DESCRIPTION
The taxpayer or partnership claims to buy a series of warrants that are redeemable for professional services from a service provider.
Prior to buying the warrants, a taxpayer or a partnership purports to enter into a 'Business Agent Dealership' (dealership). The taxpayer or the partnership may claim to be in the business of acquiring and disposing of prepaid service warrants.
The taxpayer or partnership acquires a series of warrants by making a part payment, with the balance due when the warrants are redeemed. For example, a warrant with a stated value of legal services to be provided (a face value) of $50,000 may be acquired by paying $7,500 (15% of the face value) with the balance owing to the service provider.
The taxpayer's or the partnership's claimed objective is to endorse the warrants to a client for a fee so the client can redeem the warrant for legal or other professional services from the service provider. Alternatively, rather than paying a fee, the client assigns the taxpayer or the partnership an interest in a cause of action. That is, the warrants may be exchanged for a percentage of any proceeds recovered from litigation.
The service warrants generally have a life, described as an "eligible service period" of 13 months. However in some cases involving litigation the service period may be 4 years.
The taxpayer or the partnership may appoint an administrator to conduct the administration of the dealership including acquiring the warrants and seeking clients to whom the warrants will be endorsed.
The warrants are marketed on the basis that all warrants that have not been endorsed to clients by the end of the 13 month period are cancelled and refunded by the service provider at a discount. Generally this discount is equal to the part payment made at the time the warrants were purchased. The refund is credited against the balance outstanding on the purchase of the warrants, leaving no amount outstanding by the taxpayer or the partnership.
It is claimed that the purchase of the warrants will give rise to an allowable deduction equal to the face value of the warrants in the financial year they are acquired.
Where the dealership is a partnership, the partners claim a share of the partnership loss in their tax returns.
It is claimed that on endorsing the warrants to the client or on cancelling of the warrants by the service provider the taxpayer or the partnership would derive assessable income. Generally it is claimed that this assessable income would be derived in a financial year subsequent to that in which the deduction, referred to in paragraph 9 above, is claimed.
It is claimed that the arrangements are supported by the Federal Court decision in Lamont v Commissioner of Taxation [2005] FCA 513 (Lamont).
The warrants are marketed on the basis that a continuing deferral of income tax may be achieved by entering into purchases of warrants in subsequent financial years.