Taxpayer Alerts

TA 2002/5

Prepaid Service Warrant Arrangement

FOI status: may be released

This Taxpayer Alert describes an arrangement where a taxpayer claims large income tax deductions for partnership losses. The partnership's losses are created by the partnership acquiring prepaid service warrants that may be redeemable for the provision of financial and wealth creation seminars. The arrangement produces significant tax deductions for a small cash outlay.

DESCRIPTION

The alert applies to arrangements having the following features:

1.

A taxpayer purports to enter into a partnership which claims to be in the business of acquiring and disposing of prepaid service warrants.

2.

The partnership claims to buy a series of warrants that are redeemable for services from an offshore seminar provider ("service provider").

3.

The partnership acquires a series of warrants, for example, for a face value of $50,000 by paying $6,250 (or 12.5% of the face value) with the balance owing to the service provider. No 'loan' agreement is evident for the balance owing.

4.

The arrangement is entered into at the end of the financial year.

5.

The partnership's objective is to endorse the warrants over to a client for a fee so the client can redeem them for financial and wealth creation seminars from the service provider. There is a question as to whether any warrants are actually made available to the partnership.

6.

All warrants that have not been endorsed over to clients by the end of a 12 month period will be re-purchased by the service provider at a 12.5% discount of their face value. In the example at paragraph 3, this is the amount equal to the balance owing.

7.

It is claimed that the purchase of the warrants by the partnership will give rise to a loss in the partnership for the face value of the warrants in the year that the warrants are acquired.

8.

It is claimed that on endorsing the warrants over to the client or on the re-purchasing of the warrants by the service provider the partnership would derive assessable income. If the warrants are endorsed or repurchased any assessable income would not be derived until the subsequent year.

9.

The partners claim a share of the partnership loss in their tax returns.

FEATURES WHICH THE ATO CONSIDERS GIVE RISE TO TAXATION ISSUES

(a)

The arrangement seems artificial and lacks an ordinary business purpose in its design and execution.

(b)

The arrangement raises questions about whether a partnership actually exists.

(c)

The arrangement raises questions about whether a business is actually being carried on.

(d)

The arrangement raises questions about the deductibility of the cost of the warrants.

(e)

The arrangement raises questions about the application of the anti-avoidance provisions in Section 82KZME and Section 82KZMF of the ITAA 1936.

(f)

The arrangement raises questions about the application of the general anti-avoidance provisions of Part IVA of the ITAA 1936.

The Australian Taxation Office is examining these arrangements.

Date of Issue: 8 April 2002

Date of Effect: 8 April 2002

Related Practice Statements:
PS 2001/15 - Taxpayer Alerts

Subject References:
Partnership Losses

Legislative References:
Section 8-1 of the ITAA 1997
Section 82KZME of the ITAA 1936
Section 82KZMF of the ITAA 1936
Part IVA of the ITAA 1936

Authorised by:
Mr Des Maloney First Assistant Commissioner