A4.1 This appendix sets out details of the ATO's policy and practices for remitting interest in relation to settlement offers made to taxpayers involved in Mass Marketed Tax Effective Investments (MMTEIs). It also sets out some findings and conclusions in relation to both this policy and its application in practice.

A4.2 The ATO's settlement processes for MMTEIs have been the subject of prior review by the Commonwealth Ombudsman97, the Senate Economics Reference Committee98 and, more recently, by the Australian National Audit Office.99 The purpose of this appendix is not to restate any of the matters or the findings on these settlement processes that are referred to in these prior reviews. Instead, the purpose of this appendix is to examine these settlement processes to see what they reveal about the ATO's policy and practices for remitting interest in relation to tax disputes involving groups of taxpayers.

Background

A4.3 The ATO currently describes MMTEIs as schemes sold through a prospectus and, in some cases, information memoranda, in respect of 1998/99 and earlier income years. They include schemes involving agricultural development and films. The ATO does not currently include Employee Benefit Arrangements (EBAs), retirement village investments, equity linked bond arrangements or securities lending arrangements within its current definition of MMTEIs.100

A4.4 MMTEIs involved large number of taxpayers and large amounts of disputed tax. The ATO has advised that there were 184 MMTEI arrangements involving over 43,000 taxpayers and $1.8 billion in tax, including penalties and interest.101

A4.5 MMTEIs can broadly be separated into two main categories based on the structure of the schemes and their tax effect: film investments and agricultural and other arrangements. However, some film schemes were structured in the same manner as agricultural and other arrangements.102

Film arrangements

A4.6 Film arrangements involved the investor paying a prescribed amount either directly or through borrowings on which interest was paid. The investment was to be used in the making of a film. The investor claimed a tax deduction for the amount invested103 and any interest paid on related borrowings. The investment guaranteed a return of the amount invested plus a small margin. The amount returned was assessable income and taxable in the year of receipt, which was generally up to seven years from the date of the investment. The advantage to the investor was up to a seven year deferral of tax on the amount invested.

Other arrangements

A4.7 Other MMTEIs include agricultural and franchise arrangements. The basic structure involved a payment of a cash amount and an agreement to borrow an amount ranging from three to four times the cash amount. The investor paid interest on the borrowings, which were either non-recourse or indemnified, so that ultimately the investor was not responsible for repaying the amount borrowed. The investor claimed a deduction for the total amount invested, being both the cash and borrowed amounts. The tax refund claimed for the investment funded the investor's cash outlay with some additional profit. The net claimed tax effect was that the investor permanently reduced tax in the year of the investment without having to outlay the full amount of that investment.

ATO action against MMTEIs

A4.8 The ATO's initial action against MMTEI film arrangements was to disallow the deduction claimed for the outlay in the first year and interest expense in subsequent years. The return of the investment was not considered to be assessable income.

A4.9 The ATO's initial actions against agricultural and franchise type arrangements was to disallow the deductions claimed for the outlays in the first year and interest expenses in subsequent years.

History of ATO's settlement processes for MMTEIs

A4.10 The history of the ATO's interest remission practices for settling MMTEI disputes falls into two distinct phases: a pre-February 2002 phase and a post-February 2002 phase.

Phase 1: Period prior to February 2002

A4.11 As part of trying to resolve the emerging issues relating to MMTEIs, the ATO developed a specific settlement code for MMTEIs in July 2000. This took the form of an Addendum to its existing Code of Settlement Practice.

A4.12 This Addendum, when released, also applied to EBAs which are considered in detail in the next appendix. This is because, at the time of the Addendum's release, the ATO still considered that EBAs were a form of MMTEI.

A4.13 The Addendum instructed ATO officers who were settling MMTEI disputes that there was normally no question of settling such a dispute for an amount which was less than the full amount of primary tax in dispute. However, the level of penalties and interest was negotiable.104

A4.14 The Addendum also instructed ATO officers that different settlement arrangements would apply to taxpayers who were promoters (and associated entities) and those who were simply participants in these schemes.

A4.15 For participants, the Addendum divided settlement arrangements according to whether the particular MMTEI involved a Level 1, Level 2 or Level 3 form of tax mischief. A Level 1 MMTEI scheme exhibited most of the following eight characteristics:

  1. the arrangements were contrived and artificial;
  2. the arrangements lacked commerciality;
  3. the arrangements involved fraud on the Revenue;
  4. the arrangements involved round-robin financing or non-recourse loans;
  5. the arrangements were not implemented as specified in any relevant contractual or other legal documentation;
  6. the scheme involved abuse of a specific legislative concession or anti-avoidance provision;
  7. the scheme involved a permanent non-payment of tax, as opposed to a deferral of the payment of tax to a later period; and
  8. the scheme involved a high risk to the Revenue.

A4.16 A Level 2 MMTEI scheme involved some of the above eight characteristics, while a Level 3 scheme did not involve characteristics 1, 3, 5 and 6 (that is, artificiality, fraud, non-implementation according to contractual terms and abuse of a specific concession or anti-avoidance provision).

A4.17 The Addendum then instructed ATO staff that the following settlement offers should apply according to the level of tax mischief in the relevant scheme, unless there were special circumstances that might allow a departure from these offers. The offers were as follows.

Level 1 scheme: payment of full amount of primary tax, a 25-50 per cent penalty and full GIC.

Level 2 scheme: payment of primary tax, a 10 per cent penalty and full GIC.

Level 3 scheme: settlement may include a deduction for the cash outlay only, a 10 per cent penalty and full GIC.

A4.18 The Addendum then stated that the following factors may operate to reduce any penalty charged to scheme participants:

  • the participant's awareness of the nature of the scheme;
  • the participant has been defrauded by the promoter;
  • the participant has made a voluntary disclosure to the ATO; and
  • the participant has co-operated with the ATO.

A4.19 There is one factor alone that is mentioned in the Addendum as giving rise to a reduction in the amount of GIC. This is the age of the relevant dispute.105

A4.20 The Addendum referred to special circumstances (which included the issue of rulings or advance opinions in relation to the scheme) in a manner which suggests that these may operate to reduce either the GIC or the penalty. However, this point was not clear in the Addendum itself.

A4.21 For promoters and associated entities, the Addendum stated that there would be very limited circumstances where these would be offered a settlement on any basis other than payment of the full amount of primary tax, a 50 per cent or higher penalty and full GIC. According to the Addendum, this was because of the promoters' level of knowledge of the tax mischief of the scheme. The Addendum noted that the extent of the promoters' co-operation with the ATO, including the extent to which they have encouraged other participants to co-operate with the ATO and their role in terminating the tax mischief in the scheme, might be factors justifying a reduction in the amount of any penalty.

26 April 2001 and 23 July 2001 announcements

A4.22 On 26 April 2001, the ATO announced that it would reduce the interest on tax debts for some MMTEIs from the full applicable rate (then 13.86 per cent) to an interest rate which reflected the time value of money (then 5.86 per cent).106 The ATO announced that it would, after consultation with relevant stakeholders, develop guidelines for determining who should be entitled to this interest rate reduction. EBAs and financial products such as linked bonds would not be eligible for this interest rate reduction.

A4.23 On 23 July 2001,the promised guidelines were released. On this date, the ATO also announced that the relevant reduced interest rate would be 4.72 per cent.107 The persons to be excluded from the rate reduction were scheme promoters, tax advisers, financial planners and investors who had bad tax records (for example, outstanding tax debts). Investors who were involved in three different MMTEIs or other tax avoidance schemes in three or more years since 1990 were not automatically eligible for the interest rate reduction, but would be considered on a case by case basis.

A4.24 The July 2001 interest rate reduction was offered to MMTEI investors who either paid the disputed tax in full, who entered into a settlement arrangement in relation to this tax or who entered into a payment arrangement for the outstanding tax.

A4.25 The July 2001 interest reduction applied to all investors other than those who were specifically ineligible. The individual circumstances of all eligible investors were not to be reviewed to determine their entitlement to the reduction. This decision not to consider taxpayers on an individual basis was stated to be in 'the interests of fairness or efficiency in administration'.

A4.26 The factors which the ATO stated that it had considered in reaching this global interest rate reduction decision were as follows:

  • many investors in the relevant schemes lacked full knowledge of the scheme arrangements and the operation of the tax system;
  • these investors were subject to aggressive and sophisticated marketing techniques in relation to the arrangement;
  • these investors had a generally good tax record;
  • these investors took advice from people expected to have the necessary knowledge; and
  • many of these investors suffered a real financial loss.

A4.27 Investors who were eligible for this reduced interest offer were required to make an application to the ATO for this interest rate reduction. A special ATO form was created for taxpayers to use in this regard.

A4.28 Taxpayers who had already entered into a settlement arrangement with the ATO were eligible for the interest rate reduction. The reduction was also extended to taxpayers who chose to wait for the outcome of court cases before entering into a settlement or payment arrangement with the ATO.

A4.29 Submissions have noted that the above ATO settlement offer for MMTEI investors is couched in terms which suggest that the reduction in the rate of interest is being used as an inducement to settle. Both the ATO's Code of Settlement Practice and Receivables Policy specifically provide that ATO staff may not use the level of interest that is charged as an inducement to settle.108

July 2001 settlement offer for certain MMTEI agricultural arrangements

A4.30 At around the time of this global interest reduction offer, the ATO also announced, via a newsletter sent to MMTEI investors, that, for certain agricultural arrangements involving an underlying agricultural activity, the ATO would be prepared to settle on the basis of the following terms:

  • a full deduction being allowed for the investor's actual cash outlay;
  • full remission of any interest before 1 January 1998; and
  • a 5 per cent penalty for schemes relating to the 1996/97 and previous income years and a 10 per cent penalty for schemes entered into in later years.

Phase 2: Period after 14 February 2002

A4.31 On 14 February 2002, the ATO decided to accept most of the recommendations relating to settlement guidelines for MMTEIs contained in an interim report that was handed down by Senate Economics Reference Committee (SERC)109. This report was one of three reports handed down by SERC as a result of an investigation which it commenced in July 2000 into the ATO's handling of MMTEI disputes.

A4.32 The settlement offer announced by the ATO on 14 February 2002 allowed certain investors (termed 'eligible investors') to receive a tax deduction for any cash outlay, no penalties or interest on the tax owed and a two year interest free period for debt repayment, subject to an acceptable payment arrangement being made. This offer again did not apply to EBAs or other forms of financing products.

A4.33 Investors who accepted this settlement offer were required by the ATO to forego their objection and appeal rights in relation to their amended assessments.

A4.34 Promoters, financial planners, tax agents and others who gave tax advice for a fee on a regular basis were not automatically entitled to a full remission of penalties or interest or the two year interest free period to repay any tax debt, unless they could demonstrate to the ATO that special circumstances justified that they were entitled to these terms. These investors were termed 'ineligible investors' by the ATO.

A4.35 'Ineligible investors' were specifically defined by the ATO as falling into the following four categories:

  • scheme promoters who designed, prepared, managed, sold or implemented the investment scheme (including the directors and office bearers of an entity who managed the investment);
  • tax advisers or financial planners who received a fee for another investor's scheme participation;
  • tax agents and others who give tax advice for a fee on a regular basis, and who could be expected to be aware of the taxation issues associated with investments (including the self-assessment system); and
  • members of a professional firm which has a tax practice.110

A4.36 The ATO indicated that the factors (which the ATO called 'special circumstances') which had led it to make this offer to eligible investors consisted of the five factors which it had referred to in its July 2001 announcement. However, the following additional factor was added in the February 2002 announcement.

  • The investors contributed some real money to the schemes and suffered some real financial loss after the tax deduction was disallowed.

A4.37 Submissions have noted that, as with the April and July 2001 interest rate reduction, the February 2002 offer is couched in terms which suggest that this rate reduction is being used as an inducement to settle.

A4.38 The February 2002 settlement offer was described by the ATO as its final settlement offer for MMTEIs and gave a deadline of 21 June 2002 for MMTEI investors to accept this offer. According to the ATO, by this date over 38,300 of the 41,700 eligible taxpayers had accepted this offer. Of these, 1,400 participants were identified as investors who were not eligible for the full terms of the offer.111

A4.39 After 21 June 2002, the ATO wrote to 4300 participants who had not responded to the settlement offer. The letter alerted any investors who missed out on the opportunity to settle to apply for consideration for exceptional circumstances. Of these, 907 were accepted.

A4.40 As the ATO's February 2002 settlement offer was inconsistent with its previous Addendum to its Code of Settlement Practice, this Addendum was withdrawn, although this withdrawal did not formally take place until 29 October 2002.

ATO processes for handling MMTEI investors after February 2002

A4.41 From March 2002 onwards, MMTEI investors were sent a settlement deed accompanied by a letter explaining the settlement offer. The letter asked the relevant investor to identify whether or not they were an eligible investor. If they were an eligible investor they could choose to accept the settlement by signing and returning the settlement deed. If they were not an eligible investor, the ATO letter advised them to lodge a submission outlining the extent to which they satisfied the special circumstances (see above) which led to the ATO making the settlement offer for eligible investors. These submissions were considered by teams in the ATO's Perth and Brisbane offices.

MMTEI investors who did not accept the February 2002 settlement offer

A4.42 According to the ATO, MMTEI investors who did not accept the ATO's February 2002 settlement offer before or after its expiry date fall into two broad categories.

A4.43 The first category consists of investors who meet the criteria for the general February 2002 settlement offer for eligible investors. These taxpayers, if they choose to settle, are not entitled to the nil interest or nil penalties aspects of the February 2002 offer. However, these taxpayers will still receive the 4.72 per cent concessional interest terms contained in the ATO's previous announcements of April and July 2001. These terms are only available, in accordance with these ATO announcements, up to the time when the ATO has judicial clarification of the issues involved in the relevant arrangement. Once that has occurred, the ATO has indicated it will levy interest at full rates on any unpaid tax.

A4.44 The second category of MMTEI investors who have not settled are, according to the ATO, those who would be treated as 'ineligible' investors if they had accepted the February 2002 offer. These taxpayers continue to be levied with the same level of interest and penalties which the ATO applied in the amended assessment first issued to these taxpayers.

A4.45 The ATO has advised that as at January 2004 there are approximately 3300 taxpayers who have not accepted the February 2002 offer.112

ATO processes for ineligible MMTEI investors who accepted the February 2002 settlement offer

A4.46 The ATO's letter to MMTEI investors did not contain detailed guidelines to ineligible investors as to how to frame their applications for eligible treatment, nor did it list the specific criteria which these applicants needed to address. These guidelines were only published by the ATO on its website in June 2002.

A4.47 The guidelines indicated that the following factors might help investors structure their application:

  • what the taxpayer knew about the scheme;
  • the taxpayer's knowledge of the tax system at the time of investing and claiming the deduction;
  • whether the taxpayer was subject to aggressive and sophisticated marketing techniques;
  • whether the taxpayer had a generally good tax record;
  • whether the taxpayer took advice from people expected to have the necessary knowledge;
  • whether the taxpayer has suffered a real loss by paying cash into the scheme; and
  • the taxpayer's role in relation to the investment.

A4.48 By the time these guidelines were published on the ATO website, many ineligible investors had already made their applications for concessional settlement treatment. These guidelines were therefore not issued on a timely basis. In addition, by being published on the ATO website only, they were not communicated to affected taxpayers in a way that would ensure that these taxpayers would be made aware of these guidelines.

A4.49 However, the ATO did communicate the existence of these specific website guidelines in the letters which it sent to ineligible taxpayers which notified them of whether their applications for concessional treatment had been wholly or partly successful. These letters also advised these investors of the existence of an internal ATO review process for considering their applications. The investors who took advantage of this review process were therefore able to utilise these website guidelines in framing their review applications.

ATO's internal review process for ineligible MMTEI investors

A4.50 The ATO's internal review process for ineligible MMTEI investors operated as follows. The review took place in the ATO's Canberra office. Taxpayers would address their review applications directly to the relevant ATO officers in Canberra. The taxpayer's file was then sent to the Canberra reviewing officer who conducted the review using an internal checklist. Once the review decision was made the taxpayer was advised of the results of this review and of their rights to seek a review of this decision by the Ombudsman.

A4.51 As at 31 January 2004, 15 out of 213 original ATO decisions relating to ineligible MMTEI investors had been overturned as a result of this review process. These altered decisions arose mainly because of additional information which the investor provided to the reviewing officer.

Possible settlement outcomes for ineligible investors

A4.52 The ATO has advised that there were three settlement outcomes which ineligible investors were offered in response to their applications for concessional treatment. These three outcomes were as follows.

  1. The investors were eligible for the full terms of the settlement offer.
  2. The investors would be allowed a deduction for their cash outlay and subject to a small penalty, depending on the circumstances. They would also be entitled to a remission of the interest charge for underpaid tax to 4.72 per cent and a remission of the interest charge for late payment of the amended assessment to 4.72 per cent. The latter interest rate remission was to apply for a two year period only.
  3. The investors would be eligible for a cash outlay deduction, but otherwise subject to full interest and relevant penalties.

Actual settlement outcomes for ineligible investors

A4.53 When the ATO published its guidelines for ineligible investors on its website in June 2002, it indicated that, based on the cases considered by the ATO up to that time, the ATO did not expect that many investors would be eligible for the full remission of penalties and interest.

A4.54 However, the ATO stated that there would be a distinction between promoters and others who received a fee for another investor's participation (categories 1 and 2) and other investors (categories 3 and 4). Those in the latter two categories were, according to the ATO, likely to be in small to medium sized practices and were likely to have relied on the advice of unrelated and independent advisers. For this category of taxpayer, the ATO indicated that partial remission of interest along the lines of settlement outcome 2 above was appropriate.

A4.55 The ATO has subsequently indicated that as of January 2004, of the 1400 ineligible taxpayer cases, over 1100 have been finalised. Of these, 20 per cent have been granted the full terms of the settlement and 51 per cent have been given terms involving a 4.72 per cent concessional rate of interest. The remaining 29 per cent have received a settlement outcome involving full GIC, some penalties and a deduction for their cash outlay only.

Specific factors applied in granting interest reductions to ineligible MMTEI investors

Financial Planners

A4.56 Material provided for the purposes of this review indicates that, in applying its review processes for ineligible MMTEI investors, the ATO considered that the receipt of a fee for placing clients into MMTEI investments was a crucial consideration for taxpayers who were financial planners. If such a fee was received (and it exceeded a certain minimum amount) the planner would generally receive no concessional settlement (that is, settlement outcome 3 above would apply). If no fee was received, the planner would generally be treated in the same way as an eligible investor.

A4.57 The ATO considered that the term 'fee' in this context included a fee received by way of salary only. However, if the relevant financial planner investor was an employee and their work involved marketing MMTEIs, according to the ATO this might have resulted in the employee receiving the more concessional settlement outcome 2 above (that is, the 4.72 per cent interest reduction).

Tax agents or advisers

A4.58 For taxpayers who were tax agents or advisers, the ATO considered that the two key criteria which would determine the ultimate settlement outcome were the receipt of significant fees and knowledge of the tax system. The relevant fee could be either for placing others into the MMTEI arrangement or from providing tax advice generally on a regular basis.

A4.59 A tax agent who received more than a negligible fee for placing a client into a MMTEI arrangement would generally be required to pay full interest and penalties (that is, they will receive settlement outcome 3 referred to above). A tax agent who was a partner in a tax practice and who therefore received fees from the provision by that partnership of tax advice would generally receive the 4.72 per cent reduced interest settlement (that is, settlement outcome 2).

A4.60 Again, the ATO considered that, in this context, the term 'fees' included a fee received by way of salary only.

A4.61 A tax adviser's status as an employee might have had the result that they were considered a fully eligible investor (that is, entitled to receive settlement outcome 1). An example of this was where the relevant tax agent received a fee in the form of a salary only from acting as a tax adviser to a large company.

ATO processes for issuing amended assessments to ineligible investors

A4.62 Three different areas of the ATO were responsible for the calculations of the interest, penalty and primary tax amounts which ineligible MMTEI investors had to pay. Submissions to this review have pointed out that this meant that, when finalising their MMTEI dispute, taxpayers may have had to deal with up to three or more different ATO staff. This process lengthened the time taken to finalise the dispute. The ATO should consider streamlining such processes so that in future a total case management arrangement is implemented for finalising all three aspects of a dispute of this nature.

A4.63 The above comments lead to the following subsidiary finding:

Subsidiary Finding 6

Taxpayers would benefit if the ATO adopted a case management arrangement for finalising the total amount, including interest, which taxpayers must pay to finalise their dispute.

Tax Office response

A4.64 The audit and debt collection staff do work together. However the ATO will examine how to improve ways for taxpayers and their representatives to interact with the Office.

Inspector-General comment

A4.65 The Inspector-General endorses the Tax Office agreement to address the issues identified and looks forward to further detail becoming available.

Interest concessions and settlement offers made to most MMTEI investors

A4.66 The Inspector-General is of the view that, for the majority of MMTEI investors, the ATO has allowed considerations of the type of the arrangement that a particular taxpayer has entered into to overshadow considerations of the individual conduct and circumstances of that taxpayer. The settlement offer only applies to taxpayers who had entered one of the 184 arrangements which the ATO categorised as a MMTEI scheme.

A4.67 Certain features of the ATO's interest concessions and settlement offers to the majority of MMTEI investors are indicators of this overshadowing. For example, in the press release which referred to the July 2001 interest reduction the Commissioner specifically stated that the individual circumstances of investors were not to be reviewed to determine their entitlement to the reduction. This decision not to consider taxpayers on an individual basis was stated to be in 'the interests of fairness or efficiency in administration'.

Interest and other outcomes for ineligible MMTEI investors

A4.68 For MMTEI taxpayers who were promoters, financial planners, tax agents or tax advisers, the ATO has determined interest and other outcomes in their settlement arrangements according to two broad sets of criteria.

A4.69 Firstly, the ATO has determined interest remission and other settlement outcomes for these investors according to whether they are members of a particular subgroup within the broad overall group of MMTEI investors.

A4.70 Secondly, the ATO has determined interest remission and other settlement outcomes for these investors according to the degree to which these investors share some of the characteristics of those MMTEI investors to whom it is willing to grant a nil interest outcome.

A4.71 Both the above broad sets of criteria have overshadowed considerations of the conduct and circumstances of relevant individuals.

A4.72 One factor which indicates this overshadowing in determining the overall settlement outcome is as follows. The list of factors which the ATO advised ineligible taxpayers to refer to in their applications for concessional treatment did not include the particular MMTEI arrangement entered into, nor the nature of its particular tax mischief. These factors would be relevant if all the individual circumstances of these taxpayers were to be taken into account. They are also factors which, according to the ATO's Code of Settlement Practice, should be taken into account in setting the terms of any settlement.

A4.73 The ATO has justified the approach it has adopted for all MMTEI taxpayers on the basis that the MMTEI dispute was extraordinary in nature, both in terms of the level of tax involved and the number of taxpayers affected. It has also indicated that on this occasion its approach was justified in the interests of good administration.

ATO internal review processes for ineligible MMTEI investors

A4.74 As discussed above, for ineligible MMTEI investors, the ATO set up a formal internal review process for remission of interest and other elements contained in the standardised settlement arrangement. The ATO also communicated the existence of that process to affected taxpayers. A similar process has not been established for participants in other disputes examined during this review, such as EBAs.

A4.75 This review found that there were very small numbers of taxpayers in EBAs and other arrangements that were offered standardised settlement terms who actually applied for and received a variation in the level of pre-amended assessment interest based on their individual circumstances. As discussed in more detail in Appendices 5 and 6, there were four such cases for EBAs, one case involving a retirement village, five cases involving equity linked bond arrangements and three cases involving securities lending arrangements.

A4.76 There is an absence of any formal ATO process similar to that adopted for MMTEIs for the remission of interest and other elements contained in the standardised settlement arrangements for taxpayers involved in EBAs and other arrangements. This may have led many of these taxpayers and advisers to believe that there was no process within the ATO for considering whether a particular case may involve special circumstances that would lead to different settlement terms such as for the remission of interest.

A4.77 Alternatively, the absence of such a process may have led these taxpayers and their advisers to believe that, if there was such a process, the result would be that concessional settlement treatment on the basis of special circumstances would be denied.

A4.78 This review found that the actual structure of the above formal process adopted for MMTEI investors and its accompanying review procedures were well documented within the ATO and transparent to taxpayers.

A4.79 However, as indicated above, this review also found that there were certain shortcomings in the manner in which this process was communicated to affected taxpayers.

A4.80 This review also found that, in conducting the above ATO processes, considerations of the extent to which taxpayers were members of a particular group or shared certain other characteristics overshadowed considerations of the conduct and circumstances of each individual.

A4.81 Currently, taxpayers who are seeking a review of the level of interest charged by the ATO can only do so by making an application for judicial review in accordance with the terms of the Administrative Decisions (Judicial Review) Act 1977 (ADJR). This is a costly and lengthy process.

A4.82 Tax administration would therefore be improved if an internal review process of a structure similar to that adopted for MMTEI investors was adopted for EBA taxpayers. Such a process would be a quicker, less expensive and more transparent review mechanism for the remission of interest than that which currently exists for such taxpayers.

A4.83 The above comments lead to the following key finding.

Key Finding 6

For investors in mass marketed tax effective investments (MMTEIs) the ATO set up a formal process, which also involved separate ATO internal review procedures, for the remission of interest and other elements contained in a standardised settlement arrangement. A similar process has not been established for participants in EBAs.

The actual formal structure of this process for MMTEI investors and its accompanying review procedures were well documented within the ATO and transparent to taxpayers.

Currently, taxpayers who are seeking a review of the level of interest charged by the ATO can only do so by making an application for judicial review in accordance with the terms of the Administrative Decisions (Judicial Review) Act 1977 (ADJR Act). This is a costly and lengthy process.

Tax administration would therefore be improved if an internal review process of a structure similar to that adopted for MMTEI investors was adopted for EBA taxpayers. Such a process would be a quicker, less expensive and more transparent review mechanism for the remission of interest than that which currently exists for such taxpayers.

However, any such review process would need to operate according to the overriding principle that all individual circumstances relating to particular taxpayers are taken into account during the operation of this process.

In particular, considerations of the extent to which taxpayers who are subject to this review process are members of a particular group, or share certain characteristics of other taxpayers in the same process, should not override considerations of the conduct and circumstances of each individual.

Tax Office response

A4.84 See the response to Key Findings 3 and 4. Special arrangements will be established to deal with applications, within the context described in that response.

Inspector-General comment2>

A4.85 The Inspector-General notes the agreement to establish a special arrangement and looks forward to further details becoming available.

MMTEI litigation

A4.86 There are five MMTEI cases which have been considered by the Federal Court (although the ATO has recently stated that it does not regard one of these cases as a MMTEI). Of these, four have been appealed to the Full Federal Court. In three of these appealed cases (Sleight,113 Vincent114 and Puzey115), the Court held that the deductions in dispute were not allowable. In the other appealed case, which the ATO recently stated was not a MMTEI situation, (Cooke and Jamieson116) the Court held that the deduction was allowable. In the case considered by a single judge, the Federal Court confirmed that the deduction was not allowable (Howland-Rose117 — 'the Budplan Case'). Puzey's case is currently on appeal.

A4.87 The law in relation to MMTEIs is therefore considered by some parties to still be uncertain. However, the ATO has not stated in any of its MMTEI settlement offers, that uncertainty in the law is a ground for applying a reduced rate of interest. As will be seen in the next appendix, uncertainty in the relevant law has been one factor leading to an interest rate reduction for one form of EBA. MMTEIs and EBAs have therefore received different treatment in this regard.

A4.88 While not the focus of this review, the Inspector-General notes that there are significant difficulties in concurrently conducting settlement and litigation processes in respect of the same matters. In most situations involving a settlement, there is a genuine uncertainty in the application of the law to the facts of a case and each side to the dispute accepts a compromise as an alternative to expensive litigation. In some of the MMTEI situations, the ATO allowed taxpayers to await the outcome of litigation prior to accepting the settlement offer — reflecting the desire of the ATO to finalise these bulk disputes in an administratively efficient manner.

A4.89 The relative status of those who settle and those who litigate where ongoing litigation occurs is unclear for many. Similarly, the ATO's litigation strategy when compared with participants' expectations around 'test case' processes is a matter of significant misunderstanding. The reality that many cases, particularly those involving the general anti-avoidance provisions of the ITAA 1936, can turn on their own facts is not always appreciated by participants in similar arrangements. The Inspector-General observes that the ATO could usefully improve communication processes in this area.

Other observations, conclusions and findings

A4.90 The other observations and conclusions relevant to this review which arise from the above examination of the history of the ATO's settlement practices for MMTEI disputes are as follows.

Range of factors applied to remit interest

A4.91 The ATO has, either in MMTEI disputes or its Code of Settlement Practice, indicated that the following criteria will be applied as grounds for remitting the interest charge for underpaid or late paid tax in tax disputes involving large groups of taxpayers:

  • the age of the relevant dispute;
  • the taxpayer's knowledge of the arrangement giving rise to the dispute and the operation of the tax system;
  • whether the taxpayer had a good tax record;
  • whether the taxpayer was subject to aggressive and sophisticated marketing techniques to enter into the relevant arrangements;
  • whether the taxpayers took advice from people expected to have the necessary knowledge of the tax system;
  • whether the taxpayers suffered a real financial loss from entering into the relevant arrangements;
  • whether the taxpayers contributed real money to the arrangement;
  • whether the taxpayer derived fees (including fees in the form of a salary) from placing other taxpayers into the relevant arrangements;
  • whether the taxpayer was a tax agent or adviser who received fees for providing tax advice on a regular basis;
  • whether the taxpayer was an employee of a professional firm which had a tax practice; and possibly
  • whether there was a ruling or advance opinion in relation to the scheme.

A4.92 In its application of the above criteria to MMTEI disputes, the ATO has not publicly stated that uncertainty in the relevant law is a factor for consideration in respect of interest remission. As discussed in the next appendix, the ATO has indicated that this factor was taken into consideration in its decision to grant an interest rate reduction to investors in controlling interest superannuation arrangements.

A4.93 As discussed in appendix 3, only some of the above factors are referred to in Chapter 93 of the ATO's Receivables Policy which is the ATO's current policy document for the remission of interest. In addition, where these factors are referred to, it is in the context of interest on the late payment of tax rather than interest on underpaid tax.

A4.94 Taxation Ruling IT 2517, which dealt with the remission of a charge that was equivalent to pre-amended assessment interest for the years of income up to and including 1991/92 contained more discussion of the types of factors which the Commissioner would consider in remitting pre-amended assessment interest. This ruling also contained worked examples.

A4.95 The above comments lead to the following subsidiary finding.

Subsidiary Finding 7

The ATO policy document dealing with remission of interest should clearly articulate the type of key factors the Commissioner considers relevant to the remission of pre-amended assessment interest. Taxation Ruling IT 2517 is a useful model in that it contains an explanation of relevant factors and worked examples.

Tax Office response

A4.96 As stated in response to Key Finding 2, the ATO will publish clearer guidelines on the remission of the pre-amended assessment interest charge.

Inspector-General comment

A4.97 The Inspector-General endorses the Tax Office proposal to publish clearer guidelines.


97 Commonwealth Ombudsman, The ATO and Budplan: Report of the Investigation into the Australian Taxation Office's handling of claims for tax deductions by investors in a tax effective financing scheme known as Budplan, Report under section 35A of the Ombudsman Act 1976, June 1999; The ATO and Main Camp: Report of the Investigation into the Australian Taxation Office's handling of claims for tax deductions by investors in a mass marketed tax effective scheme known as Main Camp, Report under section 35A of the Ombudsman Act 1976, January 2001; and Report on investigation of a complaint by a promoter of a series of films about ATO decisions, Report under section 35A of the Ombudsman Act 1976, February 2001.

98 Senate Economics Reference Committee, Inquiry into Mass Marketed Tax Effective Schemes and Investor Protection, Interim Report (June 2001); A Recommended Resolution and Settlement, Second Report (September 2001) and Final Report (February 2002).

99 Australian National Audit Office, The Australian Taxation Office's Management of Aggressive Tax Planning, Audit Report No. 23, 2003-4.

100 ibid, at para 5.2.

101 ATO Minute No: IGT022-2004, dated 10 March 2004.

102 The following descriptions are based on those contained in the following papers: Searle, Peter and Gordon, Robert 'Mass Marketed Tax Effective Schemes', paper presented for LAAMs Seminars, 24 and 25 October 2001 and Resolution Group Holdings Limited, Submission to the Inspector-General of Taxation on ATO's remission of GIC for Groups of taxpayers in dispute with the ATO, dated 30 January 2004.

103 This deduction was claimed under Division 10BA of the ITAA 1936.

104 Australian Taxation Office, Addendum to Code of Settlement Practice, July 2000, at paragraph 1.1.7.

105 ibid, at paragraph 6.3.3.

106 Australian Taxation Office, Media Release Nat 01/30, dated 26 April 2001.

107 Australian Taxation Office, Media Release Nat 01/58, dated 23 July 2001.

108 Australian Taxation Office, ATO Receivables Policy at paragraph 93.4.4 and 93.5.31; and Australian Taxation Office, Code of Settlement Practice (in respect of taxation liabilities) at paragraph 5.1.7.

109 Senate Economics Reference Committee, Inquiry into Mass Marketed Tax Effective Schemes and Investor Protection, A Recommended Resolution and Settlement, Second Report (September 2001).

110 Australian Taxation Office, Settlement Offer for Mass Marketed Schemes — Eligibility for remission of penalties and interest, Fact Sheet, dated 13 June 2002, available at www.ato.gov.au. Note that the last category of ineligible investors is not referred to in the ATO's application for a concessional rate of interest form which the ATO has made available for use by eligible investors since July 2001.

111 ATO Briefing Paper to the Inspector-General of Taxation, dated 21 January 2004.

112 ibid.

113 FC of T v Sleight [2004] FCAFC 94.

114 Vincent v FC of T (2002) ATC 4490, (2002) ATC 4742.

115 Puzey v FC of T (2003) ATC 4782.

116 Cooke & anor v FC of T (2002) ATC 4937; {2004] FCAFC 75.

117 Howland-Rose v FC of T (2002) ATC 4200.