The Federal Court has found that a promoter of a scheme, involving the purchase and donation [of] pharmaceuticals to charities with foreign operations, engaged in conduct that resulted in himself, and 2 other entities being a promoter of a tax exploitation scheme. As a result, civil penalties totalling id=”mce_marker”.5m were imposed.

The Court said the promoter brought the scheme to Australia in 2009 and 2010. Under the scheme, participating entities incurred a liability to pay for pharmaceuticals for use in foreign markets, but liability for payment of 92.5% of the purchase price would be deferred for 50 years at very low interest. Participants would claim immediate deductions for the full amount of the purchase price.

After reviewing the facts and submissions, the Federal Court concluded that:

(i)      the scheme was a “scheme” for the purposes of s 290-65(1) of Sch 1 to the TAA;

(ii)     at the time of the conduct mentioned in s 290-50(1), it was reasonable to conclude that each respondent (and each participant) entered into or carried out the scheme in question for the dominant purpose of getting a “scheme benefit” for each participant from the scheme;

(iii)    at the same time, it was not reasonably arguable that the scheme benefit was available at law; and

(iv)    by reason of (i), (ii) and (iii), the scheme was a “tax exploitation scheme” for the purposes of s 290-65(1).

The Court imposed a penalty of id=”mce_marker”m on the promoter, $400,000 on the second respondent, and id=”mce_marker”00,000 on the third respondent.

(FCT v Arnold (No 2) [2015] FCA 34, Federal Court, Edmonds J, 4 February 2015.)

ATO commentary

In commenting on the case, ATO Deputy Commissioner Tim Dyce said the so-called philanthropic scheme was modelled on an arrangement, which previously failed in Canada, and involved the purchase and donation of AIDS pharmaceutics to charities in Africa. “As we discovered, the purchasers only paid 7.5% of the grossly inflated price of the drugs, yet claimed tax deductions of 100%”.

Mr Dyce said that, in delivering his judgment, Justice Edmonds noted at least 5 grounds why the scheme [benefit] was not available under the law, including that there was no actual delivery of the pharmaceuticals to the charities concerned at the relevant time.

In awarding the large civil penalty, Justice Edmonds said (at [171] and [207]): “Specific deterrence is a significant factor where, as here, the contraventions involved deliberate wrongdoing, sustained denials of contraventions and lack of remorse”.

“Potential promoters must be left in no doubt that acting on the commercial temptation to engage in the proscribed conduct in relation to tax exploitation schemes, so as to realise the significant potential rewards that can be available, will result in substantial penalties. The penalties need to be substantial enough to persuade potential promoters that it is not worth the risk of whether a tax exploitation scheme will escape the detection by the Commissioner.

[LTN 24, 6/2/15]