Decision Date: February 4, 2015
Link: Case Summary Document
Citation: [2015] FCA 34 Federal Court of Australia, Edmonds J
Acknowledgement:The Pemsel Case Foundation thanks The Australian Centre for Philanthropy and Nonprofit Studies for its contribution in the drafting of this Case Note.


This case involved a tax exploitation scheme. In 2009 and 2010, the respondent Arnold brought to Australia a scheme (referred to in court as the DWB scheme after one of the participants, Donors Without Borders) involving the purchase and donation of AIDS pharmaceuticals to charities with foreign operations in Africa. Arnold had previously been involved in a similar scheme in Canada. Taxpayer participants in the DWB scheme incurred a liability to pay for pharmaceuticals for use in foreign markets, but liability for payment of 92.5% of the purchase price was deferred for 50 years at very low interest. Participants claimed immediate tax deductions for 100% of the purchase price.

The scheme operated with the following steps, which were similar to the steps in the Canadian scheme:

1. The pharmaceuticals were manufactured by a generic manufacturer, Hetero, in India. They were transported to the UK and held in a bonded warehouse there.

2. Solstar Ltd (Solstar), a company incorporated in Belize, acquired title to the pharmaceuticals. It sold them to a company called MedAid Pty Ltd (MedAid) under an “umbrella” agreement, pursuant to which the price was $1,000 per unit, payable as to 5% on delivery with the balance deferred for 50 years at negligible interest.

3. MedAid sold the pharmaceuticals to the scheme participant at $2,000 per unit, payable as to 7.5% on signing the agreement with the balance deferred for 50 years at negligible interest (payable in advance).

4. Title to the pharmaceuticals was allegedly transferred while the pharmaceuticals remained in bond in the UK, from Solstar to MedAid, from MedAid to the participant, from the participant to a charity which operated in Africa.

5. The pharmaceuticals were subsequently shipped from the bonded warehouse in the UK to Africa.

6. The charity would issue the participant with a receipt in respect of the gifted pharmaceuticals.

7. The participant would claim a deduction for the donated pharmaceuticals of $2,000 per unit, as shown on an invoice generated by MedAid for the sale from it to the participant.

The Commissioner of Taxation (the Commissioner) sought declaratory relief and civil penalties against the respondents pursuant to section 290-50(3) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA). The Commissioner sought declarations that:

(1) The first respondent (Arnold) engaged in conduct that resulted in himself, the second respondent (Leaf Capital) and the third respondent (Donors Without Borders) being a promoter of a tax exploitation scheme in contravention of section 290-50(1) of Schedule 1 to the TAA;

(2) Leaf Capital engaged in conduct that resulted in it being a promoter of a tax exploitation scheme in contravention of section 290-50(1) of Schedule 1 to the TAA; and

(3) Donors Without Borders engaged in conduct that resulted in it being a promoter of a tax exploitation scheme in contravention of section 290-50(1) of Schedule 1 to the TAA.

The Commissioner was successful in obtaining the relief sought. The court awarded civil penalties of $1.5 million to the Australian Taxation Office (ATO) against the scheme promoters Arnold, Leaf Capital Pty Limited and Donors Without Borders because they attempted to exploit and profit from the tax system by generating deductions, associated with a donation arrangement, to which the donors were not entitled.

The relevant statutory provisions are contained in Division 290 of Schedule 1 to the TAA. The purpose of those provisions is to, inter alia, deter the promotion of tax avoidance schemes and tax evasion schemes. Section 290-50 prohibits an entity from being a promoter of such a scheme, section 290-60 defines a promoter, and section 290-65 defines a tax exploitation scheme.

The facts of the case were not in dispute. Arnold agreed that he had actively promoted the scheme. Leaf Capital was recognised as the principal corporate entity responsible for marketing and encouraging interest in the DWB Scheme. Donors Without Borders, a nonprofit entity, was also recognised as being part of the promotion and encouragment of the scheme. The result of Arnold’s promotion was that 96 taxpayers participated in the DWB Scheme for 2010 year, entering into Purchase Agreements with MedAid for pharmaceuticals to a total invoice amount of $6,036,000, with total deductions claimed by these scheme participants in that aggregate amount. The participants paid a total cash amount of $741,802 up to 30 June 2010. Arnold and his wife received salary payments in excess of $180,000. Leaf Capital received $594,880 and Donors Without Borders received donations of $2,680.

His Honour concluded that the DWB scheme was a tax exploitation scheme with the meaning of the TAA. There were at least five grounds that could be relied on for the view that it was not reasonably arguable that the scheme benefit as identified was available at law. It was also held that Arnold, Leaf Capital Pty Ltd, and Donors Without Borders were all promoters of the scheme, and had all breached section 290-50 of the TAA. A civil penalty of $1.5 million was imposed by the court in favour of the Australian Taxation Office (ATO).

The case may be viewed at:

Implications of this case

This ‘philanthropic’ scheme was modelled on one which had previously been the subject of successful anti-avoidance litigation in Canada. Little philanthropy was involved in that participants paid only 7.5% of the purchase price of the pharmaceuticals involved, yet claimed 100% of the purchase price as a tax deduction. The ATO stated in its Non-profit New Service No 0417 that:

The decision helps protect the integrity of the not for profit sector and the community by penalising those who choose to promote tax schemes that exploit tax concessions designed to promote philanthropy.