Taxpayer Alert
TA 2008/16
Liquidation of entities to avoid the payment of tax liability-
This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
FOI status: may be released
| Taxpayer Alerts are intended to be an "early warning" of significant new and emerging higher risk tax planning issues or arrangements that the Australian Taxation Office has under risk assessment, or where there are recurrences of arrangements that have been previously risk assessed.
Taxpayer Alerts will provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the Tax Office has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the Tax Office. In these latter cases the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert. Taxpayer Alerts will give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and will highlight the features which are of concern to the Tax Office. These issues will generally require more detailed analysis to provide the Tax Office view to taxpayers. Taxpayers who have entered into or are contemplating entering into an arrangement similar to that described in this Taxpayer Alert can seek a formal determination of the Tax Office's position through a private ruling (noting that the Taxation Administration Act 1953 sets out circumstances where the Commissioner may decline to issue such a ruling). Such taxpayers might also contact the tax officer named in the Taxpayer Alert and/or obtain their own advice. This Taxpayer Alert is issued under the authority of the Commissioner. |
This Taxpayer Alert describes arrangements whereby taxpayers involved in a previous tax avoidance scheme (for example such as those described in TD 2005/34 and TA 2008/15) enter into an arrangement to avoid the payment of the tax liability arising from that scheme by liquidating entities.
These arrangements include Phoenix arrangements where the business and assets are transferred to a new entity and then the existing entity is liquidated. This has the effect of defeating creditors of the original entity including the Tax Office.
DESCRIPTION
The alert applies to arrangements having some or all of the following features:
- 1.
- A taxpayer is involved in a tax avoidance scheme that involves the creation or utilisation of various entities (for example arrangements of the type described in Taxpayer Alerts TA 2005/1 and TA 2008/15 and Taxation Determination TD 2005/34).
- 2.
- To avoid the adverse consequences arising from the application of the Tax Office view (for example, as outlined in TD 2005/34 in relation to the arrangement in TA 2005/1), the taxpayer, with the help of another entity (for example, a tax agent, a solicitor, a business recovery consultant, an insolvency administrator or a liquidator) engages in a set of transactions that lead to liquidation of one or more of the entities. This has the effect of defeating the creditors of those entities which include the Tax Office. The taxation liability remains, but due to the liquidation there is an inability to pay. In Phoenix arrangements a new entity is set up to carry on the original business.
- 3.
- These transactions will result in distributions to different parties, which may include the taxpayer or their associates.
- 4.
- The basic features of this arrangement can be summarised diagrammatically as follows:
FEATURES WHICH CONCERN US
The Tax Office considers that an arrangement of the type described above gives rise to taxation issues that include whether:
- a.
- The surrounding circumstances, including the creation of a new entity and its subsequent liquidation, indicate that the previous tax avoidance scheme is a sham under general law;
- b.
- The correct taxpayers have been assessed in respect of ordinary or statutory income arising from this structure;
- c.
- Any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3 of the Income Tax Assessment Act 1997 (ITAA 1997);
- d.
- Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to cancel any tax benefits obtained under previous tax avoidance scheme, taking into account the liquidation as part of the scheme; and
- e.
- A registered tax agent involved in the arrangement may have their registration suspended or cancelled by the Tax Agents' Board under section 251K of the ITAA 1936.
Liquidating an entity to secure an inability to pay future income tax liability may attract criminal sanctions under the Criminal Code including defraud contrary to s135.1 of the Criminal Code or conspiracy to defraud under s135.4 of the Criminal Code, or alternatively the Crimes (Taxation Offences) Act 1980, including penalties of 1000 penalty units and/or 10 years imprisonment.
As the promotion of these types of arrangements is a serious matter, information on such activities will be referred to the Commonwealth Director of Public Prosecutions, the Australian Securities and Investment Commission and the Tax Agents' Board as appropriate for action.
- •
- the case does not exhibit a significant degree of criminality by the taxpayer
- •
- the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and
- •
- the taxpayer co-operates with the investigation and consequential proceedings.
Amendment history
| Date of amendment | Comment |
|---|---|
| 3 May 2024 | Updated Tax Agent tip off hotline number |
| 19 January 2024 | Updated ATO tip-off hotline numbers |
Date of Issue: 25 June 2008
Date of Effect: 25 June 2008
Related Rulings/Determinations:
TD 2005/34
Related Practice Statements:
PS LA 2005/13 - Taxpayer Alerts
Subject References:
Losses
Hybrid trusts
Trust distributions
Liquidation
Legislative References:
Income Tax Assessment Act 1936
Section 100A
Part IVA
Section 251K
Section 251BC
Income Tax Assessment Act 1997
Part 3
Division 165
Taxation Administration Act 1953
Division 290 of Schedule 1
Stephanie Martin
Deputy Commissioner
| Contact Officer: | Bruce Collins |
| Business Line: | Aggressive Tax Planning |
| Section: | Technical & Case Leadership |
| Phone: | (02) 6216 2710 |
| Date: | Version: | |
| 25 June 2008 | Original alert | |
| 19 January 2024 | Updated alert | |
| You are here | 3 May 2024 | Updated alert |