Two weeks ago I wrote that investors in mass-marketed schemes who fought the Australian Taxation Office (ATO) in the Federal Court instead of settling, ended up with a better deal and kept their tax deductions. Moreover, because they won, they got their legal costs paid by the ATO.
The deductions that remained in place included voluminous amounts of loan interest and advance management fees, which together ate up most of the invested amount. They kept these deductions despite the fact that the investment scheme failed within three years of marketing.
There were no brownie points forthcoming from Michael Carmody, the Tax Commissioner, over the view expressed in that column. But there were plenty of brickbats.
The gist of the brickbats was that I had highlighted only one scheme and that it was different and marketed earlier than later schemes, the subject of settlements.
The Tax Commissioner said there have been five decisions over the years on schemes in the ATO's favour, one of which is still seeking a high court hearing.
The Commissioner pointed out that about 10,000 taxpayers out of 11,000 caught in the schemes have now settled and put the matter behind them.
and the tax bills they generated have to be paid. The cash component was usually very little because most of the amount invested was borrowed.
This prompts the question: what was so different about the scheme Cooke and Jamieson - the two lawyers who won their case - invested in, and the others?
The two taxpayer said they invested in the scheme - a native flower project marketed in 1988 by Growth Industries Management Ltd - for their retirement.
The other schemes appeared to be similar, except that the underlying product changed to grapes, tea tree oil research, fruit and olives.
Cooke and Jamieson borrowed nearly the entire amount of their combined $800,000 investment, and wrote off all the loan interest and $661,850 in combined advance management fees.
The scheme failed three years later. But they said that they paid extra money for a guaranteed return to be paid five years after investment. That guaranteed return never arrived because the scheme failed.
According to the Tax Commissioner, there are differences between Cooke and Jamieson and the rest , the main one being the guarantee option that never eventuated.
The ATO also pointed out that the commissioner did not agree with the Cooke and Jamieson-claimed deductions, which is why the case was fought in court. On this occasion, it lost.
Asked if the Cooke and Jamieson decision would now apply to other taxpayers caught by that native flower scheme, the ATO spokesman said he could not say.
Assistant Commissioner Kevin Fitzpatrick said that the flower scheme featured a guaranteed return and therefore it amounted to a deferred income scheme rather than a tax minimisation or evasion scheme.
He added that the way the later schemes were set up inflated the interest on the loan component and featured non-recourse (that is, non-repayable) loans and that was a point of difference to the scheme invested in by Cooke and Jamieson.
It is not clear from the Cooke and Jamieson judgement whether the taxpayers had to repay their loan. But if those loans did not have to be repaid when the scheme fell over, then they fit the category of non-recourse loans.
Fitzpatrick also said that later schemes featured a round robin of funds, which came from a company associated with the scheme promoter or manager and ended up back there without a debt being incurred.
The money to get into the scheme was also borrowed by Cooke and Jamieson from a company within the Growth Industries group.
In common with many other schemes, the flower scheme failed to deliver any returns to investors. Another feature common to the Cooke/Jamieson scheme and others is that the management fees ate up most of the investment and had to be paid in advance. Growth Industries hooked in about 2000 investors, which sounds like a mass-marketed scheme.
Perhaps a difference was that Cooke and Jamieson were lawyers and trusted the legal system to deliver for them. Their punt proved correct - the Federal Court agreed with them not once but twice.
Not all taxpayers can afford to take that punt. With a new wave of promoters gearing up to sell another lot of year-end tax schemes, it appears from the above lottery of outcomes that taxpayers would be crazy to invest in any scheme that does not have a tax ruling in its favour assuring them of the Commissioner's OK stamp.
