Taxpayer Alert

TA 2005/6

The ATO view on the arrangement described in this Taxpayer Alert is set out in ATO Interpretive Decision ATO ID 2007/47, Taxation Determination TD 2007/20, Taxation Ruling TR 2007/13 and Law Administration Practice Statement PS LA 2007/7.

• This Alert contains references to Part XI of the Income Tax Assessment Act 1936, which has been repealed and will not apply to taxpayers from the 2010-11 income year. For further information, please refer to the Foreign income return form guide 2011-12 (NAT 1840).

This Taxpayer Alert describes arrangements to artificially inflate Australian tax deductions for goods or services by the use of an offshore structure. Under such arrangements a third party supplier provides goods or services to the offshore structure at market value. Subsequently the offshore structure provides the same goods or services to an Australian resident at a price substantially above market value. The Australian resident does not disclose their interest in the offshore structure and pays no Australian tax on the profits. In extreme cases, no actual goods or services may be provided by the offshore structure, and no third party may actually be involved.

DESCRIPTION

This alert applies to arrangements generally marketed to micro and small businesses that exhibit some or all of the following features:

1.

The taxpayer establishes an offshore structure, or uses an existing structure, in a tax haven or country with bank secrecy with the assistance of a promoter. The promoter may provide a 'paper trail' of documents designed to conceal the true nature of these transactions and the taxpayer's interest in the offshore structure.

2.

The offshore structure may include one or a combination of the following types of entity, which are promoted on the basis of not being subject to attribution under Australia's anti-deferral regimes:

a)

An offshore trust, including bare, blind or discretionary trusts;

b)

An offshore company, including tax haven entities known as international business companies;

c)

Another type of entity, including Anstalts or Stichtings.

3.

The taxpayer claims to obtain goods or services at an arm's length price. This occurs through a re-invoicing arrangement via the offshore structure.

4.

A typical inbound re-invoicing arrangement involves:

a)

An agreement for a third party to provide to the offshore structure goods or services at market value;

b)

An agreement for the taxpayer to obtain the same goods or services from the offshore structure at a price substantially above their market value.

5.

In extreme cases, no goods or services are provided by the offshore structure, and no third party may actually be involved.

6.

The taxpayer claims deductions for the goods or services allegedly provided by the offshore structure. The deductions claimed are higher than if the goods or services (if any) had been provided at market value directly by a third party.

7.

The offshore structure accumulates the profits on the price differential.

8.

The taxpayer may access these profits, often in a disguised form.

9.

The taxpayer does not disclose their involvement with the offshore structure and does not pay Australian tax on the profits accumulated in the offshore structure or when they access those profits.

10.

In some arrangements, the documentation supporting the above transactions is absent, incomplete or falsified and the valuations used may be highly questionable. In addition, such documents do not disclose the Australian resident's interest in, or involvement with, the offshore structure.

DIAGRAM OF A TYPICAL ARRANGEMENT

FEATURES WHICH THE TAX OFFICE CONSIDERS GIVE RISE TO TAXATION ISSUES

The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether:

(a)

such an arrangement or crucial parts of it may be a sham;

(b)

a deduction or reduced deduction is allowable to the taxpayer under the provisions of the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997);

(c)

any entity within the offshore structure was a resident of Australia under subsection 6(1) of the ITAA 1936;

(d)

any entity within the offshore structure, the promoter or other persons involved with the structure operation, management and administration:

i)

are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or

ii)

are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure;

(e)

the income or proceeds of the offshore structure was attributable to the taxpayer under Australia's anti-deferral regimes within Part X, Part XI or Division 6AAA of Part III of the ITAA 1936;

(f)

the income of the offshore structure is assessable to the taxpayer under any other provision of the tax law;

(g)

the transactions may be subject to Division 13 of the ITAA 1936;

(h)

the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as:

i)

the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and

ii)

it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits.

The Australian Taxation Office is examining these arrangements.

Date of Issue: 21 December 2005

Date of Effect: 21 December 2005

Related Practice Statements:
PS 2008/15

Subject References:
tax havens

Legislative References:
Income Tax Asessment Act 1936
6(1)
Part X
Part XI (Repealed)
Division 13 of Part III
Part IVA

Related Taxpayer Alerts: