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07 May 14 Decision Impact Statement - Ludekens

On 7 May 2014 the ATO published a Decision Impact Statement on the decision of the Full Court of the Federal Court in FCT v Ludekens [2013] FCAFC 100.

The case concerned whether two investment advisers were promoters of a tax exploitation scheme, or had implemented a product ruling scheme in a way that was materially different from that described in the ruling. This was in the light of the Commissioner’s power under Div 290 of Sch 1 to the Taxation Administration Act 1953 (Cth) to impose civil penalties on promoters of tax exploitation schemes. As the Federal Court noted, this was the first time an appeal court had considered Div 290.

Under s 290-50(1) and (2), an entity that engages in conduct that results in that, or another, entity being a promoter of a tax exploitation scheme, or results in a scheme that has been promoted on the basis of conformity with a product ruling being implemented in a way that is materially different from that described in the product ruling, may be subject to a civil penalty.

The central issues in the appeal concerned the taxpayers’ actions in relation to two groups of investors they approached to invest in a woodlot project. The Commissioner contended that the taxpayers had contravened s 290-50(1) and (2) in their dealings with the investors. At first instance the court dismissed the proceedings. On appeal, however, the Full Court of the Federal Court allowed the Commissioner’s appeal, and held that each taxpayer contravened s 290-50(1), but did not contravene s 290-50(2). The Full Court determined that the relevant scheme was a tax exploitation scheme within the meaning of s 290-65 by characterising the dominant purpose of the scheme as deriving “scheme benefits” within the meaning of s 995-1 of the Income Tax Assessment Act 1997 (Cth) read with s 284-150(1) of Sch 1 of the TAA. The Full Court also concluded that the construction by Middleton J of the definition of “promoter” in s 290-60 was too narrow. The words used in s 290-60(1)(a) are wide, and are not limited to making offers to participate in a scheme. In an appropriate context, “otherwise encourages the growth of the scheme or interest in it”, can include conduct of developing and implementing a scheme. The Full Court found that both respondents encouraged the growth of the plan or interest in it to the secondary investors.

The ATO notes that the views of the Full Court about the operation of s 290-60 and s 290-65 are consistent with the Commissioner’s submissions to the court. The ATO also “respectfully accepts” the views of both Middleton J and the Full Court about why neither respondent had contravened s 290-50(2).


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