CAUTION: This Case Decision Summary is only a brief summary of what may have been complex legal arguments applied to complex facts. If you rely on the decision and your circumstances are materially the same as those described, you will be taken to have exercised reasonable care. This summary represents the ATO's view on the application of the relevant provisions of the law to the circumstances outlined in the summary. However, if the relevant provisions, being those in force at the date of the decision, have been amended or rewritten, it will be necessary to have regard to the amended or rewritten law. You may wish to obtain further advice from the ATO or a professional adviser.

This Case Decision Summary has been withdrawn.

ATO Case Decision

Case Decision Number:



Does Part IVA (Income Tax Assessment Act 1936 (ITAA 1936)) apply to a widely promoted scheme under which each participant claims deductions for management and research fees purported to have been incurred in carrying on business in a particular area of agricultural research?


Part IVA (ITAA 1936) applies to deny participants the deductions sought.


A prospectus invited participation in a scheme under which a company connected with the promoters would manage a participant’s business of conducting research in a particular area of agricultural research and commercial exploitation of the results. Each participant was liable for $25,000 over two years in management and research fees. The management fee (10%) was paid to the manager and the research fee (90%) was paid to a research institute connected with the promoters. Each participant gave the manager a power of attorney and the manager executed the management and research agreements on behalf of each participant.

Each participant borrowed the whole of the $25,000 from a finance company associated with the promoters. Each loan was a limited recourse loan (see below) and was provided through a bill facility agreement between the finance company and another financier, a bill with a term of one day being drawn to cover each loan application. The term of each loan was 15 years, with provision for extension until fully paid. The loan was advanced in the required proportions direct to the manager ($2,500) and the research institute ($22,500) and immediately returned by them in full to the lender as ‘deposits’. These ‘deposits’ were used by the lender to cancel the bill. In particular, none of the $22,500 ‘fee’ paid to the research institute was available for research.

Although the lender had by this ‘round robin’ effectively recovered the loan moneys, each investor was required to pay interest ($3,500) and principal ($6,500) on the loan from their own funds over the first two years of the scheme ($10,000 in total). No repayments of principal or interest were required after this, except to the extent of any net income accruing to the participant from the scheme. These principal repayments were limited to 50% of the net income remaining after the payment of interest. Therefore, if the scheme was unsuccessful, the term of the loan was effectively unlimited. The $10,000 paid by the participant to the lender was passed on to the research institute, which paid most of it out as fees and commissions to the manager and financial advisers who recruited participants. Only very small amounts were treated as research fees and spent on research activities. In addition, the fees were mixed with similar fees received from participants in other schemes run by the same promoters.

For a cash outlay of $10,000 each participant claimed over the first two years of the scheme deductions of $28,500 ($25,000 in ‘management and research fees’ and $3,500 in interest). Therefore, for a taxpayer on a marginal tax rate of 48.5%, the outlay of $10,000 would have returned a $13,800 reduction in tax liability over two years, with the non-recourse terms of the loan protecting the participant from having to make any further outlays, irrespective of how unsuccessful the scheme might be. Many of the participants were salary or wage earners who sought to reduce their PAYE tax instalments to take account of the expected deductions, and to use the regular tax saving to pay the $10,000 to the promoters in instalments and still be left with an increased take home pay.

The promoters’ projections showed an eventual internal rate of return for participants of more than 20% per annum over 15 years.

Reasons for Decision:


The scheme was all of the arrangements outlined above, including the power of attorney, the trust deed, the loan agreement, the management agreement and the research agreement. These were the particular steps adopted by the promoters and each participant to create deductions for the participants out of ‘phantom’ loans and to use the greater part of the participants’ resulting tax savings to finance the promoters’ research and other activities.

Tax benefits

For each participant, the claimed deductions referred to above would reasonably be expected not to have been allowable if the scheme had not been entered into. The amount of each such deduction was a tax benefit.


‘[V]iewed objectively, it was the obtaining of the tax benefit which directed [the promoters and each participant] in taking steps they otherwise would not have taken…’ (FC of T v Spotless Services Limited & Anor 96 ATC 5201, 5210; (1997) 34 ATR 183,193). Having paid the $10,000 and obtained a tax reduction of $13,800, and not being under any further financial obligation to the scheme, a participant was unlikely to have any further significant interest in the fortunes of the scheme. The promoters’ own projections showed that a participant would not get any return from the scheme, after paying tax and loan principal and interest, until the ninth year. From the promoters’ point of view the tax savings for participants resulting from the deductions were the very source of the finance they needed for their activities.

Features of the scheme that were considered relevant under the various heads of paragraph 177D(b) (ITAA 1936) were:

(i): the manner in which the scheme was entered into: All of the facts outlined above were relevant under this head. In particular, the promoters’ package drew attention to the fact that the tax saved because of the deductions was more than enough to finance a participant’s cash contribution of $10,000. Also, the loan, which was supposed to finance research expenditure and management fees for the benefit of the participant, was effectively repaid immediately to the lender (although the payments by the manager and the research institute to the lender were described as ‘deposits’) under a round robin of funds, ensuring that the management and research fees were not available to the manager and the research institute. The very wide power of attorney given to the manager virtually excluded participants’ involvement. That was reinforced by the requirement that participants repay their loans immediately if they removed the manager.

(ii): the form and substance of the scheme: In form, the participants were each making expenditure over two years of $25,000 of borrowed funds in a business of agricultural research and commercial exploitation of the research results. In substance, the loan funds were returned to the lender in an instantaneous round robin of funds as ‘deposits’ and the lender had no recourse to the participants for further repayments. The only real funds available to the scheme in those two years were the $10,000 paid by each participant as principal and interest on the loan. Those amounts were passed on by the lender to the manager and the research institute but very little was spent on research, most of the money being used to pay inflated management fees and commissions to financial advisers who recruited participants. Any further expenditure on research was dependent on the scheme making profits in excess of what would be needed to pay interest and principal on the loan - and that was not expected to happen before the ninth year.

(iii): timing and period of scheme: The research under the scheme was to continue over a 15 year term, yet the participants contributions were all made, and deductions were all claimed, in the first two years. The profit for participants was the excess of the tax saving over the total cash outlay required under the scheme. No further return could be expected before the ninth year. Most participants would therefore have viewed the scheme as having a term of two years. The term of the loans also purported to be 15 years, but the promoters’ projections showed that if the scheme was very successful the loan would be repaid out of profits in nine years, and if unsuccessful the loan might never have been repaid.

(iv): tax outcomes: Apart from the deductions for the participants, the manager and the research institute returned their income on an earned basis and the research institute claimed to be exempt from tax.

(v) and (vi): change in financial position: The participants claimed deductions of $28,500 for an outlay of $10,000, with no obligation to make any further outlay. The promoters and the associated entities effectively accessed the participants’ tax savings on inflated deductions as interest-free finance to enable them to carry on their activities.

Legislative References:

Income Tax Assessment Act 1936 Part IVA, paragraph 177D(b)

Relevant Cases:

FC of T v Spotless Services Limited & Anor 96 ATC 5201; (1997) 34 ATR 183



Borrowings & loans

Deductions & expenses

Limited recourse loans

Management fees expenses

Non recourse loans

Part IVA

PAYE instalment deduction issues

Schemes & shams

Tax avoidance

Tax benefits under tax avoidance schemes

Tax planning, avoidance & evasion

Date of decision:

3 June 1998

FOI Number: