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Complex tax avoidance scheme hid funds in Samoa and New Zealand

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AUSTRAC information assisted authorities to identify offshore bank accounts and international funds transfers in relation to a complex tax avoidance scheme involving funds transfers between Australia, Samoa and New Zealand ('tax avoidance' involves taxpayers avoiding tax by deliberately using arrangements that provide tax benefits that are outside the intent of the law. See the ATO website for more information).

The scheme involved the use of an offshore superannuation fund and a loan arrangement to avoid tax.

Authorities ultimately issued amended tax assessments to the individuals involved, resulting in approximately AUD2 million in additional tax, penalties and interest.

This complex case is presented in four parts:

  • Part 1 covers international transfers made to an offshore superannuation fund and the rapid return of these funds to Australia.
  • Part 2 covers the ongoing international transfers of funds under a fictitious loan arrangement over ten years.
  • Part 3 describes the transfer of this loan arrangement to another Australian company when the original company went into liquidation. This covers a further four years worth of activities.
  • Part 4 shows how a charity became involved in the loan arrangement.  

Individuals A and B were family members who owned and controlled a group of Australia-based companies (the term 'group' is used here in its ordinary sense, rather than its legal sense under theCorporations Act 2001). The companies undertook motor vehicle repairs and sold automotive products in Australia.

Arrangement 1: Offshore superannuation fund

Individuals A and B received advice from an accountant about the purported benefits of offshore superannuation funds. As a result, individual A instructed his accountant to establish a superannuation fund in Samoa. The superannuation fund was established and a Samoa-based company acted as trustee of the fund.

Company 1 was owned and controlled by individuals A and B, and formed part of the Australia-based group. Company 1 made two contributions of AUD100,000 each to the superannuation fund in Samoa. The two international funds transfers were undertaken over an eight-day period and the funds were subsequently provided to a private bank in Samoa.

The Samoa-based private bank returned the AUD200,000 to company 1 in Australia in two international funds transfers of AUD100,000. The transfers were made within one month of the initial contributions being made to the superannuation fund. The two transfers of AUD100,000 were described as a 'loan' from the bank to company 1. There was no loan agreement in place to support the transfer of these funds.

Company 1 subsequently claimed deductions for the AUD200,000 offshore superannuation contribution in its tax return and was assessed as liable for less tax than it should have been, thereby avoiding its tax obligations.

The deductions were later disallowed and deemed not deductible under the Income Tax Assessment Act 1936. An amended tax assessment was issued to company 1 by the Australian Taxation Office (ATO).

Figure 2 - Transfers to offshore superannuation fund in Samoa (Arrangement 1)

Figure 2 - Transfers to offshore superannation fund in Samoa (Arrangement 1)

Arrangement 2: Loan arrangement (years 1 to 10 of the scheme)

Individuals A and B entered into a loan agreement on behalf of company 1 with the Samoa-based private bank. This arrangement was separate to the AUD200,000 'loan arrangement' described above in 'Arrangement 1'. This second loan arrangement remained in place for more than 10 years and was later transferred to other companies in the group.

A subsidiary company of the Samoa-based private bank held a bank account in New Zealand. The subsidiary was instrumental in facilitating payments between the Samoa-based private bank and company 1, or companies and individuals associated with the Australia-based group.

In subsequent years, in accordance with the loan agreement, companies controlled by individuals A and B made annual 'interest' payments on the loan to the bank or its subsidiary, by way of international funds transfer.

The interest payments were then borrowed back from the Samoa-based private bank or its subsidiary, with funds transferred back to Australia to either company 1 or other companies and individuals associated with the group. The returned funds were generally described as 'draw downs' or 'loans'.

This complex 'round robin' tax avoidance arrangement aimed to disguise the funds movements as legitimate transactions associated with the loan. In reality, any funds sent overseas ultimately returned to the original beneficiary, either company 1 or other companies in the Australia-based group.

Figure 3 - Transfers to and from the subsidiarys New Zealand bank account disguised as loan payments (Arrangement 2)

Figure 3 - Transfers to and from the subsidiary's New Zealand bank account disguised as loan payments (Arrangement 2)

Transfer of the loan arrangement from company 1 to company 2 (years 11 to 14 of the scheme)

Company 1 changed its name and subsequently went into liquidation. As a result, the ATO was forced to write off a tax debt of AUD800,000 which had accrued on the income tax account of the company.

After company 1 went into liquidation the loan liability was transferred to company 2. Company 2 was incorporated in Australia and was associated with company 1 and individuals A and B. The loan liability at this time was approximately AUD3 million.

Company 2 continued to utilise the tax avoidance arrangement by making interest payments on the loan to the Samoa-based private bank via its subsidiary. Each time company 2 made interest payments to the bank, the bank's subsidiary subsequently transferred funds into company 2's bank accounts in Australia. These transfers were described as 'loan draw downs'.

Information in IFTIs, combined with information received by authorities, revealed four years worth of incoming and outgoing international fund transfers between company 2 in Australia and the bank's subsidiary company, which held a bank account in New Zealand.

Company 2 claimed that the funds received as 'loan draw downs' were lent to companies in the Australian group of companies by way of interest-free loans.

Introduction of an Australian charitable organisation (years 15 to 16 of the scheme)

To further complicate the loan arrangement, another Australian organisation was introduced to the transaction activity. This organisation was unrelated to the main group of companies and was described as a charitable organisation. The organisation facilitated the transfer of funds between the bank's New Zealand subsidiary and the Australian group of companies.

AUSTRAC information, combined with other information received by authorities, showed:

  • company 2 sent funds representing 'interest payments' to the New Zealand bank account of the bank's subsidiary
  • the subsidiary transferred funds, in similar amounts to the 'interest payments', from its New Zealand bank account to the bank account of the Australian charitable organisation. The transfers were described as 'draw downs' and 'transfer of funds'
  • four to five days later, the charitable organisation conducted a domestic transfer for a similar amount into the bank account of company 2, described as a 'loan draw down'.

Figure 4 - Use of Australian charitable organisation to facilitate payments

Figure 4 - Use of Australian charitable organisation to facilitate payments

In its tax returns, company 2 claimed deductions for interest expenses and fees paid to the Samoa-based private bank. As a result of claiming these deductions, company 2 reduced its taxable income and was assessed as liable for less tax than it should have been, thereby avoiding its tax obligations.

It was later determined that these expenses were not deductible and the deductions were disallowed. Amended assessments for company 2 were issued resulting in approximately AUD2 million in additional tax, penalties and interest.

Offence Tax avoidance
Customer
  • Business
  • Foreign entity
  • Individual
Industry Banking (ADIs)
Channel Electronic
Report type IFTI
Jurisdiction International – Samoa, New Zealand
Designated service Account and deposit-taking services
Indicators
  • Customer receives international funds transfers described as 'loan draw down' or 'loan advance'
  • Customer undertaking complicated transfers without a business rationale
  • International funds transfers to and from a high-risk jurisdiction
  • Multiple high-value international funds transfers to and from Australia with no apparent logical reason
  • Outgoing funds transfers sent to offshore entities followed soon after by incoming funds transfers of similar amounts from the same offshore entities
  • Use of charitable organisation with a lack of business rationale
  • Use of third-party company accounts in an attempt to complicate transaction activity
  • Use of third-party or family member accounts
Last modified: 21/08/2015 14:12