What tax and super schemes are
You have the right to arrange your financial affairs to keep your tax to a minimum. This is often referred to as tax planning or tax-effective investing. Tax planning is legitimate when you do it within the terms of the laws, including the laws about tax avoidance. However, tax and super schemes that are unlawful will attract our attention.
Unlawful tax and super schemes
Unlawful tax and super schemes usually involve the deliberate exploitation of our tax and superannuation systems. These include tax avoidance and tax evasion schemes. We take these schemes seriously and will take action. Involvement in a scheme can risk your original investment. You might also have to pay back tax, with interest and penalties.
Some advisers will look for new ways to exploit the law or changes in the law. They will promote schemes to people and promise benefits that aren't legally available.
Schemes may also target self-managed super funds (SMSFs) to channel money inappropriately through SMSFs either to:
- avoid paying tax
- encourage early access of super before a condition of release is met.
Tax and super schemes range from mass-marketed arrangements advertised to the public, to boutique or specialised arrangements tailored for specific taxpayer circumstances. Some are marketed to individuals and others to large private group and public companies.
Typical signs
These schemes typically involve:
- reducing a participant's taxable income
- increasing their deductions against their income
- increasing offsets
- inflating refunds
- avoiding tax and other obligations entirely.
A scheme may include complex transactions or distort the way funds are used to avoid tax or other obligations. It may also structure arrangements to:
- incorrectly classify revenue as capital
- exploit concessional tax rates
- obscure the source of funds or the relationships between parties
- illegally release super funds early
- inappropriately move funds through several entities, such as a series of trusts or around an existing or new SMSF, to avoid or minimise tax that would otherwise be payable.
Warning signs to look for
Anyone can be a promoter of an unlawful tax or super scheme including accountants, lawyers, financial advisers, telemarketers and salespeople in shopping centres.
Be wary of the warning signs and of promoters that:
- offer zero-risk guarantees for their product
- refer you to a particular adviser or expert (they may claim the adviser has specific knowledge about the arrangement and the promised tax benefits)
- ask you to maintain secrecy to protect the arrangement from rival firms
- charge a fee or commission based on tax saved
- discourage you from obtaining independent advice
- do not have a PDS or prospectus for the product
- offer advice about illegal phoenixing or liquidation of key companies
- offer early access to super before a condition of release is met.
Structure of schemes
The way an arrangement is structured can indicate it might be an unlawful tax or super scheme.
Be careful of any arrangement that involves:
- deferring income to a later tax period so the tax is paid in a later period
- not declaring income or hiding income (for example, in an offshore location such as a tax haven)
- changing the nature of the income so less tax is paid (for example, changing capital expenses into revenue expenses)
- changing private expenses into business expenses so they can be claimed against income
- creating an entitlement to a tax offset or credit that wouldn't otherwise have been available
- moving income to a trust or partnership to split it among people in a lower tax bracket so less tax is paid
- inflating or artificially creating deductions
- moving taxable income to an entity that is tax exempt or has a lower tax rate (such as a charity, company or super fund)
- setting up a business for the sole purpose of obtaining tax benefits, when there is no business purpose to the arrangement.
Financing schemes
Many unlawful tax and super schemes are promoted with mechanisms to meet your financing needs. The following maybe warning signs:
- 'round robin' financing, where the funds are passed through various entities and usually back to the initial entity (for example, the promoter lending you the money to invest in the product)
- 'non-recourse' loans that you don't have to repay if the investment goes bad (the lender has no recourse under the terms of the loan to pursue the debt if you fail to repay it)
- complex financing arrangements involving limited recourse loans where your liability is limited to your share in the investment
- investments that are primarily funded through tax deductions, for example, by including substantial interest prepayments in a financial year
- investing super in an unrelated trust that then on lends the funds to SMSF members.
Don't take a promoter's guarantee that there is no risk in participating in an arrangement. Always check before you commit to an arrangement.
We have more information available about our current areas of concern, as well as other arrangements of concern.
How to check your arrangement is legitimate
It is important that you make sure your arrangement to reduce tax is legitimate and lawful. Check with us through our early engagement advice service.
Before entering into any agreement, you may wish to seek independent advice from an adviser who has no connection to the seller or the arrangement.
You can also:
- check taxpayer alerts to see whether we have concerns about the arrangement
- if you are obtaining advice from a tax agent, check they are a registered tax agent at the Tax Practitioners BoardExternal Link
- ask about other qualifications your adviser holds, such as current memberships with professional associations like CPA AustraliaExternal Link, Chartered Accountants ANZExternal Link or Institute of Public AccountantsExternal Link
- If you're advised to set up an SMSF, check they're a licensed financial adviser. You can do this on the Australian Securities & Investments Commission (ASIC) website MoneysmartExternal Link
- check public rulings, private rulings or oral rulings – if we have already issued a ruling for the arrangement it provides you with certainty, as long as the arrangement being described or implemented is exactly as described in the ruling
- apply for a private ruling to cover your own circumstances if you are not sure about the tax consequences of an arrangement you are considering
- make sure you receive a product disclosure statement (PDS):
- a PDS sets out important information about an arrangement
- you and your adviser should carefully review the PDS before making any decisions
- check for a valid licence as a person who offers financial products and advice must be one of the following:
- an Australian Financial Services (AFS) licence holderExternal Link.
- a director or employee of an AFS licence holder
- an authorised representative of an AFS licence holder.
If the person or organisation offering you the arrangement doesn't hold a valid licence issued by ASIC, they could be operating illegally and your investment may not be protected if things go wrong. You can find out more at MoneysmartExternal Link.
How tax professionals can protect their clients and practice
Tax professionals are well positioned to recognise potential tax and super schemes. If you encounter an arrangement that appears suspicious, let us know.
If you have clients who are caught up in a tax or super scheme, encourage them to talk to us. This allows us to work together to resolve any problems.
Read more about how you can protect your clients and practice from tax and super schemes.
Promoter penalty laws
We have laws in place to deter the promotion and implementation of tax and super schemes. The promoter penalty laws are concerned with arrangements:
- that avoid or evade tax
- where the benefit claimed isn't available under the tax laws
- that are promoted on the basis of conforming with a public, private or oral ruling but the arrangement is materially different from that described in the ruling
- implemented in a way that is materially different to what is described in a public, private or oral ruling that the arrangement is promoted as having conformed with
- promoting early access to super before a condition of release is met.
We actively monitor adviser behaviour and take action against potential promoters through application of the promoter penalty laws. We take action against alleged promoters of tax and super schemes, misrepresentations of conformity to ATO rulings and promoters of illegal early access to super. This is regardless of the firm's size, occupation, position in their organisation or standing in the tax community.
How to report a scheme
If you think you're involved in a scheme, we can help you. If you tell us about your involvement before we start to investigate, you could be eligible for a reduction in penalties.
You can report a tax or super scheme confidentially by:
- completing the tip-off form on our website or in the ATO app 'contact us' section
- contacting us on 1800 060 062.