Taxpayer Alerts

TA 2002/1

The ATO view on the arrangement considered in this Taxpayer Alert is set out in Taxation Determination TD 2002/23.

This Taxpayer Alert describes an arrangement where a taxpayer claims large income tax deductions for Internet marketing expenses paid to a tax haven based Internet marketer.

DESCRIPTION

The alert applies to arrangements having the following features.

1.

A taxpayer enters into a marketing agreement with a tax haven based Internet marketer to 'establish a location on the Internet and to carry on the business of selling advertising and marketing services over the Internet'. The agreement is for one year only.

2.

The taxpayer prepays a marketing fee of, for example, $100,000 to the Internet marketer of which $20,000 is sourced from the individual's own means and $80,000 is borrowed (for a period of one year) from another tax haven entity.

3.

The taxpayer claims a tax deduction of $100,000.

4.

The taxpayer's borrowed funds are guaranteed and indemnified by an Australian company of which the taxpayer is the sole owner and director.

5.

The Internet marketer guarantees a return of at least $20,000 in advertising revenue to the taxpayer.

6.

The borrowed funds of $80,000 are not repaid. Neither the taxpayer nor the guarantor is pursued to repay the borrowed funds.

FEATURES WHICH THE ATO CONSIDERS GIVE RISE TO TAXATION ISSUES

(a)

The arrangement raises questions about the deductibility of the expenses under the general provisions. The expenditure appears to be capital in nature.

(b)

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

(c)

The arrangement seems artificial and lacking commerciality in its design and execution.

(d)

There appears to be round robin funding or a circular movement of funds and guaranteed returns.

(e)

There appears to have been a substantial removal of risk from the taxpayer.

(f)

The transactions involve tax havens.

The Australian Taxation Office is examining these arrangements.

30 January 2002

30 January 2002

PS 2001/15 - Taxpayer Alerts

Section 8-1 of the ITAA 1997
Pt IVA of the ITAA 1936