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The Federal Court (Besanko J) has imposed civil penalty orders against five respondents for contraventions of s 290-50(2) in Schedule 1 of the Taxation Administration Act 1953 (TAA).

Section 290-50(2) in Schedule 1 of the TAA provides as follows:

 "An entity must not engage in conduct that 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."

The five respondents were all associated with 2 viticultural projects in South Australia in respect of which product rulings were issued by the Commissioner. Members of the public who invested in the projects incurred an upfront management fee of $4,400 on application and, in subsequent income years, smaller ongoing fees, for which they sought a deduction under s 8-1 ITAA 1997.

The Court held that each project was implemented in a way that was materially different from that described in the relevant product ruling. The Court said, at para 74:

"...the material differences in the implementation of the 2007 Project and the 2008 Project were the result of the respondents’ failure to prepare adequately or plan the development of vineyards, or to put in place appropriate structures and resources for their establishment and ongoing management. These omissions, although not deliberate, left scheme participants vulnerable to external factors such as a shortage of planting material and the soil difficulties, which led to the abandonment of vineyard lots...The decision to continue selling vineyard lots [to investors] in the 2008 Project after it was known that no rootlings would be available for planting on those blocks was deliberate."

The Court concluded at para 82:

"In summary, these are significant contraventions, but at the same time they fall well short of the worst case. At one level, the causes of the contraventions may be characterised as incompetent management and staffing difficulties. However, that is not the full story. The failure to heed the warnings of the viticultural experts and others and to check on the progress on the rootlings mean, to my mind, that the respondents were prepared to put their own commercial interests ahead of their important obligations to investors. The element of concealment and maintenance of a false position impacts heavily on any suggestion of cooperation or immediate contrition. On the other hand, the appointment of a competent manager in March 2009 is a factor in the respondents’ favour, as is the fact that the loss to investors, although no doubt important to them, is not, relatively speaking, a very substantial sum."

A civil penalty of $625,000 was imposed on the corporate respondent (the responsible entity) and a civil penalty of $125,000 was imposed on each of the four individual respondents.

In media release No 2014/05 issued 5 February 2014, ATO Deputy Commissioner Tim Dyce said this judgment sends a strong message that the courts will penalise scheme promoters who do not implement schemes in the way they promised.

‘We issue product rulings to give investors certainty about the tax consequences of their investment. However, the scheme must be implemented as it was described."

FCT v Barossa Vines Ltd [2014] FCA 20 (Federal Court, Besanko J, 3 February 2014).

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