The Federal Court has imposed civil penalties in relation to 2 mass-marketed managed investment schemes that were implemented in a way that was “materially different” from that described in ATO Product Rulings in contravention of s 290-50(2), Sch 1 of the TAA.
- Barossa Vines Ltd was the responsible entity of managed investment schemes conducting a viticultural business.
- In 2007 and 2008, it obtained Product Rulings from the Tax Office in respect of 2 schemes (Barossa Vines Projects).
- Participants paid an upfront management fee of $4,400 and entered into an agreement whereby Barossa Vines Ltd would establish and manage a vineyard lot on their behalf.
- While the management fees would generally be deductible, s 35-10(2) of the ITAA 1997 effectively defers deductions from non-commercial business activities until they can be applied against assessable income.
- However, the Commissioner agreed to exercise his discretion under s 35-55(1)(b) not to apply the rule in s 35-10(2), subject to the projects being carried out in the manner described in the relevant Product Rulings.
- The 2 projects were promoted on the basis of conformity with the relevant Product Rulings and raised over $20m from 589 participants.
Following an extensive investigation, the Tax Office found that certain vineyard lots had not been planted as at January 2008 and other lots had been abandoned due to soil problems and planting failures. The Tax Office alleged that each project was implemented in a way that was materially different from that described in the relevant product ruling and breached s 290-50(2), Sch 1 of the TAA.
The Court found that Barossa Vines Ltd, and 4 individual directors, had each engaged in conduct in contravention of s 290-50(2), Sch 1 of the TAA.
As the proceedings were resolved via mediation, the Court accepted the ATO’s submission to impose a civil penalty of $625,000 for Barossa Vines Ltd, and id=”mce_marker”25,000 for each of 4 individual directors. This represented a substantial discount to the maximum penalty of 5,000 penalty units ($550,000) for an individual, or 25,000 penalty units ($2,750,000) for a body corporate (or twice the consideration received in respect of the scheme, ie $40.4m).
The Court noted that the contraventions could be characterised as “incompetent management” but still involved an element of concealment to put their own commercial interests ahead of investors. Although the respondents did not always fully comply with the ATO’s investigation, the Court said they had acknowledged their wrongdoing and saved the cost of a trial.
(FCT v Barossa Vines Ltd [2014] FCA 20, Federal Court, Besanko J, 3 February 2014.)
[LTN 22, 4/2/14]
Extract from s290-50 of the Taxation Administration Act 1953, First Schedule
290-50 Civil penalties – Promoter of tax exploitation scheme
(1) An entity must not engage in conduct that results in that or another entity being a * promoter of a * tax exploitation scheme.
Implementing scheme otherwise than in accordance with ruling
(2) An entity must not engage in conduct that results in a * scheme that has been promoted on the basis of conformity with a * product ruling being implemented in a way that is materially different from that described in the product ruling.
Note: A scheme will not have been implemented in a way that is materially different from that described in a product ruling if the tax outcome for participants in the scheme is the same as that described in the ruling.