International Family Business Blog

Section 167 - the Australian Tax Office’s (“ATO”) weapon of mass reconstruction

The case of Mulherin v Commissioner of Taxation [2013] FCAFC 115 decided last week  affirms that section 167 of the Income Tax Assessment Act 1936 is a weapon of mass reconstruction in the hands of the ATO.

Mr Mulherin was born in Australia but spent some years developing his professional activities overseas. Following his return to Australia early in the 1990s he caused a Leichtenstein Foundation to be established. He was effectively both it's founder and principal beneficiary. 

The ATO became aware of the existence of the Foundation and of Mr Mulherin via information provided to it by a former employee of LGT Bank in Leichtenstein (who had stolen client records of a subsidiary of the bank).

It transpired that the central management and control of the Foundation was at all relevant times in Australia. 

Mr Mulherin had lodged tax returns “…disclosing modest amounts of taxable income in eachof the years between 1999 and 2003. He did not lodge returns in the 2004, 2005, 2006 and 2007 years of income”. No income was disclosed from the Foundation or investments with the LGT Bank.

The ATO utilised its powers under section 167 to “calculate” the putative taxable income of Mr Mulherin for the relevant years. The LGT documents they had obtained from the thief showed the Foundation’s balance in the LGT Bank to be approximately US$3.8 million at 31 December 1999 and approximately US$6 million at 31 December 2001. The ATO calculated the increase in the account to have been just over 51% over two years and extrapolated an annual rate of return on the original amount to be 25%.

The ATO then proceeded to recalculate Mr Mulherin’s income for the 1999 - 2007 income years as a total of approximately A$26 million. In addition to the primary tax on that income (the top marginal rate for 1999-2006 was effectively 48.5%, making a primary tax bill of some A$11 million). Additional penalties imposed amounted to nearly A$11.3 million.

The Full Bench of the Federal Court recognised that the ATO’s assessments were undeniably incorrect. However, the case precedents (NB Commissioner of Taxation v Dalco [1990] HCA 3) have established that to overturn a section 167 assessment, a taxpayer must be able to show what his correct income actually is (virtually to the last dollar) for each of the years under review. 

That is an onerous burden. It is a particularly onerous burden when the taxpayer involved has engaged in offshore tax planning that relies upon secrecy for it’s effectiveness.

This case yet again demonstrates the dangers of using unsophisticated offshore tax and estate planning strategies. The clear lesson is, if you are not prepared to spend the time and money to obtain high level professional advice - don’t do it. Relying upon secrecy alone just won’t survive an attack by any competent revenue authority

South African emigre’s offshore tax plan falls foul of Australian Tax Office’s aggressive audit approach

The Australian Tax Office (“ATO”) appears to be aggressively opposing a South African emigre’s appeal against his A$21 million income tax assessments. The case of Mark Krok v Commissioner of Taxation NSD572/2013 is listed for a Directions Hearing on 7 November in Australia’s Federal Court.

A report by Susannah Moran in today’s Australian newspaper - see http://www.theaustralian.com.au/business/ato-sets-sights-on-s-african-millions/story-e6frg8zx-1226750019299 - says that “The ATO has accused Mr Krok of tax evasion and fraud, claiming he understated his income and failed to declare capital gains made on share sales during the six years he lived in Australia.”

It is suggested that in a 5-day hiatus between leaving South Africa and arriving in Australia, Mr Krok distributed all the assets of a trust established by his father and entered into an arrangement involving a BVI company owned by a Liechtenstein Foundation.

This case will be closely watched by international tax planners and their clients, particularly since the ATO apparently sought and received relevant from the South African Revenue Service in the course of their audit investigation.

My earlier blogs International Tax Planning is increasingly fraught for both Australian residents and their advisers. and Low Tax Jurisdiction Info Exchange Agreements - Retrospective Risk provide interesting background to the ATO’s approach to such planning.

Any carbon pricing scheme is a "tax"

However you label a carbon price, it is a tax. The Macquarie Dictionary definition of a tax is: a compulsory monetary contribution demanded by a government for its support and levied on incomes, property, goods purchased, etc. 

Calling a compulsory monetary contribution mandated by government an emissions-trading scheme does not make it any less a tax. Indeed, University of Wollongong researchers Andrew and Kaidonis, in their 2011 article Policy instruments for reducing greenhouse gas emissions stated that “In economic terms, a carbon tax and an ETS are virtually identical as they both aim to raise the price of carbon, either directly through a tax impost or indirectly through a cap on the quantity of emissions.”

The fatal problem with any emissions-trading scheme is that in practice it becomes a variable tax managed and gamed by the same groups that brought toxic debt and the GFC to the World. This will provide a surefire guarantee of long-term instability for any Australian scheme tied to the EU carbon market.

Interestingly, Talberg and Swoboda’s June 2013 Australian Parliamentary Background Note Emissions trading schemes around the world reports that “…spot prices for EUAs declined from an average of around €13 ($A20.30) in January 2010 to around €3.90 ($A4.90) by the end of April 2013.”

International Tax Planning is increasingly fraught for both Australian residents and their advisers.

Australia's Part X controlled foreign corporation and rules and the Division 6AAA of Part III transferror trust rules (contained in the Income Tax Assessment Act 1936) present significant hurdles for wealthy Australians and their closely held corporations and trusts. 

In addition, the recently strengthened powerful general anti-avoidance provisions of Part IVA of that Act allow the Australian Taxation Office ("ATO") to cancel the tax benefit from "schemes" (very widely defined), entered into for the sole or dominant purpose of obtaining a tax benefit. 

Civil penalties also apply to promoters of tax exploitation schemes (widely defined). The penalties can be up to the greater of A$4.25 million or double the consideration receivable by the promoter and its associates in respect of the scheme/s. Criminal sanctions may also apply and in the recent case of Commisioner of Taxation v Ludekens [2013] FCAFC 100 a 6 year sentence of imprisonment was handed out to a "promoter".

Australia's Project Wickenby involves eight (8) separate federal departments and agencies. These include the ATO, the Australian Federal Police ("AFP"), the Australian Crime Commission ("ACC"), the Australian Transaction Reports & Analysis Centre ("ATRAC"), and the the Commonwealth Director of Public Prosecutions ("DPP"). It is a powerful cross-agency task force set up to "…address the significant threat that illegal offshore schemes pose". The Project is extremely well resourced.

Project Wickenby made use of information stolen in 2006 from the Liechenstein bank LGT Group by Heinrich Kieber and sold to German and British tax authorities. Kieber is understood to have been granted residence in Australia under a new identity.

More recently, Project Wickenby may have made use of information obtained from the Caymans (see: Hua Wang Bank Berhad v Commissioner of Taxation (No 7) [2013] FCA 1020) despite it earlier having been found by the Grand Cayman Court to have been provided in breach of provisions of the Tax Information Sharing Agreement (M.H. Investments & J.A. Investments v The Cayman Islands Tax Information Authority Cause No: G391/2012).

Three individuals (2 Australian directors and one Belgian resident of Switzerlandwho was boarding a plane) were arrested in Sydney yesterday and charged with fraud and money laundering offences arising from transactions related the the two recent cases cited.

It is uncertain how the transactions and entities involved in the cases above were structured, but the arrest of prominent individuals involved in these cases will be sobering for others either involved in or contemplating international tax plans. It must be noted that if evidence presented in earlier Wickenby cases has been reported accurately, some offshore structuring implemented for wealthy Australians over the last several decades has been somewhat "primitive". Planning that primarily relies on maintenance of secrecy to succeed is unlikely to survive the harsh spotlight of subsequent discovery.

Low Tax Jurisdiction Info Exchange Agreements - Retrospective Risk

In the Australian Federal Court on Tuesday (8 October) Justice Perram allowed the Australian Tax Office ("ATO") to use documents obtained in apparent breach of the exchange of the Tax Information Agreement ("TIA") between Australia and the Cayman Islands. 

It appears that the Cayman Islands Tax Information Authority ("CITIA") erroneously provided the ATO with information for tax years prior to the date set as operational for the agreement. 

The Australian court's decision has effectively validated an effective retrospective application of the Cayman's TIA, at least in this case.

The judgement (in Hua Wang Bank Berhad v Commissioner of Taxation (No 7) [2013] FCA 1020) found that although the Caymans Grand Court had decided on 13 September 2013 that the CITIA decision on 23 February 2011 to provide the information to the ATO should be set aside and the documents should be returned-

 "…for the purposes of deciding whether the documents were obtained improperly is besides the point:the ATO validly requested the material under Art 5 and it validly received them under Art 6. That the Grand Court has quashed that deision is a matter of domestic law and can have no effect upon the lawfulness of the ATO's receipt of that material."

This case follows the Full Federal Court judgement in Denlay v Commissioner of Taxation [2011] FCAFC 63 which held that even if the obtaining of information involved unlawful conduct on the part of ATO officers it would not necessarily impinge upon the validity of an assessment made using the information.

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