RA 09/01 advises that schemes entered into with the intention of obtaining false, inflated or inappropriate GST refunds or income tax deductions are tax avoidance.
A Revenue Alert is issued by the Commissioner of Inland Revenue, and provides information about a significant and/or emerging tax planning issue that is of concern to Inland Revenue. At the time an alert is issued risk assessments will already be underway to determine the level of risk and to consider appropriate responses.
A Revenue Alert will identify:
- the issue (which may be a scheme, arrangement, or particular transaction) which the Commissioner believes may be contrary to the law or is inconsistent with policy;
- the common features of the issue;
- our current view; and
- our current approach.
An alert should not be interpreted as being Inland Revenue's final position. Rather, an alert outlines the Commissioner's current view on how the law should be applied. For any alert we issue it is likely that some investigatory work has already been carried out.
If people have entered into an arrangement similar to the one described or are thinking about it, they should talk to their tax advisor and/or to Inland Revenue for advice about tax implications.
Issue: Increasing tax minimisation through involvement in multi-level or network marketing and direct marketing schemes: the circumstances when Inland Revenue will consider this arrangement is tax avoidance.
Inland Revenue is aware that most people comply with their tax obligations. However, the department has always been concerned about arrangements that involve taxpayers who minimise their tax through loss offsets and / or receive GST tax credits where loss-making ventures are not genuine business activities.
We accept that there are taxpayers who enter into ventures for legitimate business reasons, and acknowledge that a business tax loss does not on its own, amount to a tax avoidance arrangement. However, we are noticing that there are increasing numbers of people who are entering into a purported business arrangement more for the perceived tax benefits than with a true intention to make a profit.
We will review each case on its own facts and, additionally, cases are independently reviewed before a final decision is made.
Inland Revenue has been investigating arrangements where people are registering for GST and are purporting to operate as independent business owners engaged in multi-level networked marketing activities. It is generally claimed these activities are designed for the sale of goods, but on investigation there is often little evidence of actual business activity.
The multi-level marketing and direct marketing activities being promoted include a number of well-known brands. The extent to which the head organisations are themselves directly involved in, or whether they may have knowledge of, these arrangements is not clear to Inland Revenue. However, it does appear that often the head organisation is not aware of the activities being undertaken by the promoters, who are often lower-level distributors within the chain or structure. They do, however, stand to have their reputations adversely affected by these practices.
Recruitment of marketers is promoted on the pretext that those who sign up will receive significant GST refunds and income tax benefits through loss offsets. However it is unlikely, in Inland Revenue’s view, that the participants will actually be entitled to these benefits, and the participants often misunderstand what is expected of them for tax purposes.
The arrangements we are concerned about typically have these features:
- A person or persons will be promoting multi-level marketing or direct marketing schemes purporting to be legitimate business arrangements for tax purposes.
- Often group meetings are arranged to recruit people to take advantage of the arrangement. The tax benefits are being promoted heavily as an inducement to enter into the arrangements.
- Participants are often advised that personal expenses can be claimed for GST and income tax.
- Little or no subsequent sales action takes place except for what are essentially personal purchases of the participant or relatives.
- Inaccurate and incomplete records are likely to be prepared and maintained, often by the promoters on behalf of the participant.
- Inaccurate GST and income tax returns will be submitted resulting in overstated tax refunds and tax credits.
- The promoter will typically take control of the tax affairs of the participant.
Inland Revenue's main concern is that real GST taxable activities do not exist in these situations, nor is a "business" being carried on for income tax purposes, meaning that the input credit and the business tax losses are not properly claimable.
In many cases taxpayers are encouraged to enter into these types of activities because of the purported tax benefits. These include being able to treat personal expenses such as telephone expenses, motor vehicle expenses, personal household expenses (e.g. power, rates, insurance etc) as being a business expense, or being able to claim back the GST on these and other costs.
Some taxpayers may also gain access (or greater access) to other non-income tax benefits that rely on income calculated for tax purposes such as Working for Families Tax Credits or a reduced Child Support liability or Student Loan obligation.
Any scheme or arrangement which is entered into with the purpose of obtaining false, inflated or inappropriate GST refunds or income tax deductions is tax avoidance and is subject to section BG 1 of the Income Tax Acts 2004 and 2007 and section 76 of the Goods and Services Tax Act 1985. This means that the Commissioner is able to disallow the tax deductions and will also recover any overpaid refunds (or assess any underpaid tax).
In some cases these activities may even constitute tax evasion.
Taxpayers taking advantage of a scheme that is promoted on this basis are warned that serious consequences may result. These include the imposition of shortfall penalties of up to 150% of any tax underpaid (or refunds overpaid), as well as late payment penalties and use of money interest.
We will also be looking closely at the promotion of these arrangements and those promoting them. In many cases the people promoting the schemes are also acting as agents for the taxpayers involved. We will be checking closely to determine whether all income and expenditure is being accounted for correctly and accurately.
We acknowledge that not everyone entering into these arrangements will be doing so for the purpose of avoiding tax. However, we are very concerned that inexperienced people may have been misled into signing up for these arrangements on the basis of the promised tax advantages and credits which are not legally available to them.
Section BG 1 or section 76 may not apply in all instances, and each case will be considered on its own fact. In addition, all cases will be reviewed independently before a final decision is made.
Inland Revenue's Investigators are currently working with a large number of taxpayers involved in these arrangements, including the promoters (who may be subject to a promoter penalty). Inland Revenue has already entered into agreed adjustments with over 1000 affected taxpayers, and a number of others are proceeding through the Disputes Process.
Where the Commissioner considers the arrangements to be tax avoidance, appropriate action will be taken against all parties involved. This could include the imposition of monetary penalties and in the case of tax evasion or fraud, prosecution.
This will mean that past GST and income tax returns will be reassessed. Taxpayers are able to dispute these new assessments and the matter may ultimately be decided by the courts.
Taxpayers who are reassessed may also be liable to late payment penalties and Use of Money Interest may also be applied. In addition, shortfall penalties of up to 150% may also apply, although these may be reduced where a voluntary disclosure is made. Guidelines for making a voluntary disclosure are contained in our booklet Putting your tax returns right (IR280) and standard practice statement SPS 09/02 Voluntary disclosures (May 2009).
People who are considering registering for GST as a "network marketer" should talk to us and we can discuss their position with them. Or, if they have already registered for GST, they may also want to contact Inland Revenue.
Anyone who suspects there may be something wrong with their income tax or GST returns should tell us about it so that it can be corrected as soon as possible. This is called making a voluntary disclosure. If Inland Revenue finds errors in your tax returns, you could face significant penalties. It is best to tell us what is wrong with your tax returns before we find out in some other way.
|Date issued:||30 November 2009|
|Authorised by:|| Graham Tubb |
Group Tax Counsel
Legal & Technical Services
|Contact (via email):||[email protected]|
|Media queries:|| David Miller |
(04) 890 1743