CofT v International Indigenous Football Foundation Australia Pty Ltd – ‘promotor penalties’ for R&D ‘tax exploitation schemes’ – company and director ‘contravened’ and $4.25m in civil penalties (interesting circumstances)

In this case, the Court found the respondents had contravened the ‘promoter penalties’ provisions in Div 290 of the  s290-50 of the Taxation Administration Act 1953, Schedule 1 (TAA1) in helping clients obtain R&D tax offsets (under Division 355 of the Income Tax Assessment Act 1997 (ITAA97).

I should say that it was not, an indigenous football foundation, that was promoting tax exploitation schemes. The first respondent was previously called Australian R&D Funds and Grants Services Pty Ltd (ACN 166 989 966) and it was in liquidation. The second respondent, was a director and sole shareholder of this company: a Ms Lorraine Amede.

Ms Amede admitted the contraventions, and had cooperated with the Commissioner, all through the investigation.

The result, after this decision, was that:

• The Court imposed ‘civil penalties’ of $4.25m on the Company Respondent. [para 73 of the Court’s reasons]
• The Court made no order, for civil penalties, against company’s director and shareholder: Ms Lorraine Amede, finding it appropriate to do so, after the Commissioner made a ‘humane’ decision, not to press for penalties. [paras 48 & 49]
• The Court made a declaration that the company’s director, and shareholder: Ms Lorraine Amede, had ‘contravened’ these Promoter Penalty provisions. [para 76]
• Ms Amede voluntarily made undertakings, to the Commissioner (presumably not to contravene these provisions again). These were undertakings, enforceable under Subdiv 290-D of the TAA1 (s290-200). [para 77]

First R&D ‘exploitation’ case

This is, apparently, the first case, where the exploitation schemes related to Research and Development (R&D) tax offset incentives, under Div 355 of the ITAA97 [para 2]. Claims for Div 355 R&D offsets depend on incurring ‘notional deductions’, and these schemes went to claiming those ‘notional deductions’.

The schemes were ‘bespoke’ (so what’s all the fuss about?)

The relevant schemes were ‘bespoke’, but were still held to be contraventions of the ‘Promoter Penalties’ provisions. They were ‘bespoke’, in that  they were designed for each client, and were not based on a template, and were not, then, ‘mass-marketed’ [para 2]. The threshold for finding that a scheme ‘exploited’ particular tax laws, is not as high as one might expect, so it is interesting to see what was sufficiently egregious, to motivate the Commissioner, to single out this firm, for the use of these deterrent provisions. This is especially so, as the Commissioner did not press for penalties, against the director, and he did press for penalties, against the company, despite it being in liquidation (and, therefore, probably couldn’t pay them). [see paras 48 & 49]

Gravity of the contraventions

The gravity. of this firm’s conduct, can be appreciated better, by having regard to the following.

1. The evidence was that there were 42 clients, whom the Respondent Company helped register, with Aust Industry, for their R&D activities.
2. Of those, 34 claimed research and development tax offsets, totalling more than $11 million.
3. Of those 34 claims, 30 were ultimately disallowed, in whole or in part.
4. Of those, 10 were pleaded, in this case, as ‘tax exploitation’ schemes, involving 9 taxpayers. They were pleaded as a ‘sample’ and the refunds claimed, by this sample of taxpayer/clients, was $3.2m.
5. Justice Logan noted that he was dealing only with the 10 contraventions that were pleaded, but he also noted that it was relevant that these 10 cases were just a sample, and were not the totality of the respondents’ activities. [para 27]
6. Justice Logan also found that the conduct, in each of the pleaded cases, involved a ‘deep level of cynicism’ by the respondents (presumably in relation to, the prospects of success, of the claims they assisted the clients to make for their fee). [para 66]
7. Ms Armede had engaged in, other conduct, that involved contravening, not only these same Promoter Penalties provisions, but also criminal liability provisions. [para 48]
8. Further, the evidence was that, in the relevant year (2014), there were 13,776 companies registered with Aust Industry, and of them, nearly 10,000 claimed R&D offsets, of $19.6 billion, but the Commissioner paid out only $3b, of the amounts claimed (presumably because there was a low level of integrity, in the sector claiming R&D offsets). [para 53]
9. Further, the evidence was that the R&D incentive was, then, uncapped, the cost to the revenue was growing, and the integrity of claims was falling (presumably relevant to the importance of ‘general deterrence’ orders). [paras 54 & 55]
10. Justice Logan concluded that there was was ‘very real need’ to send a ‘loud and clear message’ of ‘general deterrence’. [para 56]

Onus and evidence

Ordinarily, in tax cases, the taxpayer has the onus of establishing its case. Often, then, the Commissioner need only run a ‘spoiling’ case, undertaking no role, to positively establish anything (just saying enough, to submit that the taxpayer has not discharged his/her/its onus).

In these ‘Promoter Penalty’ cases, however, the Commissioner has the onus (for a change). It is he who must establish the necessary facts, for the Court to find that there has been a ‘contravention’. In the early cases, the Commissioner was not very good at discharging this onus.

This case was complicated, by the fact that Ms Amede admitted the contraventions and joined the Commissioner in submitting that the declarations, the Commissioner sought, should be made. And part of this complication was the degree to which she could admit the contraventions by the Company.

And this, in turn, was further complicated by the fact that, whilst Ms Amede had independent representation, the Company did not. It was in liquidation, and the liquidator was not minded to spend money, on lawyers, for this case.

The net result was that the Court had to find the case proved, on the evidence submitted, albeit, without as much scrutiny as if the matter had been contested.

A ‘contravention’ of the Promoter Penalties Provisions – the requirements

The so called ‘promotor penalties’ provisions, in Div 290 of the TAA1, are triggered when there is a ‘contravention’ of the provisions allowing the Court to impose ‘civil penalties’ – that is the circumstances set out in s290-50(1)&(2). Such a contravention, is then enough to allow the Commissioner to seek an ‘injunction’, under Subdiv 290-C (to stop future exploitation) or to obtain a voluntary, but enforceable ‘undertaking’ (not to carry out any further exploitation) under Subdiv 290-D.

One of the two alternative ‘contraventions’ was relevant here.

1. This is that the ‘entity’ must not engage in conduct that results in it (Ms Amede) or another entity (her Company) being a ‘promoter‘ of a ‘tax exploitation scheme‘ (s290-50(1)).
2. A person will be a ‘promoter‘, under s290-60(1), if they have a substantial role in ‘marketing’ a scheme and they receive consideration for this. The Court found that this was the case, for the company. [para 42]
3. There will be a ‘tax exploitation scheme‘, under s290-65(1), if the ‘sole or dominant purpose’ of the promoter was to obtain a ‘scheme benefit’, that it was not ‘reasonably arguable’, was available at law (which means, not ‘as likely as not’ to be available: s284-15(1) of the TAA1). This is the factor, which makes it unexpectedly easy, for a scheme to be ‘exploitation’. For something described as ‘exploitation’ one might have expected the threshold would be set at something as low as, say, just a 20% chance of success. But, on this definition, something that had a 49% chance of being right, might still be ‘exploitation’. Justice Logan recognised this when he said that this test can raise some very ‘fine’ questions. But, he went on to say that, in this case, there were no such problems. In this case, he said that question  was ‘easily answered’ because the schemes risk of failure was ‘stark’. [para 40] This was largely because there was no ‘eligible research and development’. [para 35]
4. There are a number of ‘exceptions’ in s290-55. One of these might help account for the fact that the Commissioner did not press for penalties against Ms Amede. The Court cannot order an employee to pay penalties, if is has ordered the employer to pay penalties (s290-55(8). Ms Amede had an executive capacity, as an employee, but also a non-executive capacity as a director (where she was mind of the company). She is not technically an employee, when acting as a director, so perhaps penalties might have been available against her, too.

Civil Penalties – the principles

The law regarding ‘civil penalties’ is that the Court cannot just adopt a level penalties agreed between the parties. It must form its own view based on submissions and evidence from the parties.

The principles, for the Court, in setting the level of civil penalties, is similar to that in criminal matters.

The reasoning of the Court is, therefore, interesting.

1. One measure of civil penalties, is by reference to ‘penalty units’ – 5,000 for individuals and 25,000 for companies (s290-50(4)(a)). A penalty unit, was $170 at the time of the offence, so the maximum penalty for the company (per contravention) was: $4.25m and $42.5m for all 10 contraventions. [para 65]
2. The other way, of setting a maximum penalty, is twice the ‘consideration received’ (s290-50(4)(b)). The total consideration received by the company, over these 10 schemes, was: $575,289 [per annexures to His Honour’s reasons]. Twice this amount would set the maximum at $1,150,578 (much less than the maximum under the penalty units’ basis, of $4.25m or $42.5m).
3. The statute directs the court about the factors to take into account in s290-55(5), which are fairly common sense, but include: deterrent effect; damage to participants;  nature and extent of contravention; deliberateness; steps taken to prevent contravention; and degree of cooperation.
4. His Honour was not inclined to have the penalty set in some mechanical way to the amount of commission the Company received, in each case, as there motives were the same, in each case. [para 66]
5. There was a real issue about whether the penalties should be cumulative or not. On the one hand, His Honour thought the Statute indicated they should be cumulative ($42.5m). [para 67]  On the other hand, the revenue at risk was very small, when compared against all R&D claims. [para 69]
6. His Honour’s view was that $425,000 per contravention, and $4.25m in total, was the right amount. [para 71]
7. This was at the higher end of what the Commissioner submitted was appropriate. [para 71]
8. And, in His Honour’s view, the principle of ‘totality’ (the appropriateness of the total) did not call for any reduction. [para 72]
9. This was to send a message of ‘general deterrence’. [para 73]

(CofT v International Indigenous Football Foundation Australia Pty Ltd [2018] FCA 528, Federal Court, Logan J, 19 March 2018.)

 

Study questions (answers available)

1. Did the Court find that the respondents had ‘contravened’ the Promoter Penalty Provisions’ in the 10 cases pleaded?
2. Were the respondents helping taxpayers claim R&D off-sets, under Div 355 of the ITAA97
3. Did the taxpayers, in these 10 cases, claim $11m in R&D off-sets?
4. In 2014, was only $3b paid out of $19b claimed?
5. Is it usual for the Commissioner to have the onus of proof?
6. Does a person contravene s290-50(1), by conduct that results in that person becoming a ‘promoter’ of a ‘tax exploitation scheme’?
7. Can one be a ‘promoter’ without getting paid?
8. To be an exploitation’ scheme, does the scheme’s prospects of success have to be less than 50%?
9. Were each of the 10 cases, close to the exonerating chance of success?
10. Was the maximum penalty, on the ‘twice fees’ basis, about $1.1m?
11. Was the maximum penalty, on the ‘penalty unit’ basis, $42.5m?
12. Was the final penalty $4.25m?
13. Did ‘general deterrence’ play a role in setting this figure?