3 February 2014
The Federal Court of Australia today ordered four individuals and a company to pay stiff pecuniary penalties to the Commonwealth, in the second proceeding to be brought by the Commissioner of Taxation under Div 290 of Sch 1 to the Taxation Administration Act 1953.
The case demonstrates how Division 290 may be contravened by implementing a scheme covered by a product ruling in a way that is incompetent and places the promoters’ commercial interests ahead of their obligations to investors: . The penalties – $125,000 for each individual and $625,000 for the principal corporate entity reflected contraventions the court described as ‘significant’ but ‘well short of the worst case’: .
The proceeding is the second instituted under Division 290, which enables the Commissioner to seek civil pecuniary penalties from persons who promote or implement tax exploitation schemes in prohibited ways. It was resolved, following a successful mediation, by the parties submitting to the Court a memorandum of agreed facts and a joint submission on penalty.
The Commissioner alleged that two companies and four individuals – all associated with failed agricultural managed investment schemes operated by Barossa Vines Limited – had engaged in conduct proscribed by s 290-50(2) – that is:
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 respondent entities were
- Barossa Vines Limited (the responsible entity);
- Agribusiness Pty Ltd, which provided management services to the responsible entity (the proceeding was discontinued against this company after it entered administration); and
- four executive directors of Barossa Vines Limited and/or Agribusiness Pty Ltd.
The projects, the product rulings and the exercise of the discretion in s 35-55(1)(b)
The Barossa Vines Project 2007 and the Barossa Vines Project 2008 were managed investment schemes operated by Barossa Vines Ltd, which promised investors large deductible losses in year 1, and on-going deductions for interest and fees incurred in respect of vineyard lots in the projects. Each project was covered by a product ruling issued by the Commissioner.
The availability of the promised deductions in year 1 and subsequent years depended upon the projects being implemented in a way that did not differ materially from that described in the product rulings. This was because in issuing the product rulings the Commissioner exercised a power in s 35-55 of the Income Tax Assessment Act 1997 (ITAA 97) to allow investors to deduct their losses in the year they were incurred. If that power were not exercised, Div 35 of the ITAA 97 would apply to defer the deductibility of the losses until the vineyard business generated assessable income against which the losses could be offset.
The power in s 35-55 was expressed as being exercised ‘subject to [each] Project being carried out in the manner described’ in the product rulings. If the scheme actually carried out was materially different from the scheme described in the product rulings, the product ruling would cease to be binding on the Commissioner. The Court accepted that in those circumstances there would be a materially different tax outcome for investors (who would cease to be entitled to the up-front deductions), and the persons whose conduct resulted in the materially different tax outcome would contravene s 290-50(2).
The contravening conduct
The contravening conduct occurred against the background of a failure properly to resource the vineyard operations, or heed warnings about inadequate resources, during a time of significant expansion: -. The specific contraventions of s 290-50(2) were established by the following conduct:
- In 2007, respondents sold 1277 lots to investors on a vineyard block, but failed to plant the lots until the planting season 12 months after the establishment period indicated in the product ruling and the PDS. In 2008, due to a failure in supply of planting material, the same lots, and further new lots that had been sold were planted with cuttings, rather than proper planting material. The cuttings failed completely. The period in which the lots’ owners would derive assessable income was set back either one or two seasons. The board of Barossa Vines Limited (and the ATO) were misled about these failures. -, -
- In 2008, the respondents continued to sell vineyard lots even when they knew they would not have proper material to plant them with. 
- In two other vineyard blocks, lots were planted in areas found by soil surveys to be too stony or shallow for planting without amelioration measures. These lots failed and were later abandoned and the investors therefore lost the ability ever to derive assessable income from them. -
Section 290-50(4) provides for the court to order penalties up to a maximum of twice the consideration received or receivable by the entity in respect of the scheme, or an amount of penalty units (currently $550,000 for individuals and $2.75 m for companies) – whichever is the larger.
The penalties imposed reflected a synthesis of various factors, including the gravity of the conduct, the loss suffered by investors and the time and expense saved to the community by the resolution of the proceeding by consent.
Applying the rule in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285, the Court adopted the approach of accepting the parties’ agreed submission as to the quantum of penalty, being satisfied that they were within an appropriate range. In so doing, the Court followed Full Federal Court authority and declined to follow the approach taken by the Victorian Court of Appeal in ASIC v Ingleby  VSCA 49. 
* Sam Ure appeared as junior counsel for the Commissioner in the proceeding, led by Helen Symon SC.