YIP v FC of T

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2011] AATA 785

S A Forgie Deputy President

1. Ms Christina Yip has applied for review of two objection decisions made by the Commissioner of Taxation (Commissioner) on 14 January 2010 and 17 February 2010 respectively. They arise out of a request for a private ruling made by the Remuneration Strategies Group (RSG) regarding the taxation consequences in respect of the financial years ending 30 June 2010, 2011 and 2012 if a long-term equity plan, to be known as the Ambassador Funds Management Services Employee Share Trust (AEST), were implemented. The Commissioner made a ruling and a related ruling. In the ruling, he answered a number of questions but only three remained in issue between the parties. The effect of the Commissioner's answers was that contribution of funds by the employer to the trustee were Ms Yip's assessable income under s 6-5 of the Income Tax Assessment Act 1997 (ITAA97), to the extent that they are not assessable income, they are assessable income under s 15-2 and, if the trustee later decides to pay salary to Ms Yip, that amount will not be included as assessable income. I have decided to affirm his objection decisions in relation to the first and third of these answers and to substitute an answer to the effect that there is no assessable income under s 15-2.

2. The Commissioner also issued a related ruling in which he ruled that, if the contributions made by the employer are not included as Ms Yip's assessable income, she will obtain a tax benefit as defined in s 177C of the Income Tax Assessment Act 1936 (ITAA36). If she obtains that benefit, the Commissioner will make a determination under s 177F to cancel that tax benefit. I have decided to affirm his objection decision on that issue.

Private ruling: applying for, and making, a private ruling

3. The legislative provisions relating to rulings are set out in Part 5.5 of Chapter 5 of Schedule 1 to the Taxation Administration Act 1953 (TA Act).^[1] Rulings, both public and private, were first introduced in the Taxation Administration Act 1953 (TA Act) on 30 June 1992 ( Taxation Laws Amendment (Self Assessment) Act 1992 , s 4). They were the subject of Part IVAA of the TA Act, which had been inserted by the Taxation Laws Amendment (Self Assessment) Act 1992 . Part IVAA was repealed by the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005 (s 3 and Schedule 2, Item 16) and replaced by Divisions 357 to 360 of Part 5.5, Schedule 1 to the TA Act (s 3 and Schedule 2, item 1) with effect from 1 January 2006 (s 3 and Schedule 2, item 28) but subject to transitional provisions (s 3 and Schedule 2, items 29-31). The object of Part 5.5 is said to be to provide a way in which a taxpayer can find out how the Commissioner thinks that laws he administers apply, or would apply, to his or her particular circumstances.^[2] TA Act, s 357-5(1) There are three types of rulings: public, private and oral. Division 357-B sets out rules that apply to all rulings together with rules that apply to both public and private rulings and those that apply to both private and oral.

4. A taxpayer or his or her agent or legal personal representative may apply to the Commissioner for a private ruling.^[3] TA Act, s 359-10(1) A private ruling is the written ruling that the Commissioner may make after receiving an application to do so and addressed to the way in which he "… considers a relevant provision applies or would apply to … [the taxpayer] in relation to a specified *scheme."^[4] TA Act, Schedule 1, s 359-5(1) A "scheme" means:

• "(a) any arrangement; or
• (b) any scheme, plan, proposal, action or course of action or course of conduct, whether unilateral or otherwise."^[5] TA Act, s 3AA(2) and Income Tax Assessment Act 1997 (ITAA97), s 995-1(1)

A "relevant provision" is a provision specified in s 357-55. Among them are those described as "*tax", which means income tax imposed by, and assessed under, the Income Tax Assessment Act 1997 (ITAA97) or income tax imposed by other legislation but assessed under ITAA97.^[6] TA Act, s 3AA(2) and ITAA97, s 995-1(1)

5. A private ruling may cover any matter involved in the application of a relevant provision.^[7] TA Act, s 395-5(2) It must identify the entity to whom it relates and specify both the scheme and provision to which it relates.^[8] TA Act, Schedule 1, s 359-29(2) If the Commissioner considers that the correctness of a private ruling would depend on which assumptions were made about a future event or other matter, the Commissioner may either decline to make the ruling or make those assumptions he considers most appropriate.^[9] TA Act, Schedule 1, s 357-110(1)(b) If the Commissioner chooses to make assumptions, he must advise the applicant for the private ruling of those assumptions^[10] TA Act, Schedule 1, s 357-110(2)(a) and give the applicant a reasonable opportunity to respond.^[11] TA Act, Schedule 1, s 357-110(2)(b) The applicant may respond to the Commissioner and may provide further information then or otherwise.^[12] TA Act, Schedule 1, ss 357-110(2)(b) and 357-115 The Commissioner must ask the applicant for information if he considers that it is required to make a private ruling^[13] ITAA97 at s 357-105(1) and may take account of that information.^[14] TA Act, Schedule 1, s 357-105 The Commissioner may also take account of information provided by third parties so long as he has told the applicant what it is and that he intends to take it into account and so long as he has given the applicant a reasonable opportunity to respond.^[15] TA Act, Schedule 1, s 357-120

Related ruling: the legislative framework

6. The TA Act does not define the expression "related ruling" but it provides for such rulings in s 359-45. Those rulings may be made when the Commissioner is making a private ruling that a person has asked for about the way in which, in the Commissioner's opinion, a relevant provision applies, or would apply, to that person. Instead of making the private ruling about the application of the relevant provision identified by the person seeking it, which is described as "the first ruling",^[16] TA Act, Schedule 1, s 359-45 the Commissioner may make that ruling about how another relevant provision applies, or would apply to him or her.^[17] TA Act, Schedule 1, s 359-45(a) The Commissioner may also choose to make the private ruling about the relevant provision identified in the application for it but may:

"make an additional private ruling on the way in which:

• (i) another relevant provision applies or would apply; or
• (ii) a relevant provision applies or would apply to you in relation to a *scheme related to the scheme to which the first ruling applies."^[18] TA Act, Schedule 1, s 359-45(b)

Private ruling: seeking review

7. The person who applied for a private ruling may object against the private ruling in the manner set out in Part IVC of the TA Act^[19] TA Act, Schedule 1, s 359-60(1). Section 359-60(2) complements this provision by providing that the private ruling is taken to be a taxation decision within the meaning of Part IVC. That means that it is a “ taxation decision … against which a taxation objection may be, or has been, made ”: TA Act, s 14ZQ and see also s 14ZL(1). but his or her right is modified by the provisions in Part 5.5 of Schedule 1 to the TA Act. Therefore, he or she may do so by making a taxation objection in the form provided in s 14ZU but may not do so if the Commissioner has issued an assessment for the accounting period to which the ruling relates.^[20] TA Act, Schedule 1, s 359-60

8. When considering a taxation objection, the Commissioner may consider any additional information that he did not consider when making the ruling. If that is information that the applicant did not have, the Commissioner must tell him or her what that information is and give him or her a reasonable opportunity to comment upon it.^[21] TA Act, Schedule 1, s 359-65(2) Should the Commissioner look at the additional information and decide that the scheme to which the application related is materially different from the scheme to which the ruling relates, he must ask the applicant to apply for another private ruling. If that is the case, the objection to the ruling is taken not to have been made.^[22] TA Act, Schedule 1, s 359-65(3) The fact that a person has applied for a private ruling does not affect the person's obligation to lodge a return or the Commissioner's power to make or amend an assessment.^[23] TA Act, Schedule1, s 357-125

9. If a person is dissatisfied with the decision that the Commissioner makes on the taxation objection, and it is a reviewable objection decision, he or she may apply to the Tribunal for review of the decision^[24] TA Act, s 14ZZ(a)(i) or appeal to the Federal Court against it.^[25] TA Act, s 14ZZ(a)(ii)

Private ruling: the Tribunal's duties on review

10. Schedule 1 of the TA Act establishes a scheme that appears to be the same in substance as that in Part IVAA of the TA Act before its repeal. The basis of the latter scheme was described by Lockhart J in
Commissioner of Taxation v McMahon and Anor:^[26] 97 ATC 4986 ; [1997] FCA 1087 ; (1997) 79 FCR 127 ; 149 ALR 159 ; 37 ATR 167 ; Lockhart, Beaumont and Emmett JJ

"The private ruling system rests on the premise that the taxpayer will not abuse the system and will genuinely seek to obtain rulings in relation to anticipated facts or facts which are in fact known, albeit that no relevant assessments have issued so that the taxpayer's affairs may be ordered accordingly. The important point to note, however, is that the Administration Act talks of the private ruling made about the 'arrangement', which means the set of facts that constitute the arrangement. The taxpayer specifies what the relevant facts are that constitute the arrangement. The Commissioner may request the applicant to give further information to the Commissioner in order to enable him to make a private ruling. But once the private ruling is made the Commissioner is bound by it, so is the taxpayer, in the sense that, leaving aside the question of appeal or review, the Commissioner when he issues an assessment must do so on the basis that the 'arrangement' as identified by the Commissioner in his ruling binds both the taxpayer and the Commissioner. It is important to note, however, that when the actual facts as ascertained by the Commissioner form the basis of an assessment by the Commissioner, it is those facts that will govern the assessment, not the facts as identified in the form of an arrangement by the Commissioner in his private ruling, unless the two correspond.

The private ruling regime is quite different from the process of assessment to tax under the Assessment Act. A private ruling is founded on the way in which, in the Commissioner's opinion, a tax law applies to the applicant in respect of a year of income. The arrangement is but a complex of assumed or identified facts. It may also involve assumptions which, if made by the Commissioner, must be stated in his identification of the relevant arrangement. …

When making a private ruling the Commissioner does not make findings of fact. He simply identifies facts and then states his opinion about the way in which the relevant tax laws apply to the applicant in relation to those identified facts.

The assessment process continues notwithstanding the application for and making of private rulings, subject to the constraint that, if a private ruling has been made, the facts as identified by the Commissioner which constitute the relevant arrangements will govern the assessment that issues in due course. If the facts turn out to be different from those identified by the Commissioner, then the ordinary assessment process applies and in that sense the private ruling becomes academic."^[27] 97 ATC 4986 ; [1997] FCA 1087 ; (1997) 79 FCR 127 ; 149 ALR 159 ; 37 ATR 167 at 132-133; 163-164; 172

11. Lockhart J went on to describe how this both shaped and limited the review undertaken by the Tribunal:

"If a taxpayer seeks a review of the private ruling before the Tribunal, the subject matter of that review is the arrangement as identified by the Commissioner in his private ruling. That arrangement is constant throughout the process of the private ruling and any review or appellate process that ensues. The Tribunal may form its opinion as to how the tax law operated or would operate on the facts that constitute the arrangement; and it may disagree with the Commissioner and alter the objection decision. But the review is not a review in the usual sense that applies to the processes of administrative review when it is dealing with actual facts. These are hypothetical facts. They may turn out to be the real facts; but the whole notion of a private ruling is that the facts are not necessarily the facts that will underlie the making of any ultimate assessment. If the factual matrix as explained to the Commissioner in aid of a request for a private ruling are[sic]suspicious, the Commissioner has ample powers to decline to make a private ruling. Once the ruling is made, it is made with respect to the facts that are identified for the purposes of the private ruling itself.

In my opinion on a process of review the Tribunal cannot redefine the arrangement. The Tribunal is limited to the facts that constitute the arrangement as identified by the Commissioner in his own ruling. I agree with the submission of counsel for the taxpayer that the arrangement is a 'constant' and a ruling is about how a tax law applies to that arrangement. The question for the Tribunal is whether the Commissioner's opinion as to the application of the law concerning the arrangement is correct. In considering the correctness or otherwise of the objection decision the Tribunal must be limited to the facts as identified by the Commissioner in his ruling as constituting the arrangement.

In making his decision about the private ruling the Commissioner is bound by the facts said by him to constitute the arrangement. Nor can the Tribunal travel beyond those facts as identified in the ruling. What the Tribunal does is to 'go over again' the objection decision to consider what it thinks should be the proper answer to the question about the way in which the relevant tax law operated on the identified facts constituting the arrangement:
Comptroller General of Customs v Akai Pty Limited (1994) 50 FCR 511 at 521 and the cases there cited."^[28] [1997] FCA 1087 ; (1997) 79 FCR 127 ; 149 ALR 159 ; 37 ATR 167 at 133; 164-165; 172-173

12. It seems to me that his Honour's conclusions are directly apposite to the scheme of private rulings provided for in Schedule 1 of the TA Act. For the same reasons, I have concluded that I am equally bound to have regard only to the facts identified by the Commissioner as constituting the arrangement.

The application for a private ruling

13. On 20 May 2009, RSG wrote to the Commissioner applying for a private ruling regarding the taxation consequences if a long-term equity plan, AEST, were implemented.^[29] Documents lodged in 2010/599-610 (T599 documents) at 46 It did so on behalf of Ambassador Funds Management Services Pty Ltd (Ambassador), which is the Employer, Trinity Management Pty Ltd (Trinity), which is the Plan Trustee, and Ms Yip, who is an employee of Ambassador. After describing the plan and making submissions regarding the application of the law, RSG requested "… confirmation of the following taxation implications of the proposed Plan for …" each of Ambassador, Trinity and Ms Yip. It then set out 16 questions relating to the implications for Ambassador, eight for Trinity and 13 for Ms Yip.

The scheme

14. Ms Yip and the Commissioner agreed on the description of AEST.^[30] Email correspondence dated 16 September 2009 between Mr Nick Avraam of the Australian Taxation Office (ATO) and Mr Gary Fitton of RSG (T599 documents at 143) and earlier response by RSG dated 12 June 2009 (T599 documents at 183-184) to letter dated 5 June 2009 from the Commissioner asking 11 questions of it (T599 documents at 124-128). As it both sits at the heart of the matters I must decide and circumscribes them, I will set the description out in full:

"To establish the Share Plan

Ambassador Funds Management Services Pty Ltd (Ambassador) (the Employer) is a private company limited by shares, and registered in the State of New South Wales.

Ambassador intends to implement a long term equity plan for the purpose of providing a long term equity incentive structure to deliver equity based benefits to Miss. Christina Yip.

Miss. Yip is an arm's length employee of Ambassador, employed as an Administration Assistant. For the purposes of this ruling, an 'arm's length employee' is a person in respect of whom a contribution or loan of monies is made by Ambassador to the Trustee pursuant to clause 4.1 of the Trust Deed at arm's length. The expression 'at arm's length' is defined in The CCH Macquarie Concise Dictionary of Modern Law, 1988, CCH Australia Ltd/Macquarie Library Pty Ltd, Sydney as meaning that the parties to a transaction are not connected in such a way as to bring into question the ability of one to act independently of the other.

Miss. Yip has no interest in shares in Ambassador either directly or indirectly, legally or beneficially. Furthermore, Miss. Yip holds no interest in shares of Trinity Management Pty Ltd (the Trustee), either directly or indirectly, legally or beneficially.

In order to facilitate the Employee Share Plan, it is proposed to establish a unit trust to be known as the Ambassador Funds Management Services Pty Ltd Employee Share Trust (the Trust) by way of declaration of trust by the Trustee.

Ambassador will settle on the Trustee from time to time for the benefit of Employees as a general class contribution of amounts of monies or loans of amounts of monies as Ambassador may decide (clause 4.1 of the Trust Deed).

Such contributions of amounts of monies or loans of amounts of monies as are settled on the Trustee shall be applied by the Trustee at its discretion in making loans to Miss. Yip and other Eligible Employees for the purpose of making application to the Trustee for the issue of Share Units in the Trust (clause 4.2 of the Trust Deed). The Issue Price of a Share Unit will be the greater of the market value of the Share Unit, or $0.50.

Application Monies then received from Miss. Yip shall be used exclusively by the Trustee to acquire Shares to be allocated to Share Units (clause 4.2 of the Trust Deed).

Share is defined as shares or rights to acquire shares in the Employer or a holding company (within the meaning of the Corporations Law) of the Employer (clause 1.1 of the Trust Deed). Under the Employee Share Plan the shares to be acquired by the Trustee are freshly issued share capital of Ambassador and the Trustee will pay full market value for the shares, that is, the amount that an arm's length entity would pay to acquire such shares. Ambassador will set aside 10% of its share capital for application to this scheme.

Sacrifice of prospective salary/bonuses

The contribution monies settled on the trustee by Ambassador pursuant to clause 4.1 of the Trust Deed are attributable to prospective salary or bonus remuneration of Miss. Yip.

By completing a document titled 'Employee Preferences for Salary Sacrifice', Miss. Yip will enter into an agreement with Ambassador to deal with a future and prospective amount of base salary. Pursuant to the 'Employee Preferences for Salary Sacrifice', Miss. Yip may request that a fixed dollar amount be deducted from her gross pre-tax salary for each future pay period commencing at a certain nominated date and that this amount be provided as a benefit nominated in one or more of a few options, including 'Employee Share Trust'.

Miss. Yip will be informed of the possibility of forthcoming bonuses. By completing a document titled 'Employee Preferences for Bonus Delivery', Miss. Yip may request that her prospective bonus be provided as a benefit nominated in one or more of a few options, including 'Employee Share Trust'. If there is no preference expressed by Miss. Yip on this form, the bonus will be provided as Share Units.

The Board determines how much is to be allocated to the 'bonus pool' and will determine how and when bonuses are to be paid. Any bonuses to be awarded to Miss. Yip will be determined annually but may be bi-annually awarded and are calculated on net profits before tax.

Class of Share Units

The beneficial interest in the Trust Fund is divided into four classes of Share Units; Class A Share Units, Class B Share Units, Class C Share Units and Bonus Share Units (clause 5.1 of the Trust Deed). For the purposes of this ruling, Class A, B and C Share Units are referred to as Share Units.

As soon as practicable after the time of issue, the Trustee shall specify the Allocated Shares referable to each Share Unit (clause 5.3 of the Trust Deed).

Allocated Shares are defined as Shares referable to particular Share Units (clause 1.1 of the Trust Deed).

Class A, B and C Share Units entitle the holder to

• a. receive a distribution in respect of each Accounting Period equal to the Share Unit Distribution Entitlement;
• b. a Cancellation Entitlement on cancellation in accordance with Clause 13;
• c. distributions of the net income of the Trust Fund in accordance with Clause 15;
• d. request the Trustee to pass a resolution cancelling the Share Unit in accordance with Clause 12; and
• e. any rights or benefits and subjects the holder of the Share Unit to any obligations set out in the Terms of Issue, if any (clauses 5.4, 5.5 and 5.6 of the Trust Deed).

Miss. Yip will acquire Class B Share Units, representing the incentive Share Units and which is subject to the Terms of Issue.

The Terms of Issue for the Class B Share Units to be acquired by Miss. Yip will be subject to a non-disposal period as set by Ambassador of 5 years.

Bonus Share Units entitle the holder to payment of the Redemption Distribution on cancellation less the balance due to the Trustee by Miss. Yip in respect of any loan provided by the Trustee and previously applied as Application Monies for the acquisition of Share Units issued by the Trustee to Miss. Yip and no other right (clause 5.7 of the Trust Deed).

Ambassador shall advise the Trustee when Miss. Yip is selected by Ambassador to participate in the Share Plan. Miss. Yip shall then be invited in writing by the Trustee to make application to the Trustee for the issue of a specified number of Share Units as determined at the absolute discretion of Ambassador (clause 7 of the Trust Deed).

Making the Loan

An application for Share Units shall be accompanied by a request to the Trustee pursuant to Clause 11.1 of the Trust Deed for a loan of an amount equal to the total Issue Price of Share Units applied for together with a direction to the Trustee to apply the loan monies in payment to the Issue Price of Share Units in the event that the Trustee approves the loan and the application for the Issue of Share Units (clause 10.2 of the Trust Deed).

The loan application shall be approved or not approved at the absolute discretion of the Trustee but after consultation with Ambassador (clause 11.3 of the Trust Deed). The Trustee will be treated as having approved the loan application if the Trustee issues Share Units to Miss. Yip, which Share Units have a total Issue Price equivalent to the amount of the loan applied for (clause 10.2 of the Trust Deed).

The loan to Miss. Yip shall not bear interest as provided for Ambassador.

Where Miss. Yip is required to repay to the Trustee monies borrowed by Miss. Yip and an amount is payable by the Trustee to Miss. Yip as a Cancellation Entitlement for Share Units cancelled, the Trustee shall set off the amount payable by Miss. Yip to the Trustee against any amount payable by the Trustee to Miss. Yip. The liability of Miss. Yip to the Trustee shall be reduced by the amount set off (clause 11.4(h) of the Trust Deed).

If the Share Unit is cancelled and the Cancellation Entitlement and Redemption Distribution is not enough to cover the loan amount owed by Miss. Yip to the Trustee, the Trustee will accept cancellation of the Share Unit and set off the amount payable to Miss. Yip as full and final satisfaction of the debt outstanding on the loan made in respect of the cancellation (clause 11.4(i) of the Trust Deed).

When instructed by Ambassador, the Trustee may, at its discretion, pay amounts to Miss. Yip on behalf of Ambassador from repayments of loan pursuant to clause 11.4(h) of the Trust Deed as salary minus amounts withheld as Pay As You go tax instalments (clause 11.4(j) of the Trust Deed).

Acquisition of Shares

The Trustee shall use the Application Monies received from Miss. Yip to acquire Shares (clause 9.4/10.4 of the Trust Deed). The Shares shall be designated to the Share Units owned by Miss. Yip (clause 10.5 of the Trust Deed).

For the purposes of this ruling, no Bonus Share Units will be issued to Miss. Yip under this Share Plan.

Although the Shares are designated to the Share Units owned by Miss. Yip, the Trustee may make adjustments to the division of such Allocated Shares between Share Units but only with the consent of Miss. Yip or in relation to a Share Unit which is cancelled in circumstances where the Cancellation Entitlement is equal to the Issue Price. Any adjustment made by the Trustee shall be at its absolute discretion, but shall be made after consultation with Ambassador (clause 10.10 of the Trust Deed).

Share Unit Distribution Entitlement

The Share Unit Distribution Entitlement attached to the Share Units held by Miss. Yip is defined in clause 1.1 of the Trust Deed to mean, in relation to a Bonus Share Unit, nil.

Cancellation Entitlements

Miss. Yip will be entitled to a Cancellation Entitlement on the happening of specified events which include:

• a. termination of employment;
• b. termination of employment in Special Circumstances;
• c. Miss. Yip transferring or assigning or attempting to transfer or assign a Share Unit;
• d. Miss Yip's employment being Terminated for a Cause;
• e. a request in writing from Miss. Yip to cancel one or more Share Units; and/or
• f. the death of Miss. Yip, Miss. Yip committing an act of bankruptcy or being declared bankrupt (clause 12.1 of the Trust Deed).

The quantum of the Cancellation Entitlement will depend upon the class of Share Units Miss. Yip holds and the circumstances in which the Cancellation Entitlement arises.

Miss Yip will be allocated Class B Share Units and when they are cancelled, Miss. Yip will be entitled to an in specie distribution of the Allocated Shares referable to the Share Units where:

• • the date of cancellation is on or after the Stipulated Date,
• • Miss. Yip requests such a distribution, and
• • the cancellation arises either on the termination of Miss. Yip's employment in other than Special Circumstances or on receipt by the Trustee of a request in writing from Miss. Yip to cancel the Share Units (clauses 13.1(a)(ii), 13.2(c) and 13.3(c) of the Trust Deed).

In all other circumstances, the Cancellation Entitlement for Class B Share Unit cancelled shall be equal to the Issue Price of the Share Unit (clauses 13.1(a)(i), 13.1(b), 13.2(a)(i), 13(2)(b), 13.3(a)(i) and 13.3(b) of the Trust Deed).

Distributions on cancellation of Share Units are subject to the Trustee's right of set off in relation to any outstanding loan monies (clauses 14.1 and 14.4 of the Trust Deed). Further, distributions on cancellation of Share Units are subject to the Trustee's ability and discretion to redesignate the Allocated Shares referable to such Share Units (clause 14.3 of the Trust Deed). Cancellation Entitlements may be effected by a payment from the Trust Fund of monies and/or by an in specie transfer of the Allocated Shares or any other property which may be comprised in the Trust Fund of an equal value to the Cancellation Entitlement (clause 14.5 of the Trust Deed).

The Cancellation Entitlement for each Bonus Share Unit will be its Redemption Distribution (clause 13.5 of the Trust Deed), defined in Clause 1.1 of the Trust Deed to mean Shares or right to Shares at the date of cancellation which have a market value equal to the lower of the Issue Price or the Share Unit Distribution Entitlement of the Share Unit in relation to which the Share Bonus Unit was issued.

Trustee's Discretions

In exercising the powers, authorities and discretions vested in it by the Trust Deed, the Trustee shall have an absolute and uncontrolled discretion (clause 16.9 of the Trust Deed).

Share Plan Expenses

Share Plan expenses, to the extent that they are not met out of the Trust Fund or by the Administrator pursuant to the Plan Administration Agreement are to be met by Ambassador.

Share Plan expenses may include operating costs associated with the operation of the Plan. The operating costs that may be directly incurred by Ambassador include general administration costs.

Pursuant to the Plan Administration Agreement, Ambassador will also pay Administration Fees to the Administrator for the provision of the Administration Services listed in Schedule 3 of the Plan Administration Agreement to the Trustee.

In this ruling capitalised terms are specifically defined in the Trust Deed and the Plan Administration Agreement."^[31] T599 documents at 150-155

15. In response to the Commissioner's questions, RSG had supplied a copy of three pro forma documents:

• (1) First pro forma

  "Dear Employee,

  Your Prospective Bonus

  Subject to the confirmation of the Board of Ambassador Funds Management Services Pty Ltd, a bonus of $ has been suggested tentatively for you and is subject to the final approval of the Board.

  You may express a preference as to the mode of the provision of this prospective bonus (i.e. either as a cash salary or some other form of approved benefit) by completing the attached Bonus Delivery form, and forwarding it to at .

  Yours sincerely,

  "^[32] T599 documents at 185

• (2) Second pro forma

  " EMPLOYEE PREFERENCES FOR BONUS DELIVERY

  Employee Name:

  Location:

  Bonus Delivery

  I, , hereby express a preference to have my prospective bonus provided as a benefit I have selected in Table 1 below.

  
  

  Table 1

  Table 1

  	%	OR	$
  Cash Salary Payment
  Employee Share Trust
  Superannuation
  Other
  Other
  Other

  If you do not express a preference, the bonus will be provided in the form of a share benefit in the Employee Share Trust.

  Signature

  Date"^[33] T599 documents at 187

• (3) Third pro forma

  " EMPLOYEE PREFERENCES FOR SALARY SACRIFICE

  Employee Name:

  Location:

  Salary Sacrifice

  I wish to have a salary sacrifice amount of $ deducted from my gross pre-tax salary for each future pay period commencing 2009 and that amount provided as the benefit nominated in Table 1 below.

  
  

  Table 1

  Table 1

  	%	OR	$
  Employee Share Trust
  Superannuation
  Other
  Other
  Other

  If you do not express a preference, all benefits will be provided in the form of cash salary plus a 9% compulsory superannuation contribution.

  Signature

  Date"^[34] T599 documents at 187

Private rulings, objection decisions and applications for review

Proceedings 2010/509-610: first private ruling

16. After seeking further information, the Commissioner made a private ruling applying to Ms Yip alone. That private ruling is dated 9 October 2009.^[35] T599 documents at 144-149 and see also 150-162 (statement of reasons) After dealing with procedural matters, the private ruling noted that the Commissioner could make a related ruling. He referred particularly to his being able to make an additional private ruling about the way in which Part IVA of ITAA36 applies to cancel a tax benefit obtained by a person in connection with Ms Yip's participation in AEST. The private ruling went on to explain the effect of Part IVA as a general anti-avoidance rule. It applies if two criteria are met. The first is that a person obtains a tax benefit (such as an allowable deduction) in connection with an arrangement. The second is that it can be concluded that the arrangement, or any part of it, was entered into, or carried out, by any person for the dominant purpose of enabling a tax benefit to be obtained. Where both criteria exist, the effect of the provisions in Part IVA is to cancel the tax benefit the person would otherwise enjoy.

17. The private ruling was written in the form of answers to 17 questions that the Commissioner had reframed after discussing them with RSG and reaching agreement regarding their formulation. Although not forming part of the private ruling, the Commissioner attached a statement of reasons for each answer in order to help Ms Yip and others to understand how he had reached his decision.

18. In her objection dated 24 November 2009 to the Commissioner' private ruling, Ms Yip made it clear that she was objecting to only three of the answers given by the Commissioner in his private ruling.^[36] T599 documents at 169 and 170 Together with their questions, those answers are:

• (1) "Will the contributions of monies by Ambassador Funds Management Service Pty Ltd (Ambassador) (the Employer) to the Trustee pursuant to clause 4.1 of the Trust Deed be included as assessable income of Ms Yip under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

  Yes"^[37] T599 documents at 43. Question, or Issue, 1 in private ruling.

• (2) "Will the contributions of monies by Ambassador to the Trustee pursuant to clause 4.1 of the Trust Deed be included as assessable income of Ms Yip under section 15-2 of the ITAA 1997?

  Yes, to the extent that the contributions of monies by Ambassador to the Trustee pursuant to clause 4.1 of the Trust Deed are not included as assessable income of Ms Yip under section 6-5 of the ITAA 1997."^[38] T599 documents at 43. Question, or Issue, 2 in private ruling.

• (3) "If the Trustee, pursuant to clause 11.4(j) of the Trust Deed, decides to pay salary to Ms Yip on behalf of Ambassador, will the amounts paid to Ms Yip (including any amounts of Pay As You Go instalments withheld) be included as assessable income of Ms Yip under section 6-5 of the ITAA 1997?

  No"^[39] T599 documents at 43. Question, or Issue, 17 in private ruling.

19. These remain the three rulings that Ms Yip challenged when she applied to the Tribunal for review of the Commissioner's objection decision dated 14 January 2010.^[40] T599 documents at 5, 8 and 9 In his decision, the Commissioner had disallowed her objection.^[41] T599 documents at 176-182

Proceedings 2010/965-967: additional or related private ruling

20. As the Commissioner had foreshadowed in his private ruling made on 9 October 2009, he made an additional or related private ruling on 14 December 2009.^[42] T965 documents at 59-66 and see also 67-70 (statement of reasons) Only two questions were posed and answered in the private ruling. They were:

" Question 1

If the contribution of monies by Ambassador to the Trustee pursuant to clause 4.1 of the Trust Deed are not included in the assessable income of Ms Yip under section 6-5 or section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997), has Ms Yip obtained a tax benefit in respect of those contributions, as defined in section 177C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

If Ms Yip has obtained a tax benefit in respect of the contributions of monies by Ambassador to the Trustee pursuant to clause 4.1 of the Trust Deed, will the Commissioner make a determination pursuant to section 177F of the ITAA 1936 to cancel the tax benefit obtained by Ms Yip?

Answer

Yes"^[43] T965 documents at 59-60

21. On 12 January 2010, Ms Yip objected to this private ruling^[44] T965 documents at 86-95 but, in an objection decision dated 17 February 2010, the Commissioner disallowed the objection.^[45] T965 documents at 96 and 40-58 Ms Yip applied to the Tribunal for review of the objection decision and both questions and answers remain in dispute.

The evidence of Mr John Kenneth Day

22. Mr Day is a Remuneration Consultant and has, since 2000, been a consultant to RSG and Trinity. Over the years, he said in his statement, RSG has introduced many employee share plans. A number of them have involved salary sacrifice based allocations of equity to employees. This has enabled the employer to provide equity across the board while controlling employment cost budgets. In general, salary sacrifice based equity allocations from a base or fixed remuneration have tended to be typical at the lower to middle tiers of employment in an organisation. At those tiers, the tendency has been to have fewer developed short and long term incentive arrangements.

23. Ambassador contacted him, he said, and asked him to prepare a staff retention and succession plan for its employees. He did that by developing a Handbook called the "Ambassador Funds Management Services Pty Ltd Employee Share Trust Handbook"^[46] T599 documents at 108-114 (First Handbook). In this way, the proposal could be both communicated to Ambassador's employees and the Commissioner could be asked for a private ruling.

24. Mr Day assumed that a copy of the First Handbook was attached to Ms Yip's application for a private ruling. His attention was drawn to RSG's letter dated 20 May 2009 and accompanying the applications made by Ms Yip, Ambassador and Trinity. The relevant Trust Deed and other documentation was said to be enclosed as Attachment 1. Although the copy of the First Handbook was not marked as Attachment 1, he accepted that was probably an oversight and that the First Handbook, rather than another version of it,^[47] Attachment D was the version submitted to the Commissioner. I accept that oversight would seem to be the explanation. If any of the documents had been marked, I would have expected the Trust Deed at least to have been marked as Attachment 1 being the first of the documents said to be marked in that way. The copy in the T documents is not marked at all.

Proceedings 2010/0599-601 (first private ruling)

Relevant legislation

A. Taxable income

25. In general terms, an individual must pay income tax for each financial year.^[48] ITAA97, ss 4-1 and 4-10(1) The amount of income tax that is payable for a particular financial year is worked out by reference to the individual's taxable income for that year.^[49] ITAA97, s 4-10(2) "Taxable income" is "Assessable income" minus "Deductions".^[50] ITAA97, s 4-15(1)

B. Assessable income

26. If an Australian resident, an individual's "assessable income" includes two types of income: ordinary income and statutory income other than exempt income.^[51] ITAA97, s 6-1(1)-(5). “ Statutory income ” is not ordinary income but it is included in assessable income by provisions of ITAA97: ITAA97, s 6-10. “ Exempt income ” is an amount of ordinary or statutory income that is made exempt from income tax by a provision of ITAA97 or by another Commonwealth law: ITAA97, s 6-20. Amounts that may be deducted from assessable income are the subject of Division 8 of Part 1-3 of ITAA97.

C. Statutory income

27. "Statutory income" is not ordinary income but it is included in assessable income by provisions of the taxation law.^[52] ITAA97, ss 6-10(1) and (2) If an Australian resident, an individual's assessable income includes all statutory income from all sources, whether those sources are inside or outside Australia.^[53] ITAA97, s 6-10(4) In circumstances in which an individual has not received an amount that would otherwise be statutory income, that amount becomes statutory income as soon as it is applied or dealt with in any way on his or her behalf or as he or she directs.^[54] ITAA97, s 6-10(3)

28. Section 10-5 lists a number of provisions of ITAA97. Those provisions fall into two groups. In the first are those provisions that include in a taxpayer's assessable income amounts that are not ordinary income. Provisions varying or replacing rules that would otherwise apply for certain kinds of ordinary income fall into the second group. Section 15-2 falls within the first group and provides:

• "(1) Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).
• (2) This is so whether things were *provided in money or in any other form.
• (3) However, the value of the following are not included in your assessable income under this section:
  • (a) a *superannuation lump sum or an *employment termination payment;
  • (b) an *unused annual leave payment or an *unused long service leave payment;
  • (c) a *dividend or *non-share dividend;
  • (d) an amount that is assessable as *ordinary income under section 6-5;
  • (e) *ESS interests to which Subdivision 83A-B or 83A-C (about employee share schemes) applies."

29. Income that a taxpayer derives by way of the provision of a fringe benefit is neither assessable income nor his or her exempt income.^[55] ITAA36, s 23L(1) A "fringe benefit" means a fringe benefit as defined by s 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTA Act) and a benefit that would be a fringe benefit if ss 136(1)(d) and (e) of the definition of "employer" were omitted.^[56] ITAA97, s 995-1(1)

D. Fringe benefits

30. The Fringe Benefits Tax Act 1986 (FBT Act) provides that:

"Tax is imposed in respect of the fringe benefits taxable amount of an employer in a year of tax."^[57] FBT Act, s 5

Subject only to a law or provision expressly exempting a person from liability to pay it, tax imposed in respect of a fringe benefits taxable amount is payable by the employer.^[58] FBTA Act, s 66

31. Part IIA of the FBTA Act sets out the way in which an employer's "fringe benefits taxable amount" is worked out. The method involves the assessment of the employer's "aggregate fringe benefits amount" and that involves identification of the "fringe benefits in respect of each of the employer's employees that are GST-creditable benefits"^[59] “ GST-creditable benefits ” are benefits in respect of which the person who provided the benefit or who is a member of the same GST group as the person who provided the benefit, is entitled to an input tax credit under Division 111 of the A New Tax System (Goods and Services Tax) Act 1999 or is a benefit provided in respect of the employment of an employee and meets the criteria in s 149A(2); FBTA Act, s 149A as part of the calculation of the "aggregate fringe benefits amount". The general rule is that:

"The individual fringe benefits amount is the sum of the employee's share of the taxable value of each fringe benefit that relates to the year of tax and is provided in respect of the employment other than an excluded fringe benefit."^[60] FTBA Act, s 5E(2)

32. A "fringe benefit":

"… in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

• (a) provided at any time during the year of tax; or
• (b) provided in respect of the year of tax;

  being a benefit provided to the employee or to an associate of an employee by:

• (c) the employer; or
• (d) an associate of the employer; or
• (e) a person (in this paragraph referred to as the arranger ) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:
  • (i) the employer or an associate of the employer; and
  • (ii) the arranger or another person; or
  • (ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer:
    • (i) participates in or facilitates the provision or receipt of the benefit; or
    • (ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

      and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

    in respect of the employment of the employee, but does not include:

• (f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936; or
• (g)-(s) …"^[61] FBTA Act, s 136(1)

33. A "benefit" is defined in s 136(1) of the FBTA Act as well and:

"… includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

• (a) an arrangement for or in relation to:
  • (i) the performance of work (including work of a professional nature), whether with or without the provision of property;
  • (ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or
  • (iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of royalty, tribute, levy or similar exaction;
• (b) a contract of insurance; or
• (c) an arrangement for or in relation to the lending of money."

E. Ordinary income

34. Section 6-5 of ITAA97 is concerned with income according to ordinary concepts and known as "ordinary income". Section 6-5(1) provides that:

"Your assessable income includes income according to ordinary concepts, which is called ordinary income ."

If an Australian resident, "assessable income":

"… includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year."^[62] ITAA97, s 6-5(2). Section 6-5(3) provides for the assessable income of a foreign resident but there is no suggestion in the facts that Ms Yip is anything other than an Australian resident.

35. Section 6-5(4) provides that:

"In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct."

Section 11-5 of Schedule 1 of the TA Act complements s 6-5(4) of ITAA97 when it provides:

• "11-5(1) In working out whether an entity has paid an amount to another entity, and when the payment is made, the amount is taken to have been paid to the other entity when the first entity applies or deals with the amount in any way on the other's behalf or as the other directs.
• 11-5(2) An amount is taken to be payable by an entity to another entity if the first entity is required to apply or deal with it in any way on the other's behalf or as the other directs."

Submissions on behalf of Ms Yip

36. On behalf of Ms Yip, Dr Orow submitted that contributions of monies by Ambassador to Trinity under cl 4.1 of the Trust Deed are not Ms Yip's ordinary income within the meaning of s 6-5. He referred to the meaning of "ordinary income" as considered in recent judicial authorities:
Federal Commissioner of Taxation v McNeil ^[63] 2007 ATC 4223 ; [2007] HCA 5 ; (2007) 229 CLR 656 ; 233 ALR 1 ; 64 ATR 431 ; 60 ACSR 532 ; (2007) 81 ALJR 638 ; Gummow ACJ, Hayne, Heydon and Crennan JJ; Callinan J dissenting (McNeil) and
Federal Commissioner of Taxation v Montgomery ^[64] 99 ATC 4749 ; [1999] HCA 34 ; (1999) 198 CLR 639 ; 164 ALR 435 ; 73 ALJR 1160 ; 42 ATR 475 (Montgomery). Furthermore, Dr Orow submitted, Ms Yip had not "derived" it in the sense understood in s 6-5. An employee's salary and bonus entitlements are governed by his or her contract of employment.

37. Once Ms Yip completes a salary and bonus sacrifice form, she would never be legally entitled to receive the sacrificed prospective salary and bonuses. She may not direct or instruct Ambassador to make contributions to Trinity referable to her salary sacrifice or to insist that she be permitted to make such a sacrifice. As she could never be entitled to the salary or bonuses sacrificed, Ms Yip could not be said to have derived the sacrificed amount.

38. Section 6-5(4) does not deem the amount of sacrificed salary and bonuses to have been derived by Ms Yip. In order for that provision to take effect, the amount must first be ordinary income.^[65] Brent v Federal Commissioner of Taxation 71 ATC 4195 ; 1971] HCA 48; (1971) 125 CLR 418 ; 71 ATC 4195 at 428; 4200 Furthermore, there would be no amount that could be said to have been "applied or dealt with" by Ambassador on Ms Yip's behalf or as she has directed. In order for an amount to be applied or dealt with in that way, Ms Yip would first have to have a legally enforceable entitlement to the amount and a degree of control over Ambassador. Section 6-5(4) only has application, Dr Orow submitted, when a taxpayer has power to direct or instruct his or her employer to apply or deal with his or her salary or bonuses. That situation does not arise in this case when Ms Yip is an employee,^[66] The situation was different in Federal Commissioner of Taxation v White 2010 ATC 20-195 ; [2010] ATC 11,171 when the taxpayer was also the director or shareholder of the employer, Dr Orow submitted. her participation is circumscribed by cl 7 of the Trust Deed and whether she receives an amount is in the Trustee's discretion under cl 11.4(j) of the Trust Deed. All that she could do was to express a preference for salary sacrifice.

39. Later settlements to the AEST by Ambassador under cl 4.1 are made for the benefit of its employees as a general class and not for the benefit of any specific employee. Ambassador would select Ms Yip as an eligible employee. Following her selection, Trinity would invite her to apply for the issue of a specified number of units and to apply for a loan to fund her subscription. The issue of units lies in Ambassador's discretion and the making of a loan lies in Trinity's. Any loan that is made to her is repayable in full by Ms Yip. These matters, when taken with her having no legal entitlement to the amount sacrificed meant that any entitlement she has to the benefit of any capital growth in the shares is conditional.

40. Moving to a year in which contributions have been made under cl 4.1 of the Trust Deed, Ms Yip would not derive any gain in the nature of income for "The notion of income predicates a gain or benefit in the form of money or money's worth.", Dr Orow submitted.^[67] Submissions at [41] citing Federal Commissioner of Taxation v Cooke and Sherden 80 ATC 4140 ; [1980] FCA 37 ; (1980) 42 FLR 403 ; 29 ALR 202 ; 80 ATC 4140 at 4147; Brennan, Deane and Fisher JJ Ambassador's contribution of by way of further settlement would form part of AEST's capital and the contribution is to the employees as a general class. Ms Yip's being selected to participate and invited to subscribe for shares does not constitute a benefit in the nature of income for she would pay full consideration for the shares by way of a loan. Any benefit that she derives from being selected and receiving an invitation is not convertible to cash and would, in any event, be of negligible monetary value. Any capital growth would be taxable as a capital gain but not as ordinary income.

41. Ms Yip's interest in the AEST could not be turned to monies. Relying on
Federal Commissioner of Taxation v Cooke and Sherden ^[68] 80 ATC 4140 ; [1980] FCA 37 ; (1980) 42 FLR 403 ; 29 ALR 202 ; 80 ATC 4140 at 4147 ; Brennan, Deane and Fisher JJ (Cooke and Sherden), Dr Orow submitted that any benefit she obtains would be of a capital nature and would not be in the nature of income.^[69] Freeman and Ors v Federal Commissioner of Taxation (1983) 83 ATC 4456 at 4474; Northrop and Fisher JJ; Franki J dissenting in part

42. Alternatively, if Ms Yip were to obtain any benefit, it would not be a benefit in the form of ordinary income she has "derived". As a general rule, the amount of income derived is determined by the application of ordinary business and commercial principles.^[70] Brent v Federal Commissioner of Taxation 71 ATC 4195 ; [1971] HCA 48 ; (1971) 125 CLR 418 ; 71 ATC 4195 at 428; 4200 per Gibbs J The object in assessing income:

"… is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form."^[71] Commissioner of Taxation v Executor & Trustee Agency Co of South Australia (Carden’s case) (1938) 63 CLR 108 at 155 per Dixon J, with whom Rich and McTiernan JJ agreed; Latham CJ dissenting

An amount has not been derived if Ms Yip's entitlement to it is contingent^[72] Ballarat Brewing Co Ltd v Federal Commissioner of Taxation [1951] HCA 35 ; (1951) 82 CLR 364 per Fullagar J ; Arthur Murray (NSW) v Federal Commissioner of Taxation [1965] HCA 58 ; (1965) 114 CLR 314 ; Barwick CJ, Kitto and Taylor JJ. or if the amount due cannot be ascertained.^[73] Farnsworth v Federal Commissioner of Taxation [1949] HCA 27 ; (1949) 78 CLR 504 at 512-513 (citations omitted)

43. Ms Yip has no interest in the capital of AEST that is made up of Ambassador's contributions. Any interest she has is contingent upon her satisfying certain conditions and the exercise of the discretion of Ambassador and Trinity. Any amount due to her could not, at the time of Ambassador's contribution, be ascertained. Therefore, any benefit referable to the contributions, Ambassador's selection of her as an eligible employee, Trinity's loan to her and her subscription to shares could not be derived by her.

44. Finally, and in the alternative, Dr Orow submitted that, were Ms Yip to derive any benefit under AEST that is in the nature of ordinary income, it would be a benefit derived by way of a fringe benefit. As such, it would be non-assessable as ordinary income by reason of s 23L of ITAA36. The benefits Ms Yip derives are her selection by Ambassador to participate in the AEST and any interest free loan made by Trinity to her. The later issue of Share Units would also be a benefit to her but they would have a nil taxable value for she would have given full consideration for them by using the loan monies to pay for them. Any capital growth in the value of the units would confer a benefit upon Ms Yip as a unit holder and not as an employee. Therefore, they would not be fringe benefits under the FBTA Act.

Ordinary income under s 6-5

45. I have started with some general propositions regarding the meaning of "ordinary income". It is not a term that is defined in ITAA97 or in its predecessors:

• (1) "Although income is not defined by the Act, its provisions give some indication of its meaning. …"^[74] Cooke and Sherden [1980] FCA 37 ; (1980) 42 FLR 403 ; 29 ALR 202 ; 80 ATC 4140 at 412-413; 210; 4147 referring, for example to the definitions in s 6(1) of ITAA36 of “ income from personal exertion ”, “ income from property ”, the division in s 25 of gross income into assessable income and exempt income and the definition of “ taxable income ” as assessable income reduced by allowable deductions.
• (2) "… Whether a receipt is to be treated as income or not is determined according to 'the ordinary concepts and usages of mankind' … except where [the] statute sweeps in particular receipts or amounts which would not ordinarily be taken to fall within the concept."^[75] Cooke and Sherden [1980] FCA 37 ; (1980) 42 FLR 403 ; 29 ALR 202 ; 80 ATC 4140 at 413; 210; 4147 citing Scott v Federal Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219 per Jordan CJ
• (3) "… Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form. …"^[76] Carden’s case at 154 per Dixon J
  • (a) "… The word 'gains' is not here used in the sense of net profits of the business for the topic under discussion is assessable income, that is to say gross income. But neither is it synonymous with 'receipts'. It refers to amounts which have not only been received but have 'come home' to the taxpayer' and that must surely involve, if the word 'income' is to convey the notion it expresses in the practical affairs of business life, not only that the amounts received are unaffected by legal restrictions, as by reason of a trust or charge in favour of the payer - not only that they have been received beneficially - but that the situation has been reached in which they may properly be counted as gains completely made, so that there is neither legal nor business unsoundness in regarding them without qualification as income derived.

    The ultimate inquiry in either kind of case, of course, must be whether that which has taken place, be it the earning or the receipt, is enough to satisfy the general understanding among practical business people of what constitutes a derivation of income. …"^[77] Arthur Murray (NSW) v Federal Commissioner of Taxation [1965] HCA 58 ; (1965) 114 CLR 314 at 318

• (4) "If a taxpayer receives a benefit which cannot be turned to pecuniary account, he has not received income as that term is understood according to ordinary concepts and usages."^[78] Cooke and Sherden [1980] FCA 37 ; (1980) 42 FLR 403 ; 29 ALR 202 ; 80 ATC 4140 at 414; 212; 4,148 . Mr and Mrs Cooke and Mr and Mrs Sherden were soft drink retailers. Each couple had each been offered, and accepted, a holiday when they met certain criteria set by manufacturers with whom they had contracts. The holidays were not transferable and could not be converted to a cash payment in place of taking the holiday. The Full Court of the Federal Court said: “ The conversion of an item into money may occur, of course, in a variety of ways. It is not desirable (or even possible) to define in advance the ways in which conversion may possibly occur in order that a non-pecuniary item of receipt might be treated as an item of income. However, it will not often occur that a benefit to be enjoyed by a taxpayer cannot be turned to pecuniary account if the benefit be given up, or if it be employed in the acquisition of some other right or other commodity. If one were so to vary the facts of the present case that the tickets with which the taxpayers were provided could be surrendered by them for cash, the benefit which, on that hypothesis, the taxpayers would have received would have been converted into money, and would have constituted income if the origins of the receipt gave that character to it. Indeed, as the authorities show, it is not necessary that the pecuniary alternative be available by way of direct conversion of the benefit received … ” [1980] FCA 37 ; (1980) 42 FLR 403 ; 29 ALR 202 ; 80 ATC 4140 at 414; 212; 4,148 ;
• (5) "… The question in each particular case is as to the character of the receipt in the hands of the recipient. … The test to be applied is an objective, not a subjective, test. …"^[79] Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 at 55 per Fullagar J. The issue for consideration was whether receipt of shares long after his employment by a proprietary company had ceased and on the incorporation of a public company was a receipt of income either within the ordinary concept of “ income ” or within the terms of s 26(e) of ITAA36 i.e. “ the assessable income of any person shall include … (e) the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise. ” “ A voluntary payment of money or transfer of property by A to B is prima facie not income in B’s hands. If nothing more appears than that A gave to B some money or a motor car or some shares, what B receives is capital and not income. But further facts may appear which show that, although the payment or transfer was a ‘gift’ in the sense that it was made without legal obligation, it was nevertheless so related to an employment of B by A, or to services rendered by B to A, or to a business carried on by B, that it is, in substance, and in reality, not a mere gift but the product of an income-earning activity on the part of B, and therefore to be regarded as income from B’s personal exertion. … ” (at 54) In the circumstances of the case he was considering, Fullagar J found that “ … there is nothing whatever to suggest that the gift can properly be regarded as money earned by Hayes as director or secretary of the proprietary company. It was not paid to him in any such capacity. It was in no true sense a product or an incident of any employment in which Hayes had engaged or any business which he had carried on. ” (at 57)
• (6) "… It does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make. … The motives of the donor do not determine the answer. They are, however, a relevant circumstance. …"^[80] Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 526 per Windeyer J. A client, who had engaged and paid proper remuneration to his solicitor for many years, gave him a gift of £10,000. It was found not to be income. Rather than a payment made in discharge of an obligation to the solicitor, the amount was found to be a gratuitous payment or a gift and so not income.
• (7) "… An unsolicited gift does not, in my opinion, become part of the income of the recipient merely because generosity was inspired by goodwill and the goodwill can be traced to gratitude engendered by some service rendered. … The relation between the gift and the taxpayer's activities must be such that the receipt is in a relevant sense a product of them."^[81] Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 526-527 per Windeyer J
• (8) "… whether a particular receipt has the character of the derivation of income depends upon its quality in the hands of the recipient, not the character of the expenditure by the other party …".^[82] McNeil [2007] HCA 5 ; (2007) 229 CLR 656 ; 233 ALR 1 ; (2007) 64 ATR 431 ; (2007) 60 ACSR 532 ; (2007) 81 ALJR 638 at [20]; 663; 6; 537; 643; 436
• (9) "… The relevant question is not the character of the expenditure by S.E.C.W.A. [the payer]. A receipt may be income in the hands of a payee whether or not it is expenditure of a capital nature by the payer. Nor is the relevant question the nature of the expenditure made by the taxpayer in the construction of the plant. A taxpayer may apply income in the acquisition of a capital asset or, conversely, apply a capital receipt to discharge a liability of a non-capital nature. … And thus a receipt may be income although the recipient is bound to apply it for the purpose of discharging a capital liability …".^[83] GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation [1990] HCA 25 ; (1990) 170 CLR 124 ; 93 ALR 193 ; 21 ATR 1 ; 64 ALJR 392 ; [1990] ATC 4,413 at 136; 199; 6; 395-396; 4,149 per Brennan, Dawson, Toohey, Gaudron and McHugh JJ
• (10) "…[A]s a general proposition, a gain derived from property has the character of income and this includes a gain to an owner who has waited passively for that return from property …".^[84] McNeil [2007] HCA 5 ; (2007) 229 CLR 656 ; 233 ALR 1 ; (2007) 64 ATR 431 ; (2007) 60 ACSR 532 ; (2007) 81 ALJR 638 at [21]; 663; 6; 537; 643 per Gummow, Hayne, Heydon and Crennan JJ; Callinan J dissenting. Mrs McNeil was a shareholder in St George Bank Ltd (SGL), which adopted a scheme to buy back issued shares in order to reduce its capital. For every 20 of its ordinary shares, St George issued one put option (sell back right) obliging it to buy back one share for $16.50. At all times, Mrs McNeil’s shareholding remained precisely as it had been before the introduction of the scheme. The put options did not represent any portion of her rights as a shareholder under SGL’s constitution. Instead, they were generated by the execution and subsequent performance of covenants in the deeds poll. Under that deeds poll, each shareholder could acquire put options according to their shareholding. If they did not choose to acquire them within a certain period, the put options were traded by a merchant bank appointed for the purpose. That merchant bank accounted for the proceeds of the trades to a trustee who held the proceeds for those particular shareholders. The put options were issued and listed at a market value of $1.89. Mrs McNeil was paid $576.64 being $514 as the total of the proceeds of the sale of the put options that she did not take up and a sum of $62.64 being the increase in realisable value of the put options since they were issued. The smaller sum was assessable as a capital gain. The majority held that the derivation of $514 was a gain derived from property and so a derivation of income and assessable as such. It was not receipt of a distribution in any form of SGL’s assets. It was not an amount provided “ in satisfaction ” of the rights of shareholders under SGL’s constitution. The scheme took its life from the deeds poll alone. Consequently, no proper analogy could be drawn between dividend cases and the sum paid under the deeds poll or between bonus shares and that sum.

Is the contribution made by Ambassador to Trinity Ms Yip's assessable income under s 6-5(1) of ITAA97?

46. The Commissioner has submitted that the amount of the contribution by Ambassador to Trinity is assessable as Ms Yip's ordinary income under s 6-5 of ITAA97 for three reasons: it is an amount deducted from her salary or wages for that income year; it has been made on her behalf and at her request; and, under s 6-5(4), she must be taken to have received the amount for, when it was contributed by Ambassador to Trinity, the contribution was made at, and in accordance with, her direction.

47. The starting point of my consideration is that Ms Yip is an employee of Ambassador. As such, she is entitled to remuneration payable by way of a salary and may, from time to time, be entitled to be paid a bonus. In return, Ms Yip must perform the duties for which Ambassador has engaged her. The remuneration that she is paid, be it by way of salary or bonus, is ordinary income. It is paid as consideration for her having undertaken the duties in the period to which the remuneration relates. It is payable to her on the completion of her duties in that period and is received or derived by her at that time. It is income according to ordinary concepts and so ordinary income.

48. Should Ms Yip ask Ambassador to deduct a fixed dollar amount from her gross salary for each pay period commencing from a date in the future and to provide her with one or other of the benefits offered to her and including the Employee Share Trust, there would be no change in the duties she would perform for Ambassador in each of those future pay periods. All that would change as a result of her request would be that she would forego receipt of that fixed dollar amount as part of her salary in each of the forthcoming periods and, in its place, she would receive what is described as a "benefit". Should she make a similar request in relation to bonuses to which she may become entitled in the future, the result would be the same. The upshot would be that, as consideration for Ms Yip's performing her duties, she would receive the amount of remuneration agreed between her and Ambassador less the fixed dollar amount she has asked Ambassador to deduct and the "benefit".

49. Were it not for Ms Yip's request, this would not be the "upshot". She would be paid the full monetary amount of the remuneration agreed upon between her and Ambassador. Her request must be viewed as a direction to Ambassador to pay part of her remuneration to her in monetary form and part in the form that would acquire her a "benefit". Therefore, she has asked Ambassador to apply or deal with that part of her remuneration on her behalf and as she has directed. That conclusion would lead to the further conclusion that Ms Yip has received the amount of remuneration that she has asked Ambassador to apply or deal with on her behalf. The effect of s 6-5(4) would be that she has derived that amount of remuneration at the same time that she derives the amount of remuneration that is not the subject of her request. It is ordinary income according to ordinary concepts.

50. It will also be assessable income unless it is a fringe benefit within the meaning of s 136(1) of the FBTA Act. That follows from the fact that s 23L(1) of ITAA36 provides that:

"Income derived by a taxpayer by way of the provision of a fringe benefit is not assessable income and is not exempt income of the taxpayer."

51. A fringe benefit is a "benefit" of a type referred to in the definition of "fringe benefit" in s 136(1) of FBTA Act. The word "benefit" is defined in very broad terms to include "any right …, privilege, service or facility …". Without limiting its generality, the definition then goes on to specify three broad categories of arrangements under which a "… a right, benefit, privilege, service or facility …" might be provided. The definition is somewhat difficult for the word "benefit" is first defined by reference to a right, privilege, service or facility and the examples are described by reference to those four concepts as well as by reference to a benefit. Furthermore, the words tend to be defined, at least to some extent, by reference to each other:

"right": "… (noun) 1 … a power, privilege, title, etc that someone may claim legally or that is morally due to them … "^[85] Chambers 21st Century Dictionary, 1999, reprinted 2004, Chambers

"benefit: "… something good gained or received. …"^[86] Ibid

"privilege": "… a right granted to an individual or a select few, bestowing an advantage not enjoyed by others. …"^[87] Ibid

"service": "… work carried out for and on behalf of others. …"^[88] Ibid

"facility": "… an arrangement, feature, attachment, etc that enables someone to do something. …"^[89] Ibid

52. The words "service" and "facility" would seem inappropriate in the circumstances of this case but that leaves me with the other three to consider. What Ms Yip receives in return for her voluntarily foregoing remuneration is that she becomes a person to whom Trinity may, in its discretion, make a loan for a specific purpose i.e. for the purpose of applying to Trinity for the issue of Share Units in AEST. Is that a benefit in the sense in which that word is defined in s 136(1) of the FBTA Act?

53. I will begin with the question: Is Ms Yip able to claim anything, whether legally or morally, in return for her foregoing remuneration? Has she acquired a "right", "privilege" or "benefit"? I have looked to cases that have considered s 8 of the Acts Interpretation Act 1901 (AI Act) in an attempt to work out what a "right", "privilege" or "benefit" may look like and to explore any boundaries that may exist. I do not suggest that their interpretation in one context is necessarily that in the other but it provides a starting point for thinking about the way in which words are used when I am not aware of any cases considering them in the context of s 136(1) of the FBTA Act.

54. Section 8 of the AI Act provides, in part, that:

"Where an Act repeals in the whole or in part a former Act, then unless the contrary intention appears the repeal shall not:

• (a)-(b) …
• (c) affect any right privilege obligation or liability acquired accrued or incurred under any Act so repealed;
• (d)-(e) …

  …"

55. The word "right" is given an interpretation that is not confined by "… an exercise in analytical jurisprudence, or with the classification, expressed in terms of correlatives and opposites, that delights and attracts both disciples and critics to Hohfeld. …".^[90] Mathieson v Bureon [1971] HCA 4 ; (1971) 124 CLR 1 at 12 per Windeyer J It is a "… specific right which in one way or another has been acquired by an individual, and which some persons have got and others have not got …".^[91] Starey v Graham [1899] 1 QB 406 at 411 quoted with approval by Sugerman P in Boyce v Hughes (1970) 72 SR (NSW) 54 at 57 It may be described as "… an immunity, or exemption from legal consequences …"^[92] Mathieson v Bureon [1971] HCA 4 ; (1971) 124 CLR 1 at 12 per Windeyer J or even a "power", to use the language of jurisprudence.^[93] Mathieson v Bureon [1971] HCA 4 ; (1971) 124 CLR 1 at 13 per Windeyer J A right may be qualified, limited or transitory but to say so "… is to define or explain the nature of the right but is not to deny its existence.'^[94] Mathieson v Bureon [1971] HCA 4 ; (1971) 124 CLR 1 at 23 per Gibbs J It must be something more than merely:

"… a power to take advantage of an enactment, assuming that may properly be described as a right … and does not apply where there is merely a hope or expectation that a right will be created …; but it does protect anything that may truly be described as a right, 'although that right might fairly be called inchoate or contingent' …."^[95] Mathieson v Bureon [1971] HCA 4 ; (1971) 124 CLR 1 at 23 per Gibbs J and see also Esber v The Commonwealth [1992] HCA 20 ; (1992) 174 CLR 430 ; 106 ALR 577 at 440; 583 per Mason CJ, Deane, Toohey and Gaudron JJ

56. These principles are illustrated by the case of
Esber v The Commonwealth ^[96] [1992] HCA 20 ; (1992) 174 CLR 430 ; 106 ALR 577 at 440; 583 per Mason CJ, Deane, Toohey and Gaudron JJ; Brennan J dissenting in which the High Court considered the effect of the repeal of certain redemption provisions in Compensation (Commonwealth Government Employees) Act 1971 by the Commonwealth Employees' Rehabilitation and Compensation Act 1988 on Mr Esber's right to seek review of a decision rejecting his application to redeem his weekly payments of compensation so that he might receive a lump sum in their place. The decision had been made before the legislation had been amended and so had his application for review to the Tribunal. The majority of the High Court cast the right in terms of the right to review rather than in terms of a right to redeem. They said:

"Once the appellant lodged an application to the Tribunal to review the delegate's decision, he had a right to have the decision of the delegate reconsidered and determined by the Tribunal. It was not merely 'a power to take advantage of an enactment' …[
Mathieson v Burton (1971) 124 CLR 1, per Gibbs J at 23; and see
Robertson v City of Nunawading [1973] VR 819 ]. Nor was it a mere matter of procedure … [See
Newell v R (1936) 55 CLR 707, at 711-12]; it was a substantive right … [See, by way of analogy,
Australian Coal and Shale Employees Federation v Aberfield Coal Mining Co Ltd (1942) 66 CLR 161, at 175, 178, 185, 194;
Colonial Sugar Refinery Co v Irving [1905] AC 369, at 372-3]. Section 8 of the Acts Interpretation Act protects anything that may truly be described as a right, 'although that right might fairly be called inchoate or contingent' …[
Free Lanka Insurance Co Ltd v Ranasinghe [1964] AC 541, at 552; see also
Continental Liqueurs Pty Ltd v G F Heublein and Bro Inc (1960) 103 CLR 422, at 426-7;
Director of Public Works v Ho Po Sang [1961] AC 901]. This was such a right. It was a right in existence at the time the 1971 Act was repealed. That being so, and in the absence of a contrary intention, the right was protected by s 8 of the Acts Interpretation Actand was not affected by the repeal of the 1971 Act."^[97] [1992] HCA 20 ; (1992) 174 CLR 430 ; 106 ALR 577 at 440; 583

57. The concept of a "right" in the context of s 8 of the AI Act is broad but not without its limits. A "right" must have some substance so that it can be said that "… in one way or another [it] has been acquired by an individual, and which some persons have got and others have not got …".^[98] Starey v Graham [1899] 1 QB 406 at 411 quoted with approval by Sugerman P in Boyce v Hughes (1970) 72 SR (NSW) 54 at 57 It must be something that is due to them as is made clear by the ordinary meaning of the word i.e. "… a power, privilege, title, etc that someone may claim legally or that is morally due to them …". It is not an obligation or a liability or a penalty.

58. There seems to me that the word "privilege", which is also used in s 8(c) of the AI Act, should be accorded its ordinary meanings, as I have set out above, but interpreted according to the same boundaries as those accorded to the word "right". A "privilege" may be inchoate or contingent as may a "right", but it too must be substantive, and not procedural, and must be more than mere expectation. The ordinary meanings of "right" and "privilege" may extend to something described as a "power" and even an "immunity", if using the language of jurisprudence, but they do not extend to an "obligation" or a "liability".

59. Returning to the words of the definition of a "benefit" in s 136(1) of the FBTA Act, it seems to me that the words "right", "privilege", "service", "facility" or "benefit" are intended to have their ordinary meanings as I have set out in [51] above but within slightly more confined boundaries. Their boundaries are drawn by the definition of "benefit" itself and the context of the FBTA Act in which it is located. The object of the FBT Act is "… to impose a tax in respect of the value of certain fringe benefits provided in respect of the employment of employees."^[99] FBT Act, Long Title The FBTA Act is concerned with its assessment and collection. Fringe benefits tax is payable by employers and, as the then Treasurer said in introducing the Fringe Benefits Tax Bill 1986:

"What is being taxed is the value of benefits that are given to employees as an effective part of the employees' remuneration. …"^[100] Hansard, House of Representatives, 2 May 1986, Second Reading Speech, the Hon Mr Keating MP, Treasurer at 3022

60. Taxation in this form had come about because there had:

"… over the years been a very strong movement towards the remuneration of employees - especially higher income earners - by fringe benefits packages which allowed income tax to be avoided on substantial parts of overall remuneration. So-called tax-free perks came to dominate salary package negotiations and packages were openly advertised in the market place. Increasingly innovative deals were emerging particularly after the demise of the paper tax avoidance schemes in the early 1980s. All of this was aggravated by the inability of the existing income tax system to exact tax effectively from recipients of fringe benefits. …"^[101] Hansard, House of Representatives, 2 May 1986, Second Reading Speech to Fringe Benefits Tax Assessment Bill 1986 , the Hon Mr Keating MP, Treasurer at 3019

61. Although there were limited exceptions in the case of employers who were religious bodies and in the case of certain benefits such as superannuation:

"… the purpose of the tax is to remove a serious gap in the income tax law and ensure that all forms of remuneration paid to employees bear a fair measure of tax …".^[102] Hansard, House of Representatives, 2 May 1986, Second Reading Speech to Fringe Benefits Tax Assessment Bill 1986 , the Hon Mr Keating MP, Treasurer at 3020

62. The intention of the FBT Act and the FBTAA, which are clearly central to the fringe benefits tax regime, and s 23L of ITAA36 is that, subject only to a handful of exemptions and exceptions, tax is paid on the remuneration paid to an employee. It matters not how that remuneration is paid. If it takes the form of a fringe benefit, it is payable under the FBTA Act. If it does not and is otherwise assessable income, it is paid under ITAA97. Against this background, there is no room for a "benefit" to be contingent on something that might or might not happen whether it be a benefit that can be regarded as a benefit in the form of a right, privilege, service or facility or simply a benefit. It must be something that the employee is given in lieu of monetary remuneration i.e. "something good gained or received" whatever form that "something good" takes.

63. The examples given in the definition of "benefit" in s 136(1) illustrate some of the forms that a benefit might take. They do not, of course, limit the meanings to be attributed to the word "benefit". Instead, they illustrate the breadth of meaning intended by the definition and the intention that the tax has:

"… a wide sweep as to the kinds of fringe benefits it will cover. As stated in the 19 September 1985 announcement, the types of benefits to be taxed include employer-provided motor vehicles, free or low-interest loans, residential accommodation, board and excessive living-away-from-home allowances, goods and services sold at or below cost, or provided free, and expenses paid on behalf of employees. In fact, unless specifically exempted, any form of employee fringe benefit will come within the new rules."^[103] Hansard, House of Representatives, 2 May 1986, Second Reading Speech to Fringe Benefits Tax Assessment Bill 1986 , the Hon Mr Keating MP, Treasurer at 3020

64. The breadth is clear but a "benefit" must remain a benefit i.e. something gained or received. A benefit cannot be a liability for a liability is not a benefit on any understanding of the words. A liability is a debt or an obligation; something that a person becomes responsible for. How then, can a free or low-interest loan given to an employee as part of a remuneration package and requiring a person to assume a responsibility, duty or liability to repay that loan, be a benefit? That brings to mind to (c) of the definition of "benefit" in s 136(1) when it refers to a benefit provided under an arrangement for or in relation to the lending of money. The benefit that is contemplated under that paragraph might take the form of the savings in interest payments that the employee would otherwise incur had he or she obtained that loan from a bank or other lending institution. In that example, the liability and benefit would arise simultaneously.

65. That is not a situation in which Ms Yip finds herself. In her case, all that she acquires in return for her voluntarily foregoing remuneration is that she becomes a person to whom Trinity may, in its discretion, make a loan for a specific purpose i.e. for the purpose of applying to Trinity for the issue of Share Units in AEST. She has become a member of an exclusive group whose members may be chosen as the recipients of a loan. There are four facts that underline the discretionary nature of the loan. The first is that the amounts of monies or loans of monies that Ambassador settles on Trinity "… shall be applied by the Trustee at its discretion in making loans to Miss. Yip and other Eligible Employees for the purpose of making application to the Trustee for the issue of Share Units in the Trust …". The second is that the application for Share Units and the request for a loan are accompanied by a direction to Trinity to apply the loan monies in payment of the issue price of the Share Units "… in the event that the Trustee approves the loan and the application for the Issue of Share Units …". The third is that "The loan application shall be approved or not approved at the absolute discretion of the Trustee but after consultation with Ambassador …". The fourth is that "In exercising the powers, authorities and discretions vested in it by the Trust Deed, the Trustee shall have an absolute and uncontrolled discretion (clause 16.9 …)." Therefore, Trinity may never make the loan to Ms Yip.

66. In sacrificing remuneration in order to become a person to whom Trinity may, in its discretion, make a loan for a specific purpose, Ms Yip has not received a benefit as that term is defined in s 136(1) of the FBTA Act. She gains no right or privilege to anything. Any right or privilege that she has is dependent on Trinity's exercising its discretion to offer her a loan. She is offered no service or facility but, if she were, again they are dependent on Trinity's exercise of discretion. This is not a situation in which she has gained or received "something good" to use the ordinary meaning of the word "benefit". What she has gained in return for her voluntarily foregoing remuneration is an opportunity to be selected by Trinity to incur a debt.

67. If it be thought that some form of an analogy could be drawn from
Ballarat Brewing Co Ltd v Federal Commissioner of Taxation ^[104] In Ballarat Brewing Co Ltd v Federal Commissioner of Taxation , Fullagar J considered how the appellant’s gross profits should be brought to account. The appellant allowed its customers a discount for prompt payment and a rebate on the agreed gross purchase price if its customers fulfilled certain conditions. In practice, discounts and rebates were rarely disallowed. The Commissioner argued that, in any particular accounting period, no regard should be had to discounts and rebates until the appellant had actually allowed them by accepting the net price from the customer as payment in full for the goods to which they related. Justice Fullagar did not accept this argument preferring the appellant’s argument that regard should only be had to the price less the deductions and rebates. His Honour said that it was common ground that the account proceeded on an accruals or earnings basis and continued: “… It is the appropriate figure for book debts that is in question. This is in essence a matter of estimation …. And (to quote again from the judgment of Dixon J in Carden’s Case …) ‘the admissibility of the method which in fact has been pursued must depend upon its actual appropriateness. In other words, the inquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer’s true income’. What I have said provides, in my opinion, the only proper approach to the question in the present case. And, when the question is so approached, the answer seems to me to be plain. Which figure – the Commissioner’s or the company’s – represents or more nearly represents, the truth and reality of the situation? The company’s figure brings into account what the company will, in the light of all past experience and policy, almost certainly receive in respect of book debts – no more and no less. The commissioner’s figure brings into account sums which the company will certainly, or almost certainly, not receive in respect of book debts. A trading account and profit and loss account based on the latter figure would be misleading, and there is nothing in the Act which requires the assessment of income on the basis of accounts which would be misleading in this respect.” ( [1951] HCA 35 ; (1951) 82 CLR 364 ; 25 ALJ 220 at 369; 222 ) so that I could, in some way, assume Trinity will exercise its discretion in favour of Ms Yip, I do not think that it can be drawn. The facts on which the private ruling is based neither state nor assume that state of affairs. Rather, they emphasise the discretionary nature of Trinity's decision when Ms Yip applies for Share Units and requests a loan.

68. For these reasons, I am not of the view that Ms Yip has received, or will receive, a "benefit" within the meaning of s 136(1) of the FBTA Act. Therefore, she has not derived, and will not derive, income by way of the provision of a fringe benefit and s 23L of ITAA36 does not step in to render her income not assessable income. It remains assessable income under s 6-5(1) of ITAA97. For that reason, I agree with the Commissioner's answer to the first question or issue.

Will the contributions of monies by Ambassador to the Trustee under clause 4.1 of the Trust Deed be included as Ms Yip's assessable income under s 15-2 of ITAA97?

69. In view of the conclusion that I have reached on the first question, I must answer this question in the negative. As the contributions of monies are assessable as ordinary income under s 6-5 of ITAA97, they are not included in assessable income under s 15-2 of ITAA97. That is the effect of s 15-2(3)(d).

Will any payments made by Trinity under cl 11.4(j) of the Trust Deed be Ms Yip's assessable income under s 6-5 of ITAA97?

70. Clause 11.4(j) of the Trust Deed states:

"When instructed by the Employer, the Trustee at its discretion may pay on behalf of the Employer amounts to the Eligible Employee from repayments of loan pursuant to Clause 11.4(h) as salary minus amounts withheld as Pay As You Go tax instalments."

71. Clause 11.4(h) refers to the situation in which Ms Yip would be entitled to a Cancellation Entitlement. It requires Trinity to set off the amount payable by Ms Yip to it against the amount payable by it to her. Ms Yip's liability to Trinity is reduced by the amount set off. The amount of the set off represents the loan Trinity made to Ms Yip. That equates to the amount that cl 11.4(j) refers to when it provides that, on Ambassador's instruction, Trinity may, at its discretion, pay the amount as salary to Ms Yip. It also equates to the amount that was settled by Ambassador on Trinity for the purpose of its lending that amount to Ms Yip. That amount is that which is attributable to salary or bonus remuneration that Ms Yip has sacrificed under an agreement with Ambassador. Finally, that amount is the amount that I have found is assessable income under s 6-5(4) of ITAA97 at the time it was contributed under the salary sacrifice arrangement. The time of its contribution is its taxing point and not the time at which it returns to Ms Yip should Ambassador so direct and Trinity so decide. Therefore, the third question must be answered in the negative.

72. For these reasons:

"in respect of Tribunal proceedings Nos. 2010/0599-601 for review of the applicant's application to review the respondent's objection decision disallowing its objection against the private ruling issued on 9 October 2009 for the years ending 30 June 2010, 2011 and 2012, I:

• (1) affirm the respondent's objection decision to disallow the applicant's objection against its answers to questions (1) and (3); and
• (2) set aside the respondent's objection decision to disallow the applicant's objection against its answer to question (2) in so far as that answer states:

  "Yes, to the extent that the contributions of monies by Ambassador to the Trustee pursuant to clause 4.1 of the Trust Deed are not included as assessable income of Ms Yip under section 6-5 of the ITAA 1997."

  and substitute the answer:

  "No ".

Proceedings 2010/0965-967 (related private ruling)

73. In view of my decision on the private ruling, there is strictly no need to consider the related private ruling for Part IVA of ITAA36 does not arise. Furthermore, there may be practical difficulties in considering Part IVA of the sort raised by the Full Court of the Federal Court in
Bellinz and Others v Federal Commissioner of Taxation ^[105] 98 ATC 4634 ; (1998) 84 FCR 154 ; 155 ALR 220 ; 155 ALR 220 ; 98 ATC 4634 ; 39 ATR 198 ; Hill, Sundberg and Goldberg JJ (Bellinz). Their Honours said:

"… Section 177D(b) sets out the various matters to which the Commissioner shall have regard in reaching the conclusion that a person or more than one person entered into or carried out the scheme or any part of the scheme for the purpose of enabling a relevant taxpayer to obtain a tax benefit in connection with it. One of those matters is 'the manner in which the scheme was entered into or carried out'. Where the arrangement in respect of which a private ruling is sought has not yet been carried out, it is difficult to see how there could be adequate facts upon which to base a private ruling. Even where the scheme has been carried out, there may in many cases be difficulty in obtaining all relevant facts, particularly those relating to the manner in which the scheme was entered into or carried out. …"^[106] (1998) 84 FCR 154 ; 155 ALR 220 ; 98 ATC 4634 ; 39 ATR 198 at 170; 235; 4647; 212

74. Justice Hill also referred to the difficulty in
Lamont v Commissioner of Taxation ^[107] 2005 ATC 4411 ; [2005] FCA 513 ; (2005) 144 FCR 312 ; 219 ALR 678 ; 59 ATR 374 (Lamont) and thought that there was much to be said for the argument that Part IVA does not operate to bring about a result until a determination has been made. If a determination had been made, and it had not, the result was to make an amount that had been deductible not deductible. That meant that, at the time the ruling spoke, there could be no application of Part IVA. Therefore, Hill J decided that the questions and answers to the application of Part IVA should be excised from the ruling. In their place, reference would be made to the fact that the answers could be altered if the Commissioner were, in any particular year of income, to make a determination under s 177F which operated to disallow the deductions otherwise allowable.

75. In this case, the first ruling is to the effect that certain monies are assessable income. Unlike the rulings in Bellinz and Lamont, the ruling under Part IVA is not part of that first ruling. It is instead a separate ruling setting out how the Commissioner would view the same facts if those monies were not assessable income under s 6-5 of ITAA36 as he considers them to be. That would seem to be consistent with the object of Part 5.5 of the TA Act, which is to provide an insight into the Commissioner's thinking on how the laws he administers apply, or would apply, to a taxpayer's particular circumstances.^[108] TA Act, s 357-5(1) If Ms Yip chooses to maintain that the amounts of salary and bonus remuneration she sacrifices are not returnable as salary sacrifice, she will know the Commissioner's view on the subject. That can only assist her in planning her affairs. When given in a related ruling, the approach would not seem to be at odds with the caution expressed in Bellinz and Lamont and Dr Orow did not suggest that I should proceed with any caution in this regard. Therefore, I have considered the related ruling on the basis of an assumption that, contrary to the conclusion reached in the first ruling, the monies are not assessable income under s 6-5 of ITAA36.

Relevant legislation

76. Part IVA of ITAA36 is entitled "Schemes to reduce income tax". In so far as it is relevant in this case, s 177F(1) of ITAA36 provides:

"Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may:

• (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or
• (b)-(d) …
• and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination."

77. As explained by Gummow and Hayne JJ in
Federal Commissioner of Taxation v Hart ^[109] 2004 ATC 4599 ; [2004] HCA 26 ; (2004) 217 CLR 216 ; 206 ALR 207 ; 78 ALJR 875 ; 55 ATR 712 ; Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ (Hart):

"… Part IVA falls for consideration only where the Commissioner has made a determination under s 177F(1). A determination can be made only where a tax benefit has been obtained (or, but for s 177F(1), would be obtained) by a taxpayer in connection with a scheme to which Pt IVA applies. It follows, of course, that the concepts of 'tax benefit', 'scheme' and 'scheme to which this Part applies' all have their part to play in deciding whether the power given to the Commissioner by s 177F(1) can be exercised. …"^[110] [2004] HCA 26 ; (2004) 217 CLR 216 ; 206 ALR 207 ; 78 ALJR 875 ; 55 ATR 712 at [37]; 233; 217; 883; 722

A. A "tax benefit"

78. The reference made in s 177F(1) to a taxpayer's obtaining a "tax benefit" is, subject to s 177C, a reference in Part IVA of ITAA36 to:

"… the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

• (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer for that year of income if the scheme had not been entered into or carried out; or
• (b)-(bb)…

  and, for the purposes of this Part, the amount of the tax benefit shall be taken to be:

• (c) in a case to which paragraph (a) applies - the amount referred to in that paragraph; and
• (d)-(f) …".^[111] ITAA37, s 177C(1)

79. Section 177A(4) expands upon what is meant by a scheme's being "carried out" when it provides that:

"A reference in this Part [Part IVA] to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons."

B. Tax benefit obtained in connection with a "scheme" to which Part IVA applies

80. Both ss 177F(1) and 177C refer to a tax benefit obtained in connection with a scheme to which Part IVA applies. That requires identification in the first instance of a "scheme". For the purposes of the Part, a "scheme" is defined to mean:

• "(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
• (b) any scheme, plan, proposal, action, course of action or course of conduct."^[112] ITAA36, s 177A(1)

81. Section 177A(3) expands upon paragraph (b) of this definition when it provides that:

"The reference in the definition of scheme … to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to the unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be."

C. Tax benefit obtained in connection with scheme "to which Part IVA applies"

82. In order to identify a scheme to which Part IVA applies, regard must be had to s 177D of ITAA36. In so far as its provisions are relevant to the circumstances of this case, that section provides:

"This Part applies to any scheme … that has been or is carried out or commenced to be carried out … whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:

• (a) a taxpayer (in this section referred to as the relevant taxpayer ) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
• (b) having regard to:
  • (i) the manner in which the scheme was entered into or carried out;
  • (ii) the form and substance of the scheme;
  • (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
  • (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
  • (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
  • (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
  • (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
  • (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);

    it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers)."

83. Section 177A(5) explains that:

"A reference in this Part to a scheme or part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose."

Submissions on behalf of Ms Yip

84. Dr Orow submitted that to apply the provisions of Part IVA in the circumstances of this case would be to create significant uncertainty in the operation of the FBTA Act and to undermine generally accepted principles and practices of salary sacrifice. It is difficult to see, he continued, how Part IVA could apply to include the amount of the contribution in Ms Yip's assessable income when the benefits of selection and the interest free loan fall within the FBTA Act. He referred to the decision of Senior Member Pascoe in
Experienced Tours Pty Ltd v Federal Commissioner of Taxation ^[113] 2006 ATC 2232 ; [2006] AATA 517 ; at [19]; 2,241 (Experienced Tours). The operation of the FBTA Act must not be undermined by Part IVA. Parliament has intended that salary earners may choose between receiving their remuneration in the form of salary and bonuses or of fringe benefits. Each carries its own taxation consequences and:

"In enacting the FBT Act Parliament must have contemplated that taxpayers would avail themselves of such benefits and would do so in a manner and in circumstances and for the dominant purpose of reducing their overall taxation exposure."^[114] Dr Orow’s submissions at [105]

85. Part IVA does not apply because Parliament could not have intended to displace the incidence to taxation from one entity, being the employer and so Ambassador in this case, to another, being the employee and so Ms Yip. Even if it were to apply, it must not apply where there is no "misuse or abuse" of the ordinary and charging provisions of the income tax legislation read as a whole. Citing
Canada Trustco Mortgage Co v Canada,^[115] 2005 SCC 54 ; [2005] 2 SCR 601 Dr Orow submitted:

"… If and to the extent the benefit in issue is one within the scope of legislative intention then, as a matter of principle and taxation policy, Part IVA must not and cannot apply. …"^[116] Dr Orow’s submissions at [109]

86. On the facts in this case, had the scheme not been entered or carried out, no amount would have been included in Ms Yip's assessable income because:

• (1) The fact that Ms Yip was willing to sacrifice salary and bonuses as part of the plan and to defer any potential benefit under the plan for at least five years must objectively suggest that she had no immediate need for the sacrificed part of her salary and bonuses to fund her day to day living.
• (2) Rather than taking part in the plan, Ms Yip could have asked Ambassador to place the sacrificed part of her salary and bonuses into a complying superannuation fund. Therefore, a reasonable counterfactual would be that, had there been no plan, those amounts would have been contributed to a superannuation fund and would not have been included in Ms Yip's assessable income.
• (3) Alternatively, Ms Yip could have requested Ambassador to provide a fringe benefit in lieu of her prospective salary and wages. The same conclusion would be reached in relation to that counterfactual.

87. On those same facts, a reasonable person could not reasonably conclude that persons who would enter or carry out the scheme, being Ms Yip, Ambassador and Trinity, would do so for the dominant purpose of enabling Ms Yip to obtain the tax benefit in connection with the scheme as required by s 177D. In his written submissions, Dr Orow pointed to the following matters in support of his submission:

• (1) Ambassador's dominant purpose is that expressed in the deed and Handbook i.e. to put in place a business plan to assist in attracting, retaining and motivating Ambassador's key employees and associated entities and to provide a long term equity incentive structure to deliver equity based benefits to those employees.
• (2) Trinity's dominant purpose is to comply with the terms of the AEST deed and to administer that trust.
• (3) The dominant purpose of the advisers is to assist Ambassador to achieve its commercial objectives.
• (4) Ms Yip's dominant purpose is to participate in Ambassador's future growth and to derive benefits referable to its success. Her participation in the plan is, in effect, an investment in Ambassador's future growth potential.

88. Furthermore, Dr Orow submitted, the factors specified in s 177D either point away from the dominant purpose of obtaining a tax benefit or are neutral for the following reasons:

• (1) The manner in which the scheme was entered and carried on was relatively simple and designed with a minimum number of legally effective steps in order to achieve Ambassador's long term commercial objectives. The arrangement provided discernible and identifiable non-tax benefits for both Ms Yip and Ambassador.
• (2) The form and substance of the arrangement was the same. Ambassador sought to confer a benefit upon Ms Yip in a manner that:
  • (a) encouraged continued employment and loyalty by requiring her to show her loyalty for a period of time before becoming entitled to benefits under the plan; and
  • (b) preserved Ambassador's share value and strengthened its balance sheet while not weakening its financial position.

89. Dr Orow submitted that the plan had been modelled on the principles contained in the Commissioner's Taxation Rulings TR 2001/10 and 2010/6. They are public rulings and the Commissioner is bound by them by virtue of s 357-60 of the TA Act. Referring to
Bellinz and Others v Federal Commissioner of Taxation,^[117] 98 ATC 4634 ; (1998) 84 FCR 154 ; 155 ALR 220 ; (1998) 39 ATR 198 ; Hill, Sundberg and Goldberg JJ

Dr Orow said:

"… the Commissioner is obliged to treat taxpayers in general and the Applicant in particular fairly and consistently and not to discriminate between taxpayers. [In] Equality of treatment of taxpayers is an aspect of unreasonableness of decision-making. The Commissioner could not depart from the representations or the principles contained in those rulings without giving prior notice to the Applicant."^[118] Dr Orow’s submissions at [132]

Relevant judicial authorities

A. There must be a "scheme"

90. The definition of the word "scheme" is cast very broadly but it is cast in two distinct groups. The ordinary meanings of the words given in the Shorter Oxford English Dictionary^[119] Shorter Oxford English Dictionary, 5th edition, 2002, Oxford University Press and The Macquarie Dictionary^[120] Macquarie Dictionary, revised 3rd edition, 2001, The Macquarie Library Pty Ltd chosen in the first group (i.e."any agreement, arrangement, understanding, promise or undertaking …") carry with them the notion of something that has been planned or settled upon. In the case of an "agreement, arrangement … [or] understanding", the ordinary meanings carry with them the notion of a plan or settlement between two parties or among more. The ordinary meanings of the words "promise or undertaking" carry with them the notion of a commitment, assurance or a pledge that could be given either unilaterally by a person or mutually between two persons. Again, there is the notion of something that has been planned or settled upon.

91. The second group of words chosen to define "scheme" (i.e. "any scheme, plan, proposal, action, course of action or course of conduct") is more eclectic. It is in this group that the word is defined by reference to itself. Of that word, Mason J said, citing
Clowes v Federal Commissioner of Taxation,^[121] (1954) 91 CLR 209 at 225 per Kitto J all that it "… requires is that there should be 'some programme, or plan of action'."^[122] Australian Softwood Forests Pty Ltd v Attorney-General (N.S.W.) ex relatione Corporate Affairs Commission (1980-81) 148 CLR 121 at 129 In
Investment and Merchant Finance Corporation Ltd v Federal Commissioner of Taxation,^[123] (1970) 120 CLR 177 at 189 Windeyer J considered the concept of profit arising from the carrying on or carrying out of any profit-making "undertaking or scheme". He said that this presupposes activities which are "co-ordinated by plan and purpose". The word "plan" carries with it the notion of a scheme. In referring to a scheme or plan that is put forward, the word "proposal" refers to the step before there is a scheme or a plan. By way of contrast, the word "action" denotes a thing that has been done or a deed. "Conduct" may refer to "… Leadership, command … Direction, management; handling; …" or "… Manner of conducting oneself or one's life; behaviour …".^[124] The New Shorter Oxford English Dictionary, 1993 In doing so, it may refer to things or deeds that have been done or to a direction that can be gleaned from those things or deeds.

92. The word "course" is used in both the expressions "course of action" and "course of conduct". In so far as they are relevant, its ordinary meanings include " I Action, direction, or place of running. … 2. Onward movement in a particular path … II fig. Of time, events, or action. 11 The continuous … succession (of events); progress onward or through successive stages …".^[125] Shorter Oxford English Dictionary, 5th edition, 2002, Oxford University Press It may also be a "… 7. a particular manner of proceeding: try another course with him. 8. a systemised or prescribed series: a course of studies, lectures, medical treatments, etc. …".^[126] Macquarie Dictionary, revised 3rd edition, 2001, The Macquarie Library Pty Ltd Taken with the ordinary meanings of the words "action" and "conduct ", the expressions "course of action" and "course of conduct" then refer to those things or deeds that have been done that have about them some progression towards an objective or set of objectives. Whether or not all, or any, of those objectives are achieved is not to the point. What is to the point is that there is a progression.

93. A number of cases have considered the word "scheme" in a variety of contexts. They have considered not only its meaning but the proper approach to be adopted in identifying whether certain actions or events have been in some specified way a result of a scheme. In the case of
Steinberg v Federal Commissioner of Taxation,^[127] 75 ATC 4221 ; (1973-5) 134 CLR 640 ; Barwick CJ, Menzies, Gibbs and Stephen JJ the High Court considered an appeal from Mason J sitting at first instance. His Honour had considered s 26(a) of ITAA36 had provided that the assessable income of a taxpayer included "… profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making under-taking or scheme" and had said:

"The word 'scheme' in s. 26(a) connotes some 'programme or plan of action' (
Clowes v. Federal Commissioner of Taxation (1954) 91 CLR 209, at p 225, per Kitto J.;
XCO Pty. Ltd. v. Federal Commissioner of Taxation (1971) 124 CLR 343, at p 349, per Gibbs J.). In
Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation 70 ATC 4001; (1970) 120 CLR 177, at pp 188-189, reversed on appeal (1971) 125 CLR 249, speaking of the expression 'undertaking or scheme' where used in s. 26(a), Windeyer J. said:

'A scheme presupposes some programme of action, a series of steps all directed to an end result. Similarly, an undertaking is an enterprise directed to an end result. Each word connotes activities that are co-ordinated by plan and purpose - that whatever is done under the scheme or pursuant to the undertaking is done as a means to an end. There may, in one sense, be several transactions, but they are related because all directed to the attainment of the one end, profit.'

But in my view it is not an essential element of a profit-making scheme in s. 26(a) that every step which culminates in the making of a profit should be planned or foreseen before the scheme is put into operation. In a business transaction of this kind where property is acquired with the intention that a profit should be made out of its anticipated appreciation in value by whichever means prove most suitable, it matters not that the particular means by which the profit is to be made are left for subsequent decision."^[128] (1973-5) 134 CLR 640 at 669-670

94. On appeal in
Commissioner of Taxation v Steinberg,^[129] 75 ATC 4221 ; (1973-5) 134 CLR 640 ; Barwick CJ, Menzies, Gibbs and Stephen JJ Barwick CJ said:

"… For there to be a scheme, there must be a plan: it must be the taxpayer's plan and it must exist, in my opinion, at the time of the acquisition of the property: indeed, that acquisition, in my opinion, must be itself part of the scheme and the property acquired the intended vehicle for carrying the scheme into execution. Whilst it need not be fully conceived in all its details at the time of acquisition it must exist as a scheme which in principle embraces all the details yet to be worked out. It must, of course, be a profit-making scheme, that is to say, a scheme to make a capital profit, one which would not fall within s. 25. …

… It follows, in my opinion, that a scheme of realization of an asset not contemplated at the time of its acquisition but subsequently conceived and formulated, is not a scheme within the scope of the second limb of the section. Anything in the decided cases which would suggest that it may be such a scheme ought not, in my opinion, to be followed. I am unable, with great respect, to accept the views expressed by Sir Victor Windeyer in
Buckland v. Commissioner of Taxation (1960) 34 ALJR, esp at p 62; (1960) ALR at pp 603-604; 12 ATD, at p 169. The scheme, if there be one, must be more specific than an intention to turn to profitable account what is acquired. Of course, a scheme, entertained at the point of acquisition, may contemplate alternatives in its execution and, having determined the principles of the scheme, leave details for later decision. But, with due respect to what Sir Owen Dixon said in
Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation (1933) 50 CLR 268, there must be an identifiable specific scheme existing at the date of the acquisition of the property which is to be used to execute the scheme to make a profit. …".^[130] (1973-5) 134 CLR 640 at 687-689

95. Gibbs J expressly agreed with the approach adopted by Mason J at first instance when he had said that "it is not an essential element of a profit-making scheme in s 26(a) that every step which culminates in the making of a profit should be planned or foreseen before the scheme is put into operation." His Honour said on appeal:

"… Schemes may be precise or vague; every detail may be arranged in advance, or the working out of the plan may be left for decision in the light of circumstances as they arise. It is no objection to a plan that it allows room for manoeuvre. When property is bought with the purpose of making a profit in the easiest or most advantageous way that may present itself, and the taxpayer adopts 'one of the many alternatives' that his plan leaves open, thereby returning himself a profit, he will rightly be said to be carrying out a profit-making scheme: cf.
Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation (1933) 50 CLR 268, at p 300;
Buckland v. Commissioner of Taxation (1960) 34 ALJR, at p 62; (1960) ALR, at pp 602-603; 12 ATD, at p 169."^[131] (1973-5) 134 CLR 640 at 700

96. In looking at the meaning of "scheme" as it is defined in s 177A(1) of ITAA36, McHugh J said in
Federal Commissioner of Taxation v Spotless Services Ltd ^[132] 96 ATC 5201 ; [1996] HCA 34 ; (1996) 186 CLR 404 ; 141 ALR 92 ; 34 ATR 183 ; 71 ALJR 81 ; Brennan CJ, Dawson, Toohey, Gaudron, Gummow, Kirby and McHugh JJ (Spotless) that "The unilateral act of a taxpayer may therefore constitute a 'scheme' for the purpose of that Part[IVA]."^[133] [1996] HCA 34 ; (1996) 186 CLR 404 ; 141 ALR 92 ; 34 ATR 183 ; 71 ALJR 81 at 425; 104; 194; 90 This view accords with that later reached by Gummow and Hayne JJ in Hart:

"… [I]t is important to note that 'scheme' is defined, in s 177A(1), in terms that may not always permit the precise identification of what are said to be all of the integers of a particular 'scheme'. … This definition is very broad. It encompasses not only a series of steps which together can be said to constitute a 'scheme' or a 'plan' but also (by its reference to 'action' in the singular) the taking of but one step. The very breadth of the definition of 'scheme' is consistent with the objective nature of the inquiries that are to be made under Pt IVA."^[134] [2004] HCA 26 ; (2004) 217 CLR 216 ; 206 ALR 207 ; 78 ALJR 875 ; 55 ATR 712 at [43]; 236; 220; 885; 724-725

It also accords with that expressed by Callinan J in Hart when saying that "In almost every respect the language of the legislature is expressed in the widest possible terms."^[135] [2004] HCA 26 ; (2004) 217 CLR 216 ; 206 ALR 207 ; 78 ALJR 875 ; 55 ATR 712 at [85]; 250; 231; 893; 735

B. Identifying a "scheme to which Part IVA applies"

97. It is clear from s 177D that a scheme must have two characteristics in order to be described as a scheme to which Part IVA applies.

98. The first characteristic is specified in s 177D(a) of ITAA36 when it provides that there must be a relation between the tax benefit obtained by a taxpayer and a scheme to which Part IVA applies. Therefore, although "The definition of 'scheme' in s 177A is wide, … it must be related to the tax benefit obtained. …".^[136] Hart [2004] HCA 26 ; (2004) 217 CLR 216 ; 206 ALR 207 ; 78 ALJR 875 ; 55 ATR 712 at [9]; 225; 211; 878;n716-717 per Gleeson CJ and McHugh J The language of s 177D(a) is that the scheme is one "… where … a taxpayer … has obtained, or would but for s 177F obtain, a tax benefit in connection with the scheme …". Of these words, Callinan J said in Hart:

"The use of the word 'connection' is significant. It is a word of wider import than, for example, 'result'."^[137] [2004] HCA 26 ; (2004) 217 CLR 216 ; 206 ALR 207 ; 78 ALJR 875 ; 55 ATR 712 at [91]; 261; 742; 900; 742

99. The second characteristic is that it must be a scheme where, having regard to the eight matters specified in s 177D(b)(i) to (viii), it would be concluded that the person or persons who entered or carried out the scheme did so for the purpose of, in summary, obtaining a tax benefit in connection with the scheme. Where there is more than one purpose for a person's entering or carrying on a scheme, the purpose to which s 177D(b) refers is the dominant purpose. That is the effect of s 177A(5).

100. The nature of the task set by s 177D(b) of ITAA36, was considered by the Full Court of the Federal Court in
Peabody v Commissioner of Taxation. ^[138] 93 ATC 4104 ; (1993) 40 FCR 531 ; Ryan, Hill and Cooper JJ Hill J, with whom Ryan and Cooper JJ agreed, said of s 177D(b):

"It will be seen that the determination of what schemes fall within s 177D requires an objective conclusion to be drawn, having regard to the matters referred to in par (b) of the section, but no other matters. It is notable that the subjective purpose of any relevant person is not a matter to which regard may be had in drawing the conclusion. In this way, the provisions of Pt IVA stand in contrast to the similar provisions subsequently enacted in other legislation, for example, s 67 of the Fringe Benefits Tax Assessment Act (Cth)."^[139] (1993) 40 FCR 531 at 542

101. This passage was considered by Sackville J in
C.C. (New South Wales) Pty Limited (In Liquidation) v Commissioner of Taxation ^[140] (1997) 97 ATC 4,123 and again in the context of Part IVA of ITAA36. His Honour said:

"… This proposition was not considered by the High Court in Peabody.[^[141] Federal Commissioner of Taxation v Peabody [1994] HCA 43 ; (1994) 181 CLR 359 ; 123 ALR 451 ; 28 ATR 344 ; 94 ATC 4663 ; Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ ]Nor was it expressly considered by the High Court in Spotless. However, Hill J's observations are consistent with the way the joint judgment in Spotless states the question required by s. 177D(b) to be considered (at 102):

'The eight categories set out in par (b) of s 177D as matters to which regard is to be had 'are posited as objective facts'. That construction is supported by the employment in s 177D of the phrase 'it would be concluded that…'. This phrase also indicates that the conclusion reached, having regard to the matters in par (b), as to the dominant purpose of a person or one of the persons who entered into or carried out the scheme or any part thereof, is the conclusion of a reasonable person. In the present case, the question is whether, having regard, as objective facts, to the matters answering the description in par (b), a reasonable person would conclude that the taxpayers entered into or carried out the scheme for the dominant purpose of enabling the taxpayers to obtain a tax benefit in connection with the scheme.' [Footnotes omitted.]"^[142] (1997) 97 ATC 4,123 at 4,147

102. Section 177D(b) was again considered in
Eastern Nitrogen Ltd v Federal Commissioner of Taxation ^[143] 2001 ATC 4,164 ; [2001] FCA 366 ; (2001) 108 FCR 27 ; (2001) 188 ALR 415 ; Lee, Carr and Sundberg JJ in which Carr J, with whom Lee and Sundberg JJ agreed on this point, noted that:

"The whole tenor of the language in which s 177D(b) is expressed is that of ascertaining an objective purpose by having regard to objective facts."^[144] 2001 ATC 4,164 ; [2001] FCA 366 ; (2001) 108 FCR 27 ; (2001) 188 ALR 415 at [81]; 44; 431; 4,177

His Honour concluded that the "… focus should not be on the actual purpose of the taxpayer but on that purpose as objectively assessed …".^[145] 2001 ATC 4,164 ; [2001] FCA 366 ; (2001) 108 FCR 27 at [82]; 44; 431; 4,177 and see also Federal Commissioner of Taxation v Zoffanies Pty Ltd 2003 ATC 4,942 ; [2003] FCAFC 236 ; (2003) 132 FCR 523 ; 77 ALD 518 ; 54 ATR 280 at per Hill, Hely and Gyles JJ

103. This was explained by Hill J, with whom Hely J agreed, in
Commissioner of Taxation v Zoffanies Pty Ltd:^[146] [2003] FCAFC 236 ; (2003) 132 FCR 523 ; 77 ALD 518 ; 54 ATR 280

• "53 Section 177D requires the finder of fact to reach a conclusion whether there is a person who entered into or carried out the scheme or any part of if it for the purpose (or the dominant purpose) of enabling the relevant taxpayer or that taxpayer and another taxpayer or taxpayers each to obtain a tax benefit in connection with the scheme. However, it is clear from the terms of the section itself that that conclusion is one that must be reached having regard to the eight matters stipulated in s 177D(b) and no other matters. It follows that while the conclusion required to be drawn is one that requires consideration of the purpose or dominant purpose of a person, including the taxpayer, that conclusion can not take into account evidence of the actual purpose of a taxpayer or other person, save and except so far as that could be forensically relevant to any one of the matters specifically referred to in s 177D(b) for example, the manner in which the scheme was entered into. None of the eight matters refer to the actual purpose of any person. It also follows that generally, at least, evidence of what may be referred to as the actual or subjective purpose of the taxpayer is irrelevant. However, it may well be the case, as in the present circumstances, that evidence of subjective purpose might be admissible for the purpose of the determining some other issue in the case, for example, here, the provisions dealing with deductions for research and development expenditure. …"^[147] [2003] FCAFC 236 ; (2003) 132 FCR 523 ; 77 ALD 518 ; 54 ATR 280 at [53]; 538 ;

104. The objective nature of the task means that the operation of Part IVA does not depend on the "fiscal awareness of a taxpayer".^[148] Federal Commissioner of Taxation v Consolidated Press Holdings Ltd 2001 ATC 4343 ; [2001] HCA 32 ; (2001) 207 CLR 235 ; (2001) 179 ALR 625 ; (2001) 47 ATR 229 ; (2001) 75 ALJR 1150 at [95]; 265; 643; 247; 1164 Recognising the practical realities that many arrange their financial affairs on the basis of financial advisers, the majority of the High Court in
Federal Commissioner of Taxation v Consolidated Press Holdings Ltd ^[149] 2001 ATC 4343 ; [2001] HCA 32 ; (2001) 207 CLR 235 ; (2001) 179 ALR 625 ; (2001) 47 ATR 229 ; (2001) 75 ALJR 1150 ; Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ (Consolidated Press Holding) said:

"… In some cases, the actual parties to a scheme subjectively may not have any purpose, independent of that of a professional advisor, in relation to the scheme or part of the scheme, but that does not defeat the operation of s 177D. If, in the present case, there had been evidence which showed that no director or employee of any member of the Group had ever heard of s 79D, that would not conclude the matter in favour of the taxpayer. One of the reasons for making s 177D turn upon the objective matters listed in the section, it may be inferred, was to avoid the consequence that the operation of Pt IVA depends on the fiscal awareness of the taxpayer."^[150] [2001] HCA 32 ; (2001) 207 CLR 235 ; [2002] FLC 93-102 ; (2001) 179 ALR 625 ; (2001) 47 ATR 229 ; (2001) 75 ALJR 1150 at [95]; 265; 643; 247; 1164

105. Therefore:

"The conclusion as to dominant purpose may be reached not only with respect to the dominant purpose of the taxpayer, it may be reached by reference to the dominant purpose of any other person or persons so long as they are persons who entered into or carried out the scheme or any part of it …"^[151] Commissioner of Taxation v Sleight 2004 ATC 4477 ; [2004] FCAFC 94 ; (2004) 136 FCR 211 ; 206 ALR 511 ; (2004) 55 ATR 555 at [67]; 229; 528; …. Hill, Carr and Hely JJ at [67]; 229; per Hill J with whom Hely J agreed

106. It is clear from s 177D(b) that regard must be had to each of the matters to which it refers but, as explained by the Full Court of the Federal Court in
Calder v Commissioner of Taxation:^[152] 2005 ATC 5050 ; [2005] FCAFC 254 ; (2005) 226 ALR 643 ; 61 ATR 267 ; French CJ, Stone and Siopis JJ

"… This does not mean that each must point to the necessary purpose. Some may point one way, others another way:

It is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers.

All eight must be considered:
Federal Commissioner of Taxation v Hart (2004) 217 CLR 216; 206 ALR 207; [2004] HCA 26 (Hart) per Gummow and Hayne JJ at [70]. But as Callinan J said of the eight factors, in the same case (at [92]):

• [92] … It is not necessary of course that every one of them be relevant to every scheme. Indeed the presence or overwhelming weight of one factor alone may of itself in an appropriate case be of such significance as to expose a relevant dominant purpose.

The reference in s 177A(5) to a 'dominant purpose' in its ordinary meaning is a reference to that which was the ruling or most influential purpose: Spotless at CLR 416; ALR 97-98. The list of factors in s 177D are exhaustive of the considerations relevant to the question of dominant purpose:
Peabody v Commissioner of Taxation (1993) 40 FCR 531 at 542; 112 ALR 247 at 257… "^[153] 2005 ATC 5050 ; [2005] FCAFC 254 ; (2005) 226 ALR 643 ; 61 ATR 267 at [91]; 668; 5,071; 290

107. In considering the eight factors, it is not necessary to refer to each individually provided an examination of the whole of the reasons given for a decision show that the decision-maker "… took all of the specified matters into account in forming 'a global assessment of the purpose'. …".^[154] [2001] HCA 32 ; (2001) 207 CLR 235 ; (2001) 179 ALR 625 ; (2001) 47 ATR 229 ; (2001) 75 ALJR 1150 at [[94]; 263-264; 643; 246-247; 1163

108. The enquiry:

"… directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed. …"^[155] [2004] HCA 26 ; (2004) 217 CLR 216 ; 206 ALR 207 ; 78 ALJR 875 ; 55 ATR 712 at [66]; 243; 226; 889; 730

109. In
Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd ^[156] 2010 ATC 20-198 ; [2010] FCAFC 94 ; (2010) 186 FCR 410 ; 272 ALR 40 ; Dowsett, Edmonds and Gordon JJ (Trail Bros), Dowsett and Gordon JJ considered what was required of a taxpayer putting forward an alternative postulate:

"The alternative postulate requires a 'prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and that prediction must be sufficiently reliable for it to be regarded as reasonable' (emphasis added). 'A reasonable expectation requires more than a possibility':
Lenzo 167 FCR 255 at [122] citing
Peabody 181 CLR at 385. The question posed by s 177C(1) is answered on the assumption that the scheme had not been entered into or carried out:
Lenzo 167 FCR 255 at [121].

…

When assessing the alternative postulate or predicting the events that would or might take place, that question is answered on the assumption that the scheme has not been entered into or carried out:
Lenzo 167 FCR 255 at [121]. Put another way, s 177C does require the entirety of the scheme to be ignored:
Lenzo 167 FCR 255 at [136]. But that is not the entire question posed by s 177C. The rest of the question involves the objective enquiry of predicting the events that would have, or might reasonably be expected to have, taken place in the absence of the scheme. As Sackville J said in
Lenzo 167 FCR 255 at [128]:

[I]n determining whether the particular deduction claimed by the taxpayer would or might reasonably have been allowable, the Court must consider, in the absence of the scheme, what activity the taxpayer would have undertaken. The taxpayer can satisfy the onus of showing that he or she has not obtained a tax benefit in connection with a scheme if:

• • he or she would have undertaken or might reasonably be expected to have undertaken a particular activity in lieu of the scheme; and
• [• "the activity would or might reasonably be expected to have resulted in an allowable deduction of the same kind as the deduction claimed by the taxpayer in consequence of the scheme."^[157] Federal Commissioner of Taxation v Lenzo 2008 ATC 20-014 ; [2008] FCAFC 50 ; (2008) 167 FCR 255 ; 247 ALR 242 ; [2008] ATC 20-014 ; Heerey, Sackville and Siopis JJ at [128]; 279; 265; 8,168 per Sackville J. Passage omitted in judgment of Dowsett and Gordon JJ in Trail Bros. ]

(Emphasis added.)

The particular activity or the events that would have, or might reasonably be expected to have, taken place in the absence of the scheme and which are identified as a result of the objective enquiry are not confined or defined by the scheme. Of course, it cannot be the same complete set of events giving rise to the scheme - that would be the scheme. But at the same time, the identification of the activity or the events does not necessarily preclude any element of the scheme. As the High Court has said, 'scheme' is a word of wide import:
Peabody 181 CLR at 383;
Hart 217 CLR 216 at [87]."^[158] [2010] FCAFC 94 ; (2010) 186 FCR 410 ; 272 ALR 40 at [26]-[29]; 418; 47-48 per Dowsett and Gordon JJ

110. The courts recognise that taxpayers may make decisions in certain ways and in the context of a scheme in order to both gain a tax benefit and to make commercial gain. The fact they have done so is not determinative of the proper characterisation of their purpose under s 177D. As the majority said in Spotless:

"… A person may enter into or carry out a scheme, within the meaning of Pt IVA, for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit where the dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business."^[159] [1996] HCA 34 ; (1996) 186 CLR 404 ; 141 ALR 92 ; 34 ATR 183 ; 71 ALJR 81 at 415; 97; 187; 84; Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ

As they explained later in their judgment:

"A taxpayer within the meaning of the Act … may have a particular objective or requirement which is to be met or pursued by what, in general terms, would be called a transaction. The 'shape' of that transaction need not necessarily take only one form. The adoption of one particular form over another may be influenced by revenue considerations and this, as the Supreme Court of the United States pointed out, is only to be expected. A particular course of action may be, to use a phrase found in the Full Court judgments, both 'tax driven' and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine the answer to the question whether, within the meaning of Pt IVA, a person entered into or carried out a 'scheme' for the 'dominant purpose' of enabling the taxpayer to obtain a 'tax benefit'.

Much turns upon the identification, among various purposes, of that which is 'dominant'. …"^[160] [1996] HCA 34 ; (1996) 186 CLR 404 ; 141 ALR 92 ; 34 ATR 183 ; 71 ALJR 81 at 416; 97-98; 188; 85

111. This was further developed by Gleeson CJ and McHugh J in Hart:

"… [T]he fact that a particular commercial transaction is chosen from a number of possible alternative courses of action because of tax benefits associated with its adoption does not of itself mean that there must be an affirmative answer to the question posed by s 177D. Taxation is part of the cost of doing business, and business transactions are normally influenced by cost considerations. Furthermore, even if a particular form of transaction carries a tax benefit, it does not follow that obtaining the tax benefit is the dominant purpose of the taxpayer in entering into the transaction. A taxpayer wishing to obtain the right to occupy premises for the purpose of carrying on a business enterprise might decide to lease real estate rather than to buy it. Depending upon a variety of circumstances, the potential deductibility of the rent may be an important factor in the decision. Yet, if there were nothing more to it than that, it would ordinarily be impossible to conclude, having regard to the factors listed in s 177D, that the dominant purpose of the lessee in leasing the land was to obtain a tax benefit. The dominant purpose would be to gain the right to occupy the premises, not to obtain a tax deduction for the rent, even if the availability of the tax deduction meant that leasing the premises was more cost-effective than buying them.

Even so, a transaction may take such a form that there is a particular scheme in respect of which a conclusion of the kind described in s 177D is required, even though the particular scheme also advances a wider commercial objective. …"^[161] [2004] HCA 26 ; (2004) 217 CLR 216 ; 206 ALR 207 ; 78 ALJR 875 ; 55 ATR 712 at [15]-[16]; 227; 212-213; 879; 718

C. The burden of proof

112. Bearing in mind that s 14ZZK(b)(iii) of the TA Act provides that "the applicant has the burden of proving that … the taxation decision concerned should not have been made or should have been made differently", then:

"… In evidentiary terms, … that means that if the appellant failed to establish objective facts, under the various categories set out in para (b) of s 177D, from which a reasonable person would not conclude that its dominant purpose in entering or carrying out the scheme was to obtain a tax benefit, it failed to discharge its statutory onus of proof."^[162] Eastern Nitrogen Ltd v Federal Commissioner of Taxation 2001 ATC 4,164 ; [2001] FCA 366 ; (2001) 108 FCR 27 ; 188 ALR 415 at [86]; 45; 432; 4,178 per Carr J with whom Hill and Sundberg JJ agreed when considering s 14ZZO(b)(i) of the TA Act in relation to an appeal to the Federal Court against an objection decision where the taxation decision concerned an assessment. The principles are equally applicable to a private ruling.

113. In Trail Bros, Dowsett and Gordon JJ observed:

"How the taxpayer does that is a matter for it. It may, for example as Sackville J said in
Lenzo 167 FCR 255, lead evidence that the taxpayer would have undertaken a particular activity, or adopted a particular course, in lieu of the scheme. It is also conceivable that a taxpayer may not lead positive evidence of an alternative postulate because, for example, the result of any objective enquiry of the alternative postulate is inevitable. In the end, the Court will decide what would have been done, or might reasonably be expected to have been done, in lieu of the scheme having regard to all of the evidence that is led. If a taxpayer has given evidence of what he or she would have done but for entering the scheme, that evidence will be relevant and useful to the extent that it reveals facts or matters that bear upon an objective determination of the alternative postulate."^[163] [2010] FCAFC 94 ; (2010) 186 FCR 410 ; 272 ALR 40 at [36]; 420; 49

Is there a scheme to which Part IVA applies?

114. I am of the view that all of the steps and arrangements that have been, or will be, taken to implement the Share Plan comprise a "scheme" as that term is defined in s 177A(1) of ITAA36. It is a scheme, whether it be described as that or as a plan, proposal, action or course of action or course of conduct. As submitted by Mr Nicholas of counsel on behalf of the Commissioner, the scheme has the following elements which are all found in the facts upon which the Commissioner has based his ruling:

• (1) the establishment of AEST on the terms and conditions set out in the Trust Deed;
• (2) Ms Yip's selection as a person who is invited to apply for Share Units;
• (3) Ms Yip's direction to Ambassador that it contribute an amount of her salary and bonus remuneration to Trinity under cl 4.1 of the Trust Deed;
• (4) Ambassador settles contributions to Trinity under cl 4.1 of the Trust Deed;
• (5) Trinity's applying those contributions by making loans to Ms Yip for the purpose of her making applications to it for the issue of Share Units in AEST;
• (6) the application of Share Units in AEST;
• (7) Ms Yip's request to Trinity under cl 11.1 of the Trust Deed for a loan of an amount equal to the total Issue Price of Share Units for which she has applied;
• (8) Ms Yip's direction to Trinity to apply the loan monies in payment of the Issue Price of Share Units;
• (9) Trinity's approval of the loan, which is an interest-free loan;
• (10) Ambassador's issue of the Share Units;
• (11) Trinity's acquisition of shares in Ambassador and the designation of those shares to the Share Units issued to Ms Yip;
• (12) the cancellation of Share Units and the provision of Cancellation Entitlements to Ms Yip for each share unit cancelled;
• (13) the distribution to Ms Yip of the Cancellation Entitlement (if any) payable to her under cl 13 of the Trust Deed;
• (14) Ms Yip's repayment of the loans to Trinity; and
• (15) Trinity's payment to Ms Yip under cl 11.4(j) of the Trust Deed and on Ambassador's behalf.

115. On the facts that I have to consider, I do not accept Dr Orow's submission that Ms Yip might reasonably be expected to have asked Ambassador to place the sacrificed part of her salary and bonuses into a complying superannuation fund rather than entering the scheme. She clearly had no need for immediate access to the monies, he submitted. That may be true but the outcome of Ms Yip's salary sacrificing for the purpose of Ambassador's making a contribution to Trinity under the Trust Deed and its making a payment of the same amount to a complying superannuation fund have very different outcomes. He puts that as a counterfactual but it does not follow that, if one course of action is not available, Ms Yip might reasonably be expected to follow the other. That is so quite apart from the fact that one potentially leads to an asset on which she may perhaps, at a later time, make a capital gain and incur capital gains tax and the other to superannuation benefits. Had the shares been offered to her for purchase, and there is no suggestion that they would have been, Ms Yip would have purchased them from post taxed money.

116. Under the scheme, the monies are not assessable income to Ms Yip. If, under the scheme and contrary to the conclusion I reached in relation to the first ruling, she receives a fringe benefit of the sort provided for in the FBTA Act, that benefit has no value to her. It is a contingent benefit at best and, as Dr Orow submitted, any benefit that she derives from being selected and receiving an invitation is not convertible to cash and so would have negligible monetary value. The FBT payable on that benefit would be nil or negligible.

117. Had she sacrificed and Ambassador contributed the same amount to a complying superannuation fund and had she not exceeded the cap on the amount of her concessional contributions, the amount would have been taxed at the rate of 15% in the fund's hands but not as assessable income in her hands. Were she to exceed the concessional contributions cap, those funds would be taxed an additional amount calculated at 31.5% of the contribution. The monies would not be regarded as a fringe benefit although they would be had the contributions been made to a non-complying superannuation fund.^[164] Definition of “ fringe benefit ”: FBTA Act, s 136(1)(j)

118. In view of the conclusions I have reached, Ms Yip would obtain a "tax benefit" in connection with the scheme within the meaning of s 177C(1) of the TA Act. That is not an end of the matter for the provisions of Part IVA will only have the effect of deeming the contribution by Ambassador to be attributable to her as assessable income if she, or any other person, entered into or carried out the scheme for the dominant purpose of enabling a tax benefit to be obtained. In order to consider that, I must have regard to the eight matters specified in s 177D(b)(i) to (viii) of the TA Act.

119. The first matter is the manner in which the scheme has been entered into or carried out. If it were not for the tax benefit, it is difficult to see the sense in this arrangement for an employee such as Ms Yip. Under the scheme, Ms Yip forgoes remuneration to which she is entitled in return for joining a group of employees in whose favour Trinity may exercise a discretion to lend her an amount of money equating to the remuneration she has foregone. On the facts, she has no guarantee that she will be offered the loan. Ultimately, if she is offered the loan, it will be interest-free but it remains a loan for which she has foregone an entitlement to part of her remuneration. Furthermore, it remains a loan whose proceeds she must dedicate for the particular purpose of acquiring Share Units. Having obtained those Share Units, she does not have the freedom to deal with them as she pleases but must hold them for a minimum of five years. Whether she makes a profit or incurs a loss cannot be predicted. It cannot be predicted whether, when five years have passed, Ambassador will instruct Trinity to pay Ms Yip amounts from the repayments of loan as salary. Even if Ambassador issues the instruction, whether it does so is a matter within Trinity's discretion.

120. The second matter to which I must have regard is the form and substance of the scheme. As to the form of the scheme, I have set it out in the previous paragraphs. As an employee cannot realistically be expected to enter a scheme where the fate of part of his or her remuneration is subject to the discretion of another, its substance must be that the discretions will be exercised in Ms Yip's favour and that she will first be lent monies equivalent to the salary and bonuses she has sacrificed, will acquire Share Units commensurate with the amount sacrificed and, if she relinquishes those Share Units after five years, be paid an amount by way of salary and bonuses. That amount will be assessable income at that time but the tax payable has, for all practical purposes, been deferred for at least five years. The substance points to the scheme's having been entered into to obtain a tax benefit at the time she sacrifices her salary or bonus remuneration.

121. The third factor to which I must have regard under s 177D(b) is the time at which the scheme is entered into and the period during which it is carried out. That period is a minimum of five years and it takes me into the fourth factor. That is the result that would be achieved by the scheme but for the operation of Part IVA. The result that is achieved is that the equivalent of the amount sacrificed (or perhaps any excess of that amount over and above the Cancellation Entitlement) that may be paid to Ms Yip when she cancels her Share Units becomes her assessable income at that time and at least five years after the contribution is first made by Ambassador.

122. The fifth factor relates to any change in Ms Yip's financial position that has resulted, will result or may reasonably be expected to result from the scheme. Assuming that all of the discretions are exercised in her favour, the scheme enables Ms Yip to use the gross amount of the salary and bonuses she sacrifices to acquire Share Units. Had she obtained those Share Units from the net amount remaining after the deduction of PAYG taxation on assessable income, her purchasing power would have been reduced by the amount of that taxation. She pays any taxation at the conclusion of an extended period and, if the Share Units increase in value, will be able to do so from any capital gain on them less capital gains tax.

123. Under the scheme, Ambassador must make the contributions to Trinity but it may claim a tax deduction in respect of them. That is a benefit to it. Ambassador's payment of the Share Plan expenses and associated costs and expenses may also be claimed. As her employer, Ambassador is a person who has a connection with Ms Yip. Any deductions of this sort claimed by Ambassador would be a change that has, or will, represent a change that has or will result or may reasonably be expected to result from the scheme. That is the sixth factor under s 177D(b) and also addresses the eighth.

124. The seventh factor referred to in s 177D(b) requires consideration of any consequence for Ms Yip, Ambassador or any person who has, or had, a connection with Ms Yip where that consequence has resulted, or may reasonably be expected to result, from the scheme. That consequence is a consequence of the scheme's having been entered into or carried out. Once Ms Yip is given a loan, her only obligation to repay it arises if she becomes entitled to a Cancellation Entitlement. She then repays it but only to the extent that it matches, or is less than, the value of the Share Units at the time of the cancellation. If the loan is greater than that value, she is under no obligation to repay that additional amount.

125. Whether Ms Yip sees monies representing the remuneration she sacrificed at the beginning, or any of it, depends upon Ambassadors' instructing Trinity to pay her an amount as salary and Trinity's exercising its discretion to do so. Those instructions must, in turn, be dependent on Trinity's having the funds to make that payment. Had she not engaged in the scheme, or were she not to, she would have been assured of receiving that payment as part of her remuneration at the outset.

126. Having had regard to all of these factors individually and to the scheme overall, I have come to the conclusion that the dominant purpose of the scheme is that of enabling Ms Yip to obtain a tax benefit in the form of tax saved on those monies that would otherwise form part of her remuneration by way of salary and bonus. It is difficult to place any great store on any other purpose for, apart from the tax benefit, the benefits or gains that she gleans from the scheme are distant and dependent upon the favourable exercise of discretions vested in persons other than Ms Yip. Therefore, I have concluded that, if it were not for the scheme, the income would have been, or might reasonably be expected to have been, included in Ms Yip's assessable income. It is a scheme to which Part IVA applies.

Should the discretion be exercised to cancel the tax benefit?

127. Once I have decided that Part IVA applies, 177F(a) confers a discretion. The discretion arises in relation to whether the whole or part of the amount of the tax benefit should be included in a taxpayer's assessable income. No specific guidance as to the exercise of that discretion is to be found in s 177F but it is to be found in the wider context of Part IVA in which it appears. Part IVA is clearly intended to ensure that taxpayers do not arrange their affairs in such a way that the dominant purpose is that of enabling a taxpayer to gain a tax benefit so that they avoid the payment of tax, gain an allowable deduction, incur a capital loss or gain an allowable foreign income tax offset which they would not have, or might reasonably be expected not to have, avoided, gained or incurred, as the case may be.

128. That intention must be read subject to other provisions of the taxation legislation such as the public ruling provisions to which Dr Orow drew my attention and to previous authorities on which the taxpayer might have relied. If it should be the case that a scheme is a scheme to which Part IVA applies but is also consistent with a ruling that applies to a taxpayer and the taxpayer relies on it by acting in accordance with it. He referred specifically to the Commissioner's Taxation Rulings TR 2001/10 and 2010/6. They are public rulings and the Commissioner is bound by them by virtue of s 357-60 of the TA Act. The earlier Taxation Ruling, TR 2001/10 concerns salary sacrifice arrangements made in respect of, among others, those paid salary, wages, commission, bonuses or allowances and their implications under the FBTA Act and in respect of superannuation contributions where made under the arrangements. The latter, TR 2010/6, concerns the taxation consequences on the issue, holding and redemption of bonus units of an employee benefits trust arrangement.

129. The scheme that I have been asked to consider has elements of both a salary sacrifice arrangement and an employee benefit trust arrangement. There is nothing in the two Taxation Rulings that is inconsistent with the conclusion that the scheme is a scheme to which Part IVA applies. TR2001/10 provides for salary sacrifice arrangements that result in an employee's being given a fringe benefit that is taxable as a fringe benefit. This is an arrangement that is clearly contemplated by Parliament. A person has the flexibility to be remunerated in the form of ordinary remuneration, taxable under the income tax regime, or in the form of certain benefits, taxable under the fringe benefits legislation. He or she does not have the flexibility to sidestep both or, as Dr Orow submitted, arrange their affairs "… for the dominant purpose of reducing their overall taxation exposure"^[165] Dr Orow’s submissions at [105] if to do so is to bring them within the provisions of Part IVA.

130. TR 2010/6 does not refer to salary sacrifice arrangements of the type involved in the scheme in this case and refers instead to contributions made to a trust for the purpose of remunerating or providing incentives to an employee and to an employee benefits trust arrangement. At [11], the ruling recognises that a right to receive salary or wages or bonus income is not a fringe benefit as defined in s 136(1)(f) of the FBTA Act. A step, or series of steps, that has the effect of delivering salary, wages or bonus remuneration to an employee at their conclusion does not in itself attract FBT. Rather, when the employee redeems the bonus units, the remuneration, and so income, is derived by the employee and the remuneration is ordinary income under s 6-5 of ITAA97.

131. Paragraphs [18]-[23] of the ruling recognises that there will be instances in which the issue of a bonus unit is not the issue of a right to salary, wages or bonus remuneration but a benefit of the sort regarded as fringe benefit under the FBTA Act. As such, they would be income, but not assessable income by virtue of s 23L of ITAA36.

132. A situation contemplated by TR2010/6 is of the sort considered by Senior Member Pascoe in Experienced Tours. That case did not involve salary sacrifice. Instead, Experienced Tours paid the premiums on certain shares and nominated that they be allocated to two directors. Senior Member Pascoe found that the payment of the premiums constituted a benefit under the FBTA Act to the directors as employees rather than as shareholders. That payment was also ordinary income but, by virtue of s 23L, was not assessable income of the directors.

133. I see nothing inconsistent between the Commissioner's related rulings and his public rulings. In view of that, I consider it appropriate that the discretion conferred by s 177F of ITAA36 be exercised to cancel any tax benefit that has been, or would be, obtained by Ms Yip in connection with the scheme in this case. For that reason, I affirm the Commissioner's objection decision in relation to the related ruling.

134. In respect of Tribunal proceedings Nos. 2010/0965-967 for review of the applicant's application to review the respondent's objection decision disallowing its objection against the private ruling issued on 9 October 2009 for the years ending 30 June 2010, 2011 and 2012:

• (1) affirm the respondent's objection decision to disallow the applicant's objection against its answers to questions (1) and (3); and
• (2) set aside the respondent's objection decision to disallow the applicant's objection against its answer to question (2) in so far as that answer states:

  "Yes, to the extent that the contributions of monies by Ambassador to the Trustee pursuant to clause 4.1 of the Trust Deed are not included as assessable income of Ms Yip under section 6-5 of the ITAA 1997."

  and substitute the answer:

  "No".