In Commissioner of Taxation v Bakarich (No 2), Justice Kennett of the Federal Court addressed significant breaches of Section 290-50(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA), imposing severe civil penalties on individuals and entities engaged in promoting R&D tax exploitation schemes. The case serves as a landmark decision in the enforcement of the ATO’s promoter penalties regime, reaffirming the Court’s willingness to impose deterrent penalties for deliberate and systemic misconduct in Australia’s tax system.
This article explores the case in depth, analysing the key arguments, legal principles, and practical implications for businesses and professionals alike. You can find our other case studies here.
The Facts and Mechanics of the Scheme
The Respondents
- Julian Bakarich (First Respondent) – Sole director of The Dream Consortium Pty Ltd (TDC) and director of The Dream Accountants Pty Ltd (TDA).
- TDC and TDA (Second and Third Respondents) – Corporate entities used to promote the schemes.
- Thi Cam Tu Nguyen (Fourth Respondent) – Registered tax agent and co-director of TDA, who approved applications without sufficient due diligence.
Operation of the Schemes
The schemes were designed to improperly exploit the R&D tax incentive under Division 355 of the Income Tax Assessment Act 1997 (ITAA 1997). The mechanics included:
- Client Identification – Clients were referred to TDC through marketing material positioning TDC as R&D tax specialists.
- Questionnaires and Claims – Generic questionnaires were completed by clients to gather minimal information about their operations.
- Application Lodgement – Applications for R&D activity registration were lodged with AusIndustry without proper verification. Ms Nguyen’s details were used as the registered tax agent despite her failure to review claims substantively.
- R&D Schedules – Inflated tax schedules were prepared, apportioning expenses for purported R&D activities.
- Fees and Refunds – TDC charged a percentage-based fee on any tax refunds received. Significant financial benefits were secured while the claims remained not reasonably arguable under the law.
The Scale of the Conduct
- A total of 12 tax exploitation schemes were promoted across the 2015 and 2016 income years.
- The claims involved approximately $7 million in R&D tax offsets.
- TDC and TDA received or were entitled to $590,000 in fees.
- Several clients suffered financial harm, including tax penalties and insolvency (e.g., Precision Air).
The Legal Issues – R&D Tax Exploitation & Promoter Penalties
The case centered on breaches of Section 290-50(1), which prohibits the promotion of tax exploitation schemes.
Section 290-50(1) of Schedule 1 to the TAA prohibits entities from promoting tax exploitation schemes. Specifically:
“An entity must not engage in conduct that results in that entity or another entity being a promoter of a tax exploitation scheme.”
For a scheme to be classified as a tax exploitation scheme, as per Section 290-65, two key conditions must be satisfied:
- The dominant purpose of obtaining a scheme benefit (tax benefit).
- It is not reasonably arguable that the scheme benefit is available at law.
In this case, the Court examined whether:
- The conduct justified significant civil penalties under Section 290-50(4).
- The respondents promoted tax exploitation schemes under Section 290-50(1).
- The schemes lacked a reasonable legal basis for claiming R&D offsets.
Court’s Analysis and Findings
Promoter Status
Justice Kennett held that the conduct of the respondents satisfied the requirements of being a “promoter” under Section 290-60:
- TDC and TDA marketed the schemes to clients and encouraged participation.
- The respondents received financial consideration directly tied to the scheme’s success.
- Mr Bakarich played a substantial role in promoting and executing the schemes, exercising direct control over TDC and TDA employees.
Tax Exploitation Schemes
The Court found that the schemes lacked any reasonable legal basis and contravened Section 290-65:
- The claims submitted under Division 355 were not reasonably arguable, as they failed to meet legislative requirements for eligible R&D activities.
- The respondents operated with disregard for legislative compliance, failing to undertake due diligence or verify the claims lodged.
- Justice Kennett emphasised that the schemes were dependent on the ATO’s inability to detect the misconduct, elevating the seriousness of the contraventions.
Legal Principles for Penalties
Justice Kennett applied the established principles for determining civil penalties, including:
- Deterrence as the primary purpose -The penalties were imposed to send a clear signal that promoting tax exploitation schemes will not be tolerated. Citing Australian Building and Construction Commissioner v Pattinson [2022] HCA 13, the Court emphasized that penalties must be significant enough to act as a deterrent to others.
- Nature and extent of contraventions – The Court considered the deliberate and systemic conduct of Mr Bakarich and the harm caused to clients and the tax system.
- Course of Conduct: Although multiple contraventions were involved, the Court treated each R&D claim as a distinct contravention, warranting separate penalties.
- Totality Principle – The Court ensured that the aggregate penalties were proportionate to the overall misconduct.
The Court relied on key precedent cases, including:
- Commissioner of Taxation v Bogiatto (No 2) [2021] FCA 98: Addressed the financial and non-financial harm caused by tax exploitation schemes.
- Australian Competition and Consumer Commission v Geowash Pty Ltd (No 4) [2020] FCA 23: Confirmed that penalties may be imposed on insolvent companies to reinforce deterrence.
- NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285: Established that agreed penalties must fall within a permissible range.
The Federal Court’s Decision
Mr Julian Bakarich
- Admitted to promoting 12 tax exploitation schemes.
- Ordered to pay a civil penalty of $4.5 million, reflecting the scale, deliberate nature, and financial benefit derived from his conduct.
TDC and TDA
- Both corporate entities were found liable for contravening Section 290-50(1).
- Each ordered to pay $4.5 million, despite being in liquidation, to uphold general deterrence.
Thi Cam Tu Nguyen
- Admitted to promoting 3 schemes with a more limited role.
- Ordered to pay a reduced penalty of $100,000, considering her cooperation, lack of deliberate intent, and financial circumstances.
Key Takeaways
1. Strict Interpretation of Promoter Penalty Laws
- The decision highlights the rigorous enforcement of Section 290-50(1) to deter promoters of tax exploitation schemes. Promoters must ensure that tax benefits claimed have a reasonable legal basis.
2. Deterrent Penalties
- The Court imposed significant penalties to reinforce the general deterrence principle, ensuring that tax exploitation schemes remain financially unviable.
3. Corporate and Personal Liability:
- Directors and tax agents face personal liability for misconduct, and insolvency does not shield corporate entities from liability.
4. Care in R&D Claims
- Taxpayers and advisors must adhere to Division 355 requirements for R&D tax incentives. Claims must be substantiated and verifiable to withstand ATO scrutiny.
5. Legal Precedent
- This case reaffirms principles from Bogiatto, Geowash, and Pattinson regarding deterrence, totality, and proportionality in civil penalties.
Conclusion
The Bakarich decision sets a powerful precedent for the ATO’s enforcement of promoter penalty provisions. It underscores the importance of integrity, compliance, and diligence in tax advisory services. At Andersen, we remain committed to guiding clients through complex tax matters with best-in-class expertise and ethical standards.
For futher assistance with R&D tax claims or compliance matters, contact our team of specialists.
