2. The examination has a maximum word length of 6,000 words (i.e., 20 A4 pages).

3. Candidates must answer ALL questions.

4. The examination is worth 70% of the marks for the course. Unless otherwise indicated, where a question has separate parts, each part is of equal value.

5. In each answer, state the further information (if any) that you may need to fully answer the question. Where necessary, state any assumptions that you have made in answering the question.

This examination paper consists of 5 pages, including this cover page. Please be sure that your examination paper is complete.

1. "Full self assessment is a more efficient system overall because the tasks otherwise associated with calculating, notifying and paying tax due are done only once – at the point where all the necessary information is first brought together by the taxpayer or his or her agent."

Critically evaluate this statement by reference to the key design features of a system of full self assessment.

2. Discuss the implications for tax practitioners of recent decisions on professional negligence

3. Outline and analyse critically the key components of the proposed "Pay As You Go" system, and discuss the extent to which it represents an improvement on (or a worsening of) the systems which it is designed to replace.

Peta Costello-Beazley is an Australian resident lawyer. Peta derived $20 million assessable income last year, but declared a taxable income of only $15,000 because of deductions claimed under an "arrangement" into which she had entered. Peta’s declared taxable income was based on advice from her financial analyst and on an old written advice from a tax specialist directed to a rather different arrangement Peta had considered entering into a few years ago, which the adviser had concluded fell within an old Tax Ruling.

As part of a random audit programme of wealthy individuals who had entered into what the ATO regards as "aggressive" tax minimisation arrangements, a team of ATO staff led by Howard Crean recently audited Peta, and formed the view that the deductions Peta had claimed were part of a criminal conspiracy to defraud the Commonwealth, were otherwise not allowable, or alternatively were struck down by Part IVA ITAA 36.

Howard has now served on Peta a notice under sec. 264 ITAA36, requiring Peta within 14 days to:

(a) disclose the names and addresses of other taxpayers involved in the same arrangement or similar arrangements at any time (some of these persons had consulted Peta because of their professional or business relations, others had consulted Peta because of personal friendship);

(b) provide a copy of the relevant documentation evidencing the arrangements;

(c) provide a summary of the legal or other arguments which Peta believes support the validity of the scheme, together with a list of relevant authorities on which Peta relies; and

(d) provide a list of, and produce, any other relevant materials.

Peta has been unwilling to assist the audit team, because she argues that the original audit was invalid, as Peta received only 3 days notice of the ATO "visit", and the ATO team entered the building despite being told by Peta’s receptionist not to come in (Peta was away advising a client at the time).

Peta is also unwilling to comply with the sec.264 notice, and is willing to explore all avenues to avoid compliance.

Peta has also been struck over the past few days by the urge to visit her aged parents in Transylvania, and – because the parents are in poor health and Peta has not seen them for some time – thinks it would be appropriate to take lavish gifts for them, and send them a substantial amount of money soon, to ensure that they can obtain appropriate medical treatment for any illnesses which they might encounter in their twilight years. Peta has already started sending regular payments of several thousand dollars to her parents from various bank accounts Peta operates around Australia.

Howard has indicated to Peta that he intends to:

(i) issue amended assessments for some $25 million, because he has also unearthed some indications of other amounts of substantial undeclared income, though he cannot be sure of the precise amount because of the paucity of Peta’s book-keeping and Peta’s refusal to co-operate;

(ii) apply the highest possible level of penalties, and where appropriate, seek to prosecute Peta for any relevant past breaches;

(iii) require strict compliance with the sec 264 notice, and again apply the highest penalties if Peta fails to comply fully with the notice; and

(iv) take the "most rigorous action possible" to ensure effective recovery of the tax assessed.

ADVISE all parties on the taxation (and related) law implications of the above facts.

1. Fred Schwarz is a lawyer in sole practice. In his income tax returns for the last five years, Fred Schwarz has not disclosed any foreign source income, including any income attributed under Part X or Part XI of the Income Tax Assessment Act 1936. During a routine tax audit, Terry Terrier, a taxation officer, discovered a document acknowledging Fred’s acquisition, in 1995, of one share in the Bermuda Investment Company ("BIC"). Fred is unable to provide any details of the operations of BIC and denies ever receiving any dividends from the company. In fact, Fred stated that since the company had not paid any dividends, he had forgotten about his shareholding. Fred states that the acquisition of the share came about after a friend of his in the United States gave BIC Fred’s details as someone who may be interested in investing in BIC. Fred is able to locate the brochure that was originally sent him which describes BIC as a company that manages funds invested by "hundreds of people all around the world". The brochure also mentions Bermuda’s strict commercial secrecy laws, breach of which is a criminal offence.

Terry is convinced that BIC holds substantial sums accumulating for the benefit of Fred. Being unable to obtain further information or documents from Fred, Terry serves a section 264A notice on Fred seeking the following information and documents –

(b) details of the business carried on by BIC; and

ADVISE Fred as to whether he is required to respond to the notice.

ADVISE Terry of any further steps he may take to obtain information concerning BIC.

2. Ellis Abbott is thinking of entering into an arrangement designed to re-organise his financial affairs more efficiently, while at the same time effecting a significant reduction in Ellis’ personal tax liability.

Ellis has been told of several Public Rulings that might apply to his situation, and is also aware that he can apply for a Private Ruling.

ADVISE Ellis on the merits of applying for a Private Ruling, and any potential problems or pitfalls that he might have to watch for in relation to applying for or relying on a Public or Private Ruling.

3. Meg Despoiler received a tax assessment 6 years ago. She believed that the assessment erroneously included several thousand dollars in assessable income that Meg believes she had not derived.

Unfortunately, shortly after receiving the assessment, Meg fell seriously ill for 12 months, and then forgot about the assessment as Meg battled to revitalise the business that had run down during her absence due to illness. Two years ago, Meg gave her tax file to a tax agent, with instructions to lodge an objection as soon as possible. Meg didn’t follow the matter up with the agent, assuming that the agent would have lodged the objection as instructed.

Unfortunately, the agent failed to lodge the objection, and an ATO inquiries officer has now advised Meg that the ATO would not accept the objection, as too much time has passed, they have closed their files, and (particularly) in the ATO’s view, Meg does not have a strong argument supporting her view that the amount was not assessable.

ADVISE Meg on what avenues may be open to Meg at this stage to seek to dispute the assessment, the steps which she should take to utilise these avenue/s, the chances of success and, assuming that Meg is able to challenge the assessment, the various appeal/review avenues available to her, and which might be most suitable in Meg’s case.