Taxpayer Alert TA 2008/6: Claiming tax deductions for debts from a previous tax planning scheme that are forgiven or where repayments are refunded
Date of issue: 10 April 2008
Status: Current


Description: The alert applies to arrangements having the following features. | 1. The taxpayer has a debt from participating in a previous tax planning scheme. | 2. An entity associated with promotion of the previous tax planning scheme (the other entity) approaches the taxpayer with an offer to settle the outstanding debt on that scheme, on the basis of generating further tax deductions above the [net] amount repaid. | 3. The other entity proposes an arrangement whereby the taxpayer pays either: (a) an amount less than the full amount of the outstanding debt and the other entity offers to provide documents that incorrectly evidence the payment of the full amount. This may involve the fabrication of documents that purport to show the payment of the full amount by the taxpayer; or (b) the full amount of the outstanding debt and the other entity offers to provide supporting documentation to substantiate this payment, but also to arrange a covert refund of the majority of the amount paid to the taxpayer or their associates. This may involve the use of a round robin payment arrangement to return the majority of the amount paid by the taxpayer back to the taxpayer or their associates. | (a) an amount less than the full amount of the outstanding debt and the other entity offers to provide documents that incorrectly evidence the payment of the full amount. This may involve the fabrication of documents that purport to show the payment of the full amount by the taxpayer; or (b) the full amount of the outstanding debt and the other entity offers to provide supporting documentation to substantiate this payment, but also to arrange a covert refund of the majority of the amount paid to the taxpayer or their associates. This may involve the use of a round robin payment arrangement to return the majority of the amount paid by the taxpayer back to the taxpayer or their associates. | 4. The basic features of this arrangement can be summarised diagrammatically as follows: Alternatively, the arrangement may constitute a round robin, such as: | Alternatively, the arrangement may constitute a round robin, such as: | FEATURES ABOUT WHICH THE TAX OFFICE IS CONCERNED | The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether: (a) such an arrangement or certain steps within it may be a sham; (b) either the outstanding debt or the [net] amount actually repaid under this scheme may be deductible under section 8-1 the Income Tax Assessment Act 1997 ; (c) the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement, on the basis that its dominant purpose is to enable the taxpayer to obtain a tax benefit; (d) any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | (a) such an arrangement or certain steps within it may be a sham; (b) either the outstanding debt or the [net] amount actually repaid under this scheme may be deductible under section 8-1 the Income Tax Assessment Act 1997 ; (c) the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement, on the basis that its dominant purpose is to enable the taxpayer to obtain a tax benefit; (d) any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 . | The Australian Taxation Office is examining these arrangements. | The Tax Office will consider the deductibility of each settlement amount on a case by case basis taking into account the overall circumstances. Deductions, where allowable, will be limited to the amounts which have actually been incurred. Note 1: Penalties of up to 50 % of the tax avoided can apply where Part IVA is applied. Base penalties for intentional disregard of the tax law are imposed at 75 % of the tax shortfall. Reductions in base penalty may be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Note 2: In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer ; • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter; and • the taxpayer co-operates with the investigation and consequential proceedings . Note 3: Penalties of up to 5, penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. | • the case does not exhibit a significant degree of criminality by the taxpayer ; • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter; and • the taxpayer co-operates with the investigation and consequential proceedings . | Date of amendment Comment 19 January 2024 Updated ATO tip-off hotline number | Date of Issue: 10 April 2008 | Date of Effect: 10 April 2008 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: Tax avoidance Tax evasion | Legislative References: Income Tax Assessment Act 1997 Section 8-1 Income Tax Assessment Act 1936 Part IVA Taxation Administration Act 1953 Division 290 of Schedule 1 | Related Taxpayer Alerts: | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical & Case Leadership Phone: (02) 6216 2710





Related documents: PS LA 2005/13 - Taxpayer Alerts | Section 8-1 | Part IVA | Division 290 of Schedule 1 | None.

This Taxpayer Alert describes arrangements whereby taxpayers involved in a previous tax avoidance scheme enter into an arrangement under which they purport to be able to claim a tax deduction for debts relating to that scheme that have been forgiven or where repayments of the debt are refunded.