Taxpayer Alert TA 2005/8: Asset transfer to an offshore structure at below market value with subsequent use to produce income not attributed to the taxpayer for Australian tax purposes
Date of issue: 21 December 2005
Status: Current


Description: This Alert contains references to Part XI of the Income Tax Assessment Act 1936 , which has been repealed and will not apply to taxpayers from the 2010-11 income year. For further information, please refer to the Foreign income return form guide 2011-12 (NAT 1840). | This Taxpayer Alert describes an arrangement to artificially depress the value of an asset transferred to an offshore structure in order to escape Australian tax on a capital gain. The offshore structure then uses that asset to produce income without the payment of any Australian tax. The Australian resident does not disclose their interest in the offshore structure and pays no Australian tax on attributable income generated by the structure's operation of the asset. | This alert applies to arrangements generally marketed to wealthy individuals and their closely held entities that exhibit some or all of the following features: 1. The taxpayer establishes an offshore structure, or uses an existing structure, in a tax haven or country with bank secrecy with the assistance of a promoter. The promoter may provide a 'paper trail' of documents designed to conceal the true nature of these transactions and the taxpayer's interest in the offshore structure. 2. The offshore structure may include one or a combination of the following types of entity, which are promoted on the basis of not being subject to attribution under Australia's anti-deferral regimes: a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. 3. The taxpayer transfers an asset to the offshore structure at a price substantially below its market value. 4. Assets may include shares, intellectual property or other intangibles, or the creation of a new asset such as the assignment of rights to future income. 5. The offshore structure then uses the asset to generate passive income which is retained by the structure. 6. The taxpayer may access this income often in a disguised form. 7. The taxpayer does not pay the correct amount of Australian tax on the initial disposal of the asset to the offshore structure, i.e. the gain that would have resulted from a market value sale to a third party. 8. The taxpayer does not disclose their involvement with the offshore structure and does not pay Australian tax on the income generated by the offshore structure from the use of the asset or when they access that income. 9. In some arrangements, the documentation supporting the above transactions is absent, incomplete or falsified and the valuations used may be highly questionable. In addition, such documents do not disclose the Australian resident's interest in, or involvement with, the offshore structure. | 1. The taxpayer establishes an offshore structure, or uses an existing structure, in a tax haven or country with bank secrecy with the assistance of a promoter. The promoter may provide a 'paper trail' of documents designed to conceal the true nature of these transactions and the taxpayer's interest in the offshore structure. 2. The offshore structure may include one or a combination of the following types of entity, which are promoted on the basis of not being subject to attribution under Australia's anti-deferral regimes: a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. 3. The taxpayer transfers an asset to the offshore structure at a price substantially below its market value. 4. Assets may include shares, intellectual property or other intangibles, or the creation of a new asset such as the assignment of rights to future income. 5. The offshore structure then uses the asset to generate passive income which is retained by the structure. 6. The taxpayer may access this income often in a disguised form. 7. The taxpayer does not pay the correct amount of Australian tax on the initial disposal of the asset to the offshore structure, i.e. the gain that would have resulted from a market value sale to a third party. 8. The taxpayer does not disclose their involvement with the offshore structure and does not pay Australian tax on the income generated by the offshore structure from the use of the asset or when they access that income. 9. In some arrangements, the documentation supporting the above transactions is absent, incomplete or falsified and the valuations used may be highly questionable. In addition, such documents do not disclose the Australian resident's interest in, or involvement with, the offshore structure. | a) An offshore trust, including bare, blind or discretionary trusts; b) An offshore company, including tax haven entities known as international business companies; c) Another type of entity, including Anstalts or Stichtings. | The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: (a) such as arrangement or crucial parts of it may be a sham; (b) any gain on the disposal of assets is subject to Australian tax under sub-chapters 3.1 or 3.3 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular whether the market value substitution rules apply; (c) any entity within the offshore structure was a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); (d) any entity within the offshore structure, the promoter or other persons involved with the structure's operation, management and administration: i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; (e) the income of the offshore structure is assessable to the taxpayer under any other provision of the tax law; (f) the income of the offshore structure was 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; (g) the transactions may be subject to Division 13 of the ITAA 1936; (h) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. Note 1: Up to 50% penalties can apply to underpaid tax where Part IVA is applied. Base penalties for intentional disregard for the tax law start at 75% of the tax unpaid. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office. Note 2: In appropriate cases possible sanctions under criminal law may also apply. | (a) such as arrangement or crucial parts of it may be a sham; (b) any gain on the disposal of assets is subject to Australian tax under sub-chapters 3.1 or 3.3 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular whether the market value substitution rules apply; (c) any entity within the offshore structure was a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); (d) any entity within the offshore structure, the promoter or other persons involved with the structure's operation, management and administration: i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; (e) the income of the offshore structure is assessable to the taxpayer under any other provision of the tax law; (f) the income of the offshore structure was 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; (g) the transactions may be subject to Division 13 of the ITAA 1936; (h) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may have application as: i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. | i) are acting as agents for the taxpayer as principal in relation to the activities of the offshore structure; or ii) are acting as trustees for the taxpayer as beneficiary in relation to the activities of the offshore structure; | i) the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii) it appears that the dominant purpose of entering into the arrangement is to obtain tax benefits. | The Australian Taxation Office is examining these arrangements.





Related documents: ATO ID 2007/47 | TD 2007/20 | TR 2007/13 | PS LA 2007/7 | PS 2008/15 | 6(1) | Part X | Part IVA | TA 2005/5 | TA 2005/6 | TA 2005/7

Large Business & International | International Strategy & Operations