Under the current law, promoter penalties apply to entities which promote tax exploitation schemes. For an entity to be considered a promoter, the entity must play a substantial role in the marketing or encouragement of a tax exploitation scheme. An entity which merely provides advice about a particular scheme will not be a promoter under the regime.

A scheme will be a tax exploitation scheme where:

• it is reasonable to conclude that an entity entered, or intended to enter, into a scheme for the sole or dominant purpose of gaining a scheme benefit; and
• it is not reasonably arguable that the scheme benefit is available at law.

An entity obtains a 'scheme benefit' if a tax-related liability is less, or a tax credit is more, than it would be for an accounting period apart from the scheme or part of the scheme. Tax-related liabilities are pecuniary liabilities to the Commonwealth arising directly under a taxation law which includes, among other things, income tax.

The current promoter penalty regime provides a four-year limitation period within which the ATO may take action against an entity for their involvement in the promotion of a tax exploitation scheme, which commences from the time that a promoter last contravened a promoter penalty provision.

Amendments to law – promoter penalty regime reforms

In August 2023 the Federal Government announced reforms aimed at strengthening the integrity of the tax system, increasing the powers of regulators and strengthening regulatory frameworks.

On 20 September 2023, the Government released four separate exposure draft bills aimed at reforming the promoter penalty regime, increasing the power of regulators, extending whistleblower protection to disclosures related to tax practitioner misconduct, and removing limitations in tax secrecy laws.

In releasing the exposure drafts, Treasurer Dr Jim Chalmers stated that the changes are aimed at cracking down 'on misconduct in the industry' and ensuring that 'regulators have what they need to hold parties to account'.

With respect to the promoter penalty regime, the Treasury Laws Amendment (Measures for Consultation) Bill 2023: PWC Response – promoter penalty laws reform (Bill) proposes to amend the Taxation Administration Act 1953 (Cth) by:

• widening the application of the promoter penalty regime by expanding the coverage of rules prohibiting the misrepresentation of a tax scheme's conformance with an ATO product ruling to all types of ATO rulings (private, public and oral);
• broadening the meaning of various definitions contained within the promoter penalty provisions, including the definitions of 'promoter' and 'tax exploitation scheme';
• extending the time within which the ATO can commence civil penalty proceedings from four to six years; and
• increasing maximum civil penalties for promoters of tax exploitation schemes from $7.8 million to over $780 million to align them with penalties in the Corporations Act 2001 (Cth). The maximum penalty will also be extended to apply to non-corporate significant global entities (SGEs).

The Bill is open for public consultation until 4 October 2023 and is provisionally scheduled to commence on 1 July 2024.

Promoter penalty regime to apply to all ATO rulings

The Bill broadens the operation of provisions prohibiting promoters from misrepresenting a tax scheme's conformance with an ATO product ruling to encompass all ATO rulings (public, private and oral). This is intended to address a perceived deficiency in the current regime which does not contain any specific prohibitions against promoters using categories of ATO rulings, other than product rulings, to mislead clients that a scheme has ATO endorsement. These provisions will also be extended to apply irrespective of whether a scheme has been implemented, consistent with other provisions concerning the promotion of tax exploitation schemes which already apply to unimplemented schemes. Finally, the amendments clarify that a scheme promoted as conforming with a ruling does not need to be the subject of that ruling in order for these provisions to apply to any misrepresentations.

In addition to applying to entities which may promote schemes to businesses, this provision may also impact the drafting of Product Disclosure Statements, for example, in cases where a PDS references a public ruling in support of the availability of scrip for scrip rollover relief.

Wider definitions within the promoter penalty regime

An entity will be considered to be a 'promoter' where it receives a 'benefit', as opposed to 'consideration', in respect of marketing or encouraging the growth of, or interest in, a tax exploitation scheme. This change is intended to broaden the definition of 'promoter' to encompass scenarios where a promoter receives a benefit which is less obvious, intangible or disguised, from promoting a scheme, where that benefit may not necessarily be derived directly from a client. An example provided by the Explanatory Memorandum (EM) to the Bill is where a promoter increases their client base as a result of promoting a scheme.

This change would seem to significantly increase the prospect of an in-house adviser or head of tax being subject to the provisions, as it is no longer a defence that they did not receive specific payment for encouraging a scheme. For example, it might suffice if the employee's KPIs included reducing total tax costs, or if the employee was internally promoted as a consequence. We query whether this is the intent of the provisions and whether amendments should and would be made in this respect.

The definition of 'tax exploitation scheme' will also be expanded under the Bill to include schemes that are subject to the Multinational Anti Avoidance Law (MAAL) (in relation to schemes that limit a taxable presence in Australia) or diverted profits tax (DPT).

Extension to time limitation for commencing civil penalty proceedings

The Bill extends the current four-year limitation period for commencing civil penalty proceedings under the promoter penalty regime to a maximum of six years. The EM to the Bill suggests that the current four-year limitation period is unfit for purpose as the ATO frequently becomes aware of tax exploitation schemes during client audits, which often occurs after the limitation period has expired and cites the significant time required to gather evidence for proceedings.

Importantly, the extension of the limitation period appears to apply retrospectively as the EM to the Bill notes that the extended timeframe applies 'in relation to conduct engaged in before, on or after the commencement of the amendments'.

Increased penalties

The current maximum civil penalty under the promoter penalty regime is the greater of 5,000 penalty units (currently $1.57 million) for individuals or 25,000 penalty units (currently $7.8 million) for a body corporate, or twice the consideration received by an entity in respect of a scheme.

The Bill has increased these maximum penalties for bodies corporate to the greater of:

• 50,000 penalty units (currently $15.6 million);
• three times the 'benefit' received or receivable (directly or indirectly) by the entity and associates of the entity in respect of the scheme; or
• 10% of the aggregated turnover of the entity (capped at 2.5 million penalty units, currently $780 million) for the most recent income year to end before the entity engaged in the conduct that contravenes the promoter penalty regime.

These penalties have also been extended to SGEs, which the EM to the Bill states is intended to include large partnerships and trusts, to ensure multidisciplinary firms are accountable regardless of their entity structure. All partners in a partnership will be jointly and severally liable for the purposes of these civil penalties, irrespective of whether the partner had knowledge of the relevant contravention of the promoter penalty provisions.

Comments on the Bill are due by 4 October 2023.

Please contact any member of the MinterEllison Tax Team if you would like to discuss the Bill or if you would like any assistance in preparing a submission by the due date of 4 October 2023.