Disputes & Investigations

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Focus: Further guidance on promoter penalty provisions

27 February 2015

In brief: The Federal Court has recently had another opportunity to consider the application of the promoter penalty provisions in the Taxation Administration Act. The Federal Court's recent decision indicates that the promotion of schemes that are clear and deliberate tax exploitation schemes will result in substantial penalties. Partner Alex Cuthbertson and Managing Associate Susie Stone report.

How does it affect you?

  • The case of FCT v Arnold (No 2)1 is only the second occasion on which the Federal Court has considered the civil penalties provisions of subdivision 290-B of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the Act). (We previously reported on the first appeal court guidance on the proper construction of these provisions).
  • The Federal Court found that each of the three respondents engaged in conduct that resulted in them being a promoter of a very obvious and deliberate tax exploitation scheme in contravention of the promoter penalty provisions.
  • The court ordered that each respondent pay a penalty to the Commonwealth, with the first respondent ordered to pay a very significant penalty of $1 million. It is clear from the court's judgment that deterrence is a significant factor in determining whether a penalty should be ordered and, if so, the amount of the penalty.
  • The court emphasised that the promoter penalty provisions may be contravened by an entity who promotes or encourages participation in a scheme even if that entity did not know that the scheme was a tax exploitation scheme.

Overview of promoter penalty provisions

Under the promoter penalty provisions in Division 290 of Schedule 1 to the Taxation Administration Act 1953 (Cth), an entity must not engage in conduct that results in it or another entity being a promoter of a tax exploitation scheme (s290-50(1)), or 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 (s290-50(2)). Only s290-50(1) was relied on by the Commissioner in this case.

An entity will be considered a promoter if:

  • the entity markets, encourages the growth of, or encourages interest in, a tax exploitation scheme; and
  • the entity or an associate receives (directly or indirectly) consideration in respect of the marketing or encouragement; and
  • having regard to all relevant matters, it is reasonable to conclude that the entity had a substantial role in respect of that marketing or encouragement (s290-60(1)).

A scheme is a tax exploitation scheme if, at the time of the conduct mentioned in s290-50(1):

  • it is reasonable to conclude that an entity that entered into or carried out the scheme did so with the sole or dominant purpose of that entity or another entity getting a scheme benefit (that is, a reduced tax-related liability) from the scheme; and
  • it is not reasonably arguable that the scheme benefit is available at law.

The Commissioner can seek a civil penalty in relation to a contravention of the promoter penalty provisions (s290-50(3)) or can seek an injunction restraining advisers from promoting tax exploitation schemes (s290-125).


The first respondent, Mr Arnold, was a Canadian citizen. Mr Arnold arranged for the incorporation of the second and third respondents, Leaf Capital Pty Ltd and Donors Without Borders, and was the sole director of the second respondent. The scheme the subject of the proceeding involved the purchase and donation of pharmaceuticals to charities with foreign operations in Africa. In essence, participants incurred a liability to pay for pharmaceuticals for use in foreign markets, but payment of 92.5 per cent of the purchase price was deferred for 50 years at very low interest. However, participants claimed immediate deductions for the full amount of the purchase price.

In seeking to invoke the promoter penalty provisions, the Commissioner argued that:

  • the arrangements referred to above constituted a tax exploitation scheme;
  • each of the respondents was a promoter of the tax exploitation scheme and, in the case of Mr Arnold, engaged in conduct that resulted in the others being promoters of the scheme; and
  • the respondents received consideration in respect of that marketing or encouragement, in the form of: (a) a salary paid to Mr Arnold from Leaf Capital in respect of his marketing and encouragement of the scheme; (b) a marketing fee paid to Leaf Capital, representing a percentage of sales of pharmaceuticals to participants; and (c) a membership fee paid to Donors Without Borders by participants.

The Federal Court's decision

Was it a tax exploitation scheme?

Justice Edmonds held, first, that the scheme referred to above was a 'tax exploitation scheme' for the purpose of the promoter penalty provisions.

His Honour held that, on the evidence, it was clear that each respondent entered into or carried out the scheme for the dominant purpose of the participants obtaining a scheme benefit (namely, reducing their income tax liability). Indeed, his Honour emphasised that this was a very obvious and deliberate scheme, the clear intention of which was to deliver a tax benefit. Some of the factors that pointed to this finding were:

  • the fact that the purchase price of the pharmaceuticals was many multiples of their market value in the countries where the charities operated;
  • the fact that only 7.5 per cent of the purchase price of the pharmaceuticals had to be paid by the participant at the time of entering into the relevant agreement, with the balance payable in 50 years and at nominal interest;
  • the obligations imposed on the charities to issue documents to ensure that participants could claim their deductions (suggesting that deductibility was uppermost in the mind of Mr Arnold); and
  • the marketing of the scheme highlighted the purported tax benefits.

The fact that the respondents may also have had the purpose of making a commercial profit or facilitating donations to charity is not inconsistent with the conclusion that they had a dominant purpose of enabling the participants to obtain the scheme benefit.

Were the respondents promoters of the scheme?

Justice Edmonds agreed with the Commissioner that each of the respondents was a promoter of the scheme. It was clear on the facts that they each marketed and encouraged participation in the scheme, received consideration for their part in doing so and had a substantial role in respect of that marketing and encouragement. Mr Arnold undertook numerous promotional activities, including the presentation of various seminars and the distribution of brochures. The second respondent, Leaf Capital, was the principal corporate entity responsible for marketing and encouraging interest in the scheme, and also undertook various activities to this end. The third respondent, Donors without Borders, held itself out as protecting or supporting the interests of the various parties involved in the scheme, and its name and logo appeared on various marketing materials.

Accordingly, his Honour concluded that each of the respondents had contravened the promoter penalty provisions.


Section 290-50(3) grants the court a discretion to order contravening entities to pay a civil penalty. Justice Edmond spent some time considering s290-50(5), which states in a non-exhaustive way the principles relevant to the determination of the appropriate penalty. In particular, his Honour focused on general deterrence, noting the various reasons why contraventions such as those committed by the respondents should attract penalties that will act as a strong deterrent to others. His Honour also stated that specific deterrence is a significant factor in cases of this kind, where the contraventions involved deliberate wrongdoing, sustained denials of contravention and lack of remorse. His Honour noted, in particular, that Mr Arnold gave no indication of contrition for his promotion of what was 'an obviously blatant, artificial and contrived scheme'.

Taking these and other matters into account, his Honour ordered that Mr Arnold pay a penalty of $1 million, with Leaf Capital and Donors Without Borders ordered to pay $400,000 and $100,000 respectively. While these were significant, they were nonetheless lower than the range of penalties sought by the Commissioner.

Significance of the decision

As the scheme in question was an obvious and deliberate tax exploitation scheme, the decision is unlikely to provide a great deal of additional comfort to the Commissioner in prosecuting alleged breaches of the promoter penalty provisions. Nonetheless, it indicates that the court is prepared to order substantial penalties for such breaches, particularly where the penalties are likely to have a strong deterrent effect.

While it was not an issue in this case, Justice Edmonds noted in his judgment that the promoter penalty provisions do not require the Commissioner to prove that the entity knew that the scheme, the promotion of which resulted from his or her conduct, had the characteristics of a tax exploitation scheme (although subjective knowledge may be relevant to penalty). The effect is that an entity that promotes a scheme may contravene s290-50(1), even if it is unaware that another entity has the dominant purpose of obtaining a scheme benefit that is not available at law. Therefore, these provisions have the potential to impact on a broad range of financial institutions and advisers who promote or encourage participation in schemes that might result in a reduced tax liability for participants. It is, therefore, important to carefully consider the purpose of the other entities who participate in the scheme and the nature of the scheme benefit those other entities are seeking to obtain.

  1. [2015] FCA 34.

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