 percent.
Application date
The amendment will apply to arrangements entered into on or after the date of enactment.
Key features
New sections 141EA and 141EB will be inserted to provide for the imposition of a civil penalty on promoters, in cases where investment in an arrangement leads to the investor having a shortfall penalty for an abusive tax position imposed.
Taxpayers who have less than $50,000 invested in an arrangement and independent advice that it does not involve an abusive tax position will have the shortfall penalty imposed at 20 percent, rather than the normal 100 percent.
Background
As noted in the discussion document Taxpayer compliance, standards and penalties: a review, if a taxpayer becomes a party to an arrangement that is considered by Inland Revenue to involve an abusive tax position, a shortfall penalty is imposed on the taxpayer. Although the compliance and penalties legislation penalises promoters in their capacity as taxpayers, the legislation imposes no civil sanctions on promoters in their capacity as promoters of "arrangements". The compliance and penalties legislation therefore provides no incentive for promoters to ensure that the tax effects they claim for their arrangements are correct. Furthermore, offer documents in some cases restrict taxpayers from taking legal action against the promoter.
The government considers that promoters of such arrangements should be held clearly accountable for their actions. The promoter is usually the party with the greater knowledge of the arrangement's tax effects. Often, the true tax impact of an arrangement may be determined by features that the promoter is aware of but the investor is not. These undisclosed features may place the investor at risk of significant penalties.
The discussion document recommended that the introduction of a penalty on promoters as the best way to ensure that they are held clearly accountable for their actions. The penalty was to apply to arrangements that involved breaches of an anti-avoidance provision or results in an investor having a shortfall penalty for an abusive tax position.
Submissions on the discussion document were concerned that it is often difficult to determine whether an arrangement has involved tax avoidance. The government agrees and the amendment will only apply when an arrangement involves an abusive tax position.
The discussion document also proposed that imposition of the penalty on the promoter would not depend on the successful imposition of a penalty on the investor. The government now considers that the promoter penalty should be imposed in tandem with the shortfall penalty on the taxpayer.
As noted in the discussion document, the promoter penalty will generally be imposed as one penalty - but if additional taxpayer shortfalls are detected, further penalties will be imposed. In effect, the penalty on the promoter will be based on the extent of tax shortfalls generated by the arrangement. This will ensure that the promoter faces a penalty that reflects the total tax impact of the arrangement.
To prevent disputes about the rate of tax to be used to determine the tax shortfall, a flat rate of 39 percent will be used. Investors in these arrangements are typically high-income earners, so the use of the 39 percent rate is appropriate.