Taxpayer Alert

TA 2008/8

Australian resident entities creating false deductions and/or concealing income through arrangements with promoters based in Vanuatu.

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

FOI status: may be released

This Taxpayer Alert describes arrangements through which Australian resident entities, with the help of a promoter in Vanuatu, seek deductions for artificially created expenses and/or establish structures that enable the concealment of income to attempt to avoid or evade Australian tax.

DESCRIPTION

The Tax Office is investigating arrangements covered by this alert as part of the whole of government Project Wickenby. These arrangements may involve some or all of the following steps:

1.

An Australian resident taxpayer (the taxpayer) enters into an arrangement with a promoter located overseas which may involve a claim for deductions in relation to services purportedly provided or otherwise justify a flow of funds to entities located overseas.

2.

The promoter or its associates then transfers the funds back to the taxpayer through the use of purported loan arrangements, or through the use of debit or credit cards;

3.

The taxpayer may seek further deductions in respect of interest on the purported loan used to effectively repatriate the funds;

4.

Alternatively, the foreign company may transfer the funds to a separate asset-holding structure (the structure) established in Vanuatu and controlled by the taxpayer or its associates. These funds are used to acquire assets to generate passive income, which is retained by the structure. The taxpayer and/or their associates ultimately reap the economic benefits for the structure, often in a disguised form;

5.

The structure may also be used as a standalone arrangement to enable the taxpayer to hold assets offshore and conceal the income that is generated.

The above transactions may not take place as claimed or documentation supporting them may be absent, inconsistent, incomplete or contain false information.

In addition, although claimed to take place in Vanuatu, some steps in the chain of transactions may occur in other countries to further conceal the true nature of the transactions.

FEATURES THAT CONCERN US

Australian residents have tax obligations in respect of their worldwide income. This covers income from both Australian and foreign sources and includes income held in offshore structures.

In particular, the Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether:

a.

Such an arrangement or certain steps within it may be a sham;

b.

Any deduction for the expenses purportedly incurred under this arrangement is allowable under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)

c.

Any funds received as purported loans constitute deemed dividends for the purposes of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936);

d.

Any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3-1 of the ITAA 1997;

e.

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

f.

Any entity within the structure may be a resident of Australia under subsection 6(1) of the ITAA 1936;

g.

Any entity within any established structures, the promoter or other persons involved with the operation, management or administration of any such structures may be acting as trustees (whether under an express, constructive, implied or resulting trust) for the Australian entity as beneficiary in relation to the activities of the structure;

h.

Income from the structure may be assessable to the taxpayer and their associates under the trust income provisions in Division 6 of the ITAA 1936;

i.

Any of the transactions may be subject to the General Value Shifting Regime in Part 3-95 of the ITAA 1997;

j.

The income of the structure may be 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;

k.

The income of the structure may be assessable to the taxpayer under another provision of the tax law;

l.

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

a.

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

b.

It appears that the dominant purpose of entering into the arrangement is to obtain one or more tax benefits;

m.

Any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953.

n.

any criminal offences have been committed in relation to the arrangement.

Falsifying information in an attempt to inflate deductions or to disguise asset holding or offshore income, including through arrangements based in Vanuatu, in an attempt to avoid or evade these tax obligations may attract serious penalties including criminal sanctions or confiscation of criminal assets.

The Tax Office has reviewed this arrangement and has determined that it is not effective because of some or all of the features set out above.

Amendment history

Date of Issue: 7 May 2008

Date of Effect: 7 May 2008

Related Practice Statements:
PS LA 2007/7
PS LA 2007/24

Other References:
Tax Havens and Tax Administration, NAT 10567

Subject References:
Tax havens

Legislative References:
Income Tax Assessment Act 1936
Subsection 6(1)
Division 6
Division 6AAA
Division 7A
Division 13 of Part III
Part X
Part XI
Part IVA
Section 167
Income Tax Assessment Act 1997
Section 8-1
Part 3-1
Part 3-95
Taxation Administration Act 1953
Division 290

Related Taxpayer Alerts:

TA 2005/5
TA 2005/6
TA 2005/7
TA 2005/8
TA 2008/2 Authorised by:
Stephanie Martin
Deputy Commissioner