Edited version of your written advice

Authorisation Number: 1051265725581

Date of advice: 16 August 2017

Ruling

Subject: Approved worker entitlement fund

Question 1

Will the Fund continue to be entitled to be endorsed as an approved worker entitlement fund pursuant to subsection 58PB(4) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) in Scenario 1?

Answer

Yes

Question 2

Will the Fund continue to be entitled to be endorsed as an approved worker entitlement fund pursuant to subsection 58PB(4) of the FBTAA in Scenario 2?

Answer

Yes

Question 3

Where the Commissioner answers “no” to questions 1 and/or 2, will the Termination Entitlement Contribution (TEC) amounts received by the Fund from a specific employer in those scenarios constitute assessable income under section 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 4

Where the Commissioner answers “no” to questions 1 and/or 2, will the Fund be liable to pay Fringe Benefits Tax (FBT) under section 66(1) of the FBTAA in respect of the TEC amounts paid to the employees of an employer in those scenarios?

Answer

No

Question 5

Will a tax benefit for the Fund arise under section 177C(1) of the Income Tax Assessment Act 1936 (ITAA 1936) in either Scenario 1 or Scenario 2?

Answer

No

Question 6

Will the Commissioner exercise his power to cancel a tax benefit under section 177F(1) of the ITAA 1936 under Scenario 1 or Scenario 2?

Answer

No

This ruling applies for the following periods

Year ending 31 March 2018

Year ending 31 March 2019

Year ending 31 March 2020

Year ending 31 March 2021

Year ending 31 March 2022

The scheme commenced on

1 April 2017

Relevant facts

The Fund is a trust established by deed. The terms of the trust deed are incorporated into and form part of the scheme

The trustee of the Fund is currently a nominee company. The administrator of the Fund is currently an independent third party.

The administrator of the Fund is responsible for the Fund’s administration in accordance with the terms of the trust deed. Since its establishment to date, the Fund has been entitled to be endorsed as an approved worker entitlement fund (AWEF).

The Fund was established for the following purposes as stated in the Background section of the trust deed:

The Trust has been established:

(i) to provide a facility for Employers to pay Employee Entitlements to Employees on their becoming eligible for payment and thereby enable Employers to fund Award, Industrial Agreement and other obligations in relation to Employee Entitlements;

(ii) to receive Contributions and hold them until the Employee Entitlements become payable under the terms of this Deed.

A specific employer is currently a participating employer in the Fund.

Previous arrangement between a specific employer and the Fund

A specific employer previously had an enterprise agreement in place, (previous EA), that was approved by the Commissioner of the Fair Work Commission.

The previous EA:

● covered all current and future employees of a specific employer who are engaged in various classifications or occupations covered by the Incorporated Awards as per the enterprise agreement; and

● was an industrial instrument as defined in subsection 136(1) of the FBTAA 1986.

Under the terms of the previous EA, employer contributions of a certain amount per week, per employee, were to be made by a specific employer into the Fund.

When an employee leaves employment with a specific employer, they will be entitled to access the employer contributions accrued on their behalf.

Termination Entitlement Contribution

The TEC was made by a specific employer in addition to and did not offset any statutory entitlements that employees would otherwise be entitled to receive upon their termination including redundancy payments, leave payments, etc. The Fund accepted the TEC amounts from a specific employer and held the TEC amounts until they became payable under the terms of the trust deed.

A specific employer, as an employer, was required to sign a deed of adherence to ensure that the minimum contribution rate (as prescribed in the existing EA) is paid to the Fund.

In accordance with the trust deed, the TEC amounts paid by a specific employer to the Fund on behalf of its employees were credited to separate member (employee) accounts identifying the contributions for that member.

While employer contributions were credited to personal accounts of the Members, the trust deed provides that Members have no entitlement to the payment of an amount until the conditions set out in the trust deed have been satisfied.

The trust deed governs the conditions under which monies are held and payments are made under the Fund in relation to an employee’s entitlement. Payments may be made by a nominee company (as trustee of the Fund) to a specific employer (as the employer) and/or directly to the employee.

An employee of a specific employer would ordinarily receive their accrued TEC payment upon the termination of their employment.

A specific employer’s actions

A specific employer has since sought to alter the terms of the previous EA given the significant financial costs associated with contributing the current TEC amounts. A new enterprise agreement has been approved by the Fair Work Commission (new EA).

Existing arrangement between a specific employer and the Fund (Scenario 1)

The first scenario involves the adoption of the new EA by a specific employer.

Where the arrangements in Scenario 1 are adopted:

● a specific employer will no longer make any contributions to the Fund going forward;

● the employees of a specific employer would be able to continue to access their accrued TEC amounts upon the termination of their employment; and

● the current employees of a specific employer may be able to request the Fund to pay out their accrued TEC amounts whilst they are still employees of a specific employer.

In this scenario, there will be no change to the terms of the trust deed for the Fund and the Fund would continue to:

● provide a facility for employers to pay employee entitlements to employees once those employees become eligible for those payments; and

● receive contributions from participating employers and hold them until the employee entitlements become payable.

There will be no change to the fund administrator of the Fund.

Proposed arrangement between a specific employer and the Fund (Scenario 2)

In the second scenario, a specific employer will negotiate a further alteration to the new EA whereby any interest generated from the accrued TEC amounts in the fund will be credited to (or reinvested in) the relevant employees’ Fund accounts.

In this scenario, the relevant employees will not have access to the TEC amounts prior to the termination of their employment. However, they will be entitled to receive the TEC upon the termination of their employment.

In this scenario, there will be no change to the terms of the trust deed for the Fund and the Fund would continue to:

● provide a facility for employers to pay employee entitlements to employees once those employees become eligible for those payments; and

● receive contributions from participating employers and hold them until the employee entitlements become payable.

There will be no change to the fund administrator of the Fund.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 58PB

Fringe Benefits Tax Assessment Act 1986 Subsection 66(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 Subsection 6-5(1)

Taxation Administration Act 1953 Section 426-55 of Schedule 1

Reasons for decision

Question 1

Will the Fund continue to be entitled to be endorsed as an approved worker entitlement fund pursuant to subsection 58PB(4) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) in Scenario 1?

A fund will be an approved worker entitlement fund (AWEF) in either of the following two situations:

● where the fund is established by or under a law of the Commonwealth, a state or a territory for the purpose of ensuring that long service leave is paid, and is operating under that law (subsection 58PB(1) of the FBTAA); or

● where the fund is endorsed as an approved worker entitlement fund under subsection 58PB(3) of the FBTAA, or the entity that operates the fund is endorsed for the operation of the fund as an approved worker entitlement fund under subsection 58PB(3A) of the FBTAA (subsection 58PB(2) of the FBTAA).

The Fund is currently endorsed as an AWEF. As such, it is relevant to consider whether the Fund would continue to be entitled to be endorsed as an AWEF where scenarios 1 and 2 are undertaken.

Conditions for endorsement as an AWEF

Section 426-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that endorsement of a fund as an AWEF through subsection 58PB(2) of the FBTAA may be revoked by the Commissioner if, at any time after endorsement, the entity is not entitled to endorsement.

Subsections 58PB(4), (4A) and (5) of the FBTAA set out the conditions that the Fund must satisfy in order to be entitled for endorsement as an AWEF under subsection 58PB(3) of the FBTAA. These subsections state that:

58PB(4) A fund is entitled to be endorsed as an approved worker entitlement fund if:

(a) the management of the fund (including the management of the investments of the fund) is carried out at arm’s length from the contributors to the fund and their associates; and

(b) under the fund’s constituting documents:

(i) no more than 5% of the total assets of the fund are to be invested in an entity controlled by a contributor or an associate of a contributor; and

(ii) the assets of the fund are not to be used to provide or facilitate any form of financial assistance, including a loan, to a contributor, a person in respect of whom contributions are made or an associate of a contributor or an associate of a person in respect of whom contributions are made; and

(c) under the fund’s constituting documents, payments from contributions to the fund are to be made only for the following purposes:

(i) to pay worker entitlements to persons in respect of whom contributions are made, or to death benefits dependants (within the meaning of the Income Tax Assessment Act 1997) or legal personal representatives (within the meaning of that Act) of those persons;

(ii) to make investments to generate income from the assets of the fund;

(iii) to reimburse contributors who have paid entitlements directly to persons in respect of whom contributions are made;

(iv) to return contributions to contributors;

(v) to pay, for the benefit of a person in respect of whom contributions are made, an employment termination payment (within the meaning of the Income Tax Assessment Act 1997) into a complying superannuation fund (within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993), a complying approved deposit fund (within the meaning of section 47 of the Superannuation Industry (Supervision) Act 1993) or a retirement savings account (within the meaning of the Retirement Savings Accounts Act 1997);

(vi) to transfer contributions to another approved worker entitlement fund;

(vii) to pay the reasonable administrative expenses of the fund;

(viii) to pay amounts to a contributor’s external administrator that would otherwise be payable as mentioned in subparagraph (iii) or (iv) to the contributor;

(ix) to pay interest on, or to repay, money lent to the fund; and

(d) under the fund’s constituting documents, payments from the income of the fund are to be made only for the following purposes:

(i) a purpose mentioned in subparagraphs (c)(ii) to (ix);

(ii) to make payments to contributors to the fund;

(iii) to make payments to other persons where the payment is specified in subsection (5); and

(e) under the fund’s constituting documents:

(i) an account must be kept for each person in respect of whom contributions to the fund are made; and

(ii) the account must be kept in a manner that enables entitlements in respect of the person to be calculated; and

(f) the fund, or the entity that operates the fund, has an ABN.

58PB(4A) An entity is entitled to be endorsed for the operation of a fund as an approved worker entitlement fund if the fund is entitled to be endorsed as an approved worker entitlement fund.

58PB(5) A payment made by a fund to a person in the following circumstances is specified for the purposes of subparagraph (4)(d)(iii):

(a) a contribution has been made to the fund in respect of the person; and

(b) the contribution would be an exempt benefit under section 58PA if the fund were an approved worker entitlement fund; and

(c) either:

(i) the payment is of a worker entitlement the contribution for which would be an exempt benefit under section 58PA if the fund were an approved worker entitlement fund; or

(ii) the payment is of some kind other than a worker entitlement.

In scenario 1, a specific employer has adopted the new EA, meaning that:

● a specific employer is no longer required to make contributions to the Fund on behalf of its employees; and

● the employees of a specific employer will be able to access their accrued TEC whilst still a current employee of a specific employer.

Condition 1: subsection 58PB(4)(a)

The management of the fund will be unchanged. The contributors to the fund are various employers. The Fund is not associated with, and is acting at arm’s length to the employers who are contributing to the fund. In addition, the fund administrator has been appointed as an independent administrator of the Fund since the date of its establishment and will continue to be the fund’s administrator where the arrangements in this scenario are undertaken.

Therefore, the condition under subsection 58PB(4)(a) is satisfied.

Condition 2: subsection 58PB(4)(b)

The Fund’s constituting documents, the trust deed, must specify that no more than 5% of the total assets of the fund are invested in an entity controlled by a contributor or an associate of a contributor, and the assets of the fund are not to be used to provide any financial assistance to a contributor or their associate or a person in respect of whom contributions are made or their associates.

The trust deed includes the following clauses:

No more than 5% of the total assets of the fund are to be invested in an entity controlled by an entity (or an associate of that entity) that makes contributions to the fund.

The assets of the fund are not to be used to provide or facilitate any form of financial assistance, including a loan to an entity that makes a contribution to the fund, a person in respect of whom contributions to the fund are made or an associate of a contributor or an associate of a person in respect of whom contributions are made.

Therefore, the condition under subsection 58PB(4)(b) is satisfied.

Condition 3: subsection 58PB(4)(c)

Under the Fund’s constituent documents, the trust deed, payments from contributions to the fund will continue to be made only to pay worker entitlements.

The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 2003 clarifies what is considered to be a worker entitlement at paragraph 7.39:

It is considered that a worker entitlement would include payments agreed between an employer and a worker in compensation for services rendered by the worker or payments to a worker stipulated in an industrial instrument. A worker entitlement would also include any benefit to be provided to the worker which has been agreed between an employer and a worker entitlement fund. However, an ex gratia distribution of income from the fund would not be considered to be a worker entitlement fund.

The Fund’s trust deed defines 'Employee Entitlements’ as:

.. any dollar amount payable to a Member under an Industrial Agreement to which that Member has a right and which is identified as such in the Industrial Agreement including the following entitlements:

(a) annual leave and annual leave loading,

(b) sick leave,

(c) long service leave,

(d) redundancy,

(e) severance or

(f) any other amount from time to time payable by an Employer to a Member accepted by the Trustee.

The TEC amounts paid to the employees of a specific employer will be considered to be “worker entitlements” given:

● the TEC amounts will be payable under an industrial agreement (the new EA);

● the TEC amounts will be identified in the industrial agreement (the new EA); and

● the TEC amounts will be paid by the Fund to the employees of a specific employer (being the workers specified in the new EA).

The Fund will pay the worker entitlements, in the form of the TEC amounts, to persons, being employees of a specific employer, in respect of whom contributions are made.

Therefore, the condition under subsection 58PB(4)(c) is satisfied.

Condition 4: subsection 58PB(4)(d)

Under the Fund’s constituting documents, the trust deed, payments from the income of the fund can only be made for the following purposes:

● a purpose mentioned in subparagraphs 58PB(c)(ii) to (ix);

● to make payments to contributors to the fund; and

● a payment made by a fund to a person where a contribution has been made to the fund for that person and the contribution would be an exempt benefit under section 58PA if the fund was an AWEF and the payment is of a worker entitlement or the payment is some other kind.

In this scenario, payments made from the income of the Fund would be made in relation to payments of the kind specified in subsection 58PB(5) given the following:

● the TEC payments that would be made from the income of the Fund would be in respect of contributions that would have been made by a specific employer in respect of the relevant employees;

● the above mentioned contributions that would be made would be an exempt benefit under section 58PA if the Fund were an AWEF; and

● the TEC payments that would be made by the Fund, from the income of the fund, to the employees of a specific employer would be of a worker entitlement nature, the contribution for which would be an exempt benefit under section 58PA if the Fund were an AWEF.

The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 2003 further supports the above reasoning and clarified at paragraph 7.38 that:

The fund can make payments out of the income of the fund to persons in respect of whom contributions to the fund have been made and where the contribution would be an exempt benefit under section 58PA if the fund were an approved worker entitlement fund. The payment can either be a payment of a worker entitlement where the contribution for that payment would be an exempt benefit under section 58PA if the fund were an approved worker entitlement fund or a payment of some kind other than a worker entitlement. That is, if an employer has placed an employee entitlement into an approved worker entitlement fund of a kind that receives the FBT exemption under section 58PA, then payments can be made out of the fund income to that employee for such FBT exempt worker entitlements or for reasons other than a worker entitlement. For example, the income of the fund can be distributed to that worker. Other worker entitlements, for example a fringe benefit that is not exempt under section 58PA, cannot be paid out of the income of the fund.

Payments are made of a worker entitlement nature to return contributions to contributors, or persons in respect of whom contributions are made, employees of a specific employer and other employers.

Therefore, the condition under subsection 58PB(4)(d) is satisfied.

Condition 5: subsection 58PB(4)(e)

This condition specifies that the fund’s constituting document, the trust deed, must specify that:

● a fund must keep an account for each person for whom contributions to the fund are made; and

● the person’s entitlement must be able to be calculated from those records.

In this scenario, the Fund’s trust deed would continue to provide that:

● an account is kept for each person in respect of whom contributions to the fund are made; and

● the account is kept in a manner that enables entitlements in respect of the person to be calculated.

Therefore, the condition under subsection 58PB(4)(e) is satisfied.

Condition 6: subsection 58PB(4)(f)

This condition requires that either the fund, or the entity that operates the fund, has an Australian Business Number (ABN) in place.

In this scenario, the Fund, the nominee company (as trustee of the Fund), and the fund administrator who will continue to operate the Fund, have current ABNs in place.

Therefore, the condition under subsection 58PB(4)(f) is satisfied.

Conclusion

The Fund will continue to satisfy all the conditions in section 58PB(4)(a) to (f) to be entitled to be endorsed as an AWEF in scenario 1.

Question 2

Will the Fund continue to be entitled to be endorsed as an approved worker entitlement fund pursuant to subsection 58PB(4) of the FBTAA in Scenario 2?

In scenario 2, it is proposed that a specific employer will amend the new EA so that:

● a specific employer will no longer be required to make contributions to the Fund on behalf of its employees; and

● any interest generated from the accrued TEC amounts in the fund will be credited to the relevant employees’ Fund accounts.

Unlike scenario 1, the employees will not have access to the TEC amounts prior to the termination of their employment and will only be entitled to receive the TEC upon the termination of their employment.

Condition 1: subsection 58PB(4)(a)

For the reasons given in scenario 1, the condition under subsection 58PB(4)(a) is satisfied.

Condition 2: subsection 58PB(4)(b)

For the reasons given in scenario 1, the condition under subsection 58PB(4)(b) is satisfied.

Condition 3: subsection 58PB(4)(c)

In scenario 2, the payments made to the employees would essentially consist of two components being:

● the contributions made to the Fund by a specific employer on behalf of its employees, and credited to each member account; and

● the interest amount accrued on those contributions.

For the reasons given in scenario 1, the condition under subsection 58PB(4)(c) is satisfied.

The subsection relates to 'payments from contributions to the fund.’ The payment of interest will not be made from the contributions that a specific employer will make to the Fund. The subsection is not required to be satisfied with respect to interest payments to employees.

Condition 4: subsection 58PB(4)(d)

As in scenario 1, payments are made of a worker entitlement nature to return contributions to contributors, or persons in respect of whom contributions are made.

In the new EA, interest will be paid to relevant employees of a specific employer. Paragraph 58PB(4)(d) of the FBTAA allows a fund to be entitled to endorsement where, under the fund’s constituting documents, payments from the income of the fund are made according to the circumstances of subsection 58PB(5) of the FBTAA.

A payment of interest will be made by the Fund to an employee of a specific employer in circumstances where:

(a) a contribution has been made to the Fund in respect to the employee;

(b) the contribution would be an exempt benefit under section 58PA of the FBTAA if the fund were an AWEF; and

(c) the payment of interest is not a payment of a worker entitlement, but is a payment of some kind other than a worker entitlement.

Therefore, the condition under subsection 58PB(4)(d) is satisfied.

Condition 5: subsection 58PB(4)(e)

For the reasons given in scenario 1, the condition under subsection 58PB(4)(e) is satisfied.

Condition 6: subsection 58PB(4)(f)

For the reasons given in scenario 1, the condition under subsection 58PB(4)(f) is satisfied.

Conclusion

The Fund will continue to satisfy the conditions to be entitled as an endorsed AWEF in scenario 2.

Question 3

Where the Commissioner answers “no” to questions 1 and/or 2, will the Termination Entitlement Contribution (TEC) amounts received by the Fund from a specific employer in those scenarios constitute assessable income under section 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts (ordinary income).

In Scott v. Federal Commissioner of Taxation (1966) 10 AITR 367; (1966) 117 CLR 514; (1966) 14 ATD 286 Windeyer J stated that:

Whether or not a particular receipt is income depends upon its quality in the hands of the recipient.

In G. P International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 21 ATR 1; 90 ATC 4413 the High Court considered the following factors important in determining the nature of a receipt:

To determine whether a receipt is of an income or a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient’s purpose in engaging in the transaction, venture or business.

Contributions to the Fund will be assessable income of the Trustee if they are income according to ordinary concepts under section 6-5 of the ITAA 1997.

The Trust Deed states that the Fund has been established to provide a facility to enable employers to fund employee entitlements required under industrial agreements by holding the entitlements until they become payable under the terms of the Trust Deed.

The purpose of the Fund is therefore to use the contributions to protect employee entitlements under the various industrial instruments. The purpose is not to elicit funds from employers; the contributions are required by industrial instruments.

Pursuant to the powers of investment in the Trust Deed, the trustee can invest the contributions in their absolute discretion. The trustee must return any income and receipts from these investment activities to the revenue account which, after losses and outgoings, must be distributed to employers and/or members in accordance with the Trust Deed.

The contributions to the Fund are capital in nature and represent the corpus of the trust. Accordingly, the contributions are not assessable income of the trustee under section 6-5 of the ITAA 1997.

Question 4

Where the Commissioner answers “no” to questions 1 and/or 2, will the Fund be liable to pay Fringe Benefits Tax (FBT) under section 66(1) of the FBTAA in respect of the TEC amounts paid to the employees of a specific employer in those scenarios?

Fringe benefits tax (FBT) is a tax payable by an employer for the benefits provided to an employee, or an associate of the employee, by the employer, or an associate of the employer.

Subsection 66(1) of the FBTAA provides that:

Subject to this Act, tax imposed in respect of the fringe benefits taxable amount of employer of a year of tax is payable by the employer.

Employees of a specific employer, or an associate of a specific employer, are not employees of the Fund, or an associate of the Fund. There is no relationship of employment between the Fund and the employees of a specific employer. The Fund is not liable to pay FBT under subsection 66(1) of the FBTAA where TEC amounts are paid to the employees of a specific employer in either scenario 1 or 2.

Question 5

Will a tax benefit for the Fund arise under section 177C(1) of the Income Tax Assessment Act 1936 (ITAA 1936) in either Scenario 1 or Scenario 2?

Broadly, for Part IVA of Income Tax Assessment Act 1936 (ITAA 1936) to apply to an arrangement, each of the following requirements must exist:

● a scheme is entered into or carried out;

● a taxpayer obtains a tax benefit from the scheme; and

● one of the parties to the scheme entered into or carried out the scheme for the purpose of enabling the taxpayer to obtain the tax benefit.

The term 'scheme’ is defined in subsection 177A(1) of the ITAA 1936 as follows:

(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.

In this ruling, the scheme would likely involve the decision to implement the arrangements in scenario 1 and 2. For Part IV A to apply there must be a tax benefit attributable to the Fund.

The term 'tax benefit’ is defined in subsection 177F(1) to include:

Where this Part applies to a scheme in connection with which a tax benefit has been obtained, or would but this section be obtained, 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;

In determining whether a tax benefit has arisen, there are two methods for quantifying the tax benefit.

The first method is the 'would have’ limb, or 'annihilation approach’, where the scheme is completely ignored, as stated in subsection 177CB(2) of the ITAA 1936:

A decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme).

The second method is the 'might reasonably be expected to have’ limb, or 'reconstruction approach’, where the tax benefit is based on a reasonable alternative hypotheses, as stated in subsection 177CB(3) of the ITAA 1936:

A decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme.

Annihilation approach

The annihilation approach involves an application of the following steps when determining whether a tax benefit would exist:

● it is first necessary to determine the tax position of the taxpayer (the Fund) when the scheme (alternatively, scenario 1 and 2) is in place;

● it is then necessary to determine the tax position of the taxpayer (the Fund) ignoring the scheme (being scenario 1 or 2 as appropriate) in its entirety; and

● if there is a difference in the tax position of the taxpayer (the Fund) in the above two scenarios the difference would be the tax benefit.

The TEC amounts contributed to the Fund in scenarios 1 and 2 are capital in nature and represent the corpus of the fund. The amounts are not treated as assessable income under subsection 6-5(1) of the ITAA 1936.

Alternatively, where scenarios 1 and 2 are not undertaken and are ignored in their entirety, the TEC amounts contributed to the Fund would still be capital in nature and represent the corpus of the fund. The amounts would not be treated as assessable income under subsection 6-5(1) of the ITAA 1936.

Given there would be no difference in the tax position of the Fund where the scheme is either in place or ignored in its entirety, there would be no tax benefit for the Commissioner to quantify if the annihilation approach was used.

Reconstruction approach

The reconstruction approach can be applied through the following steps to determine whether a tax benefit would exist:

● a determination of the parameters of the scheme;

● an identification of possible alternative postulates to the scheme;

● a determination of how comparable the alternative postulates are to the scheme;

● an identification of the reasonable alternative postulate; and

● the quantification of the tax benefit.

Parameters of the scheme

Subsection 177CB(4) of the ITAA 1936 sets out the parameters of the scheme, as follows:

In determining for the purposes of subsection (3) whether a postulate is such a reasonable alternative:

(a) have particular regard to:

(i) the substance of the scheme; and

(ii) any result or consequence for the taxpayer that is or would be achieved by the scheme (other than a result in relation to the operation of this Act); but

(b) disregard any result in relation to the operation of this Act that would be achieved by the postulate for any person (whether or not a party to the scheme).

In this case, the substance of the scheme is largely driven by the roles and objectives of the key stakeholders of the scheme being:

● a specific employer, whose main objective is to cease making contributions to the Fund and meet its obligations under its enterprise agreement;

● a Trade Union, whose main objective is to ensure that its members are not disadvantaged where the scheme is implemented and the relevant changes to the enterprise agreement are made;

● The Fair Work Commission, whose objective is to ensure that fair work conditions are met under the enterprise agreement between a specific employer and the Union and the relevant legislation; and

● The Fund, whose objective is to retain its status as an AWEF and properly administer the operations of the Fund under the trust deed, noting that the Fund performs this role for multiple employers, not just a specific employer.

Based on the above, and where the scheme, being either scenario 1 or 2 are implemented, the results and consequences, other than tax results, for the Fund will be:

● the preservation of its status as an AWEF so as to be able to continue its operations; and

● its ability to continue to administer the fund in accordance with the trust deed.

Possible alternative postulates

Alternative postulates need to be considered to identify other ways that the Fund could have started in the same position before carrying out the scheme, and ended in the same or similar position, apart from the tax result, as they did under the scheme.

The possible alternative postulates to scenario 1 based on the substance of the scheme would be:

● scenario 2, which is the alternative being considered; and

● variations to the arrangements contemplated by scenario 1 and 2 that would give rise to the same commercial objectives of the Fund.

Conversely, the possible alternative postulates to scenario 2 would be:

● scenario 1, which is the alternative actually being considered; and

● other similar arrangements.

Comparability of the possible alternative postulates

Each of the alternative postulates would be considered to be reasonable alternative postulates for the Fund as each would achieve the objectives of each of the key stakeholders of the scheme.

Identifying a reasonable alternative postulate

In determining a reasonable alternative postulate having regard to the substance of the scheme:

● scenario 2 would be a reasonable alternative postulate of scenario 1;

● scenario 1 would be a reasonable alternative postulate of scenario 2; and

● other similar arrangements would be reasonable alternative postulates of scenarios 1 and 2.

In each of these postulates, the roles and objectives of the key stakeholders will remain the same. The purpose of the Fund will continue to be as follows:

● to provide a facility for employers to pay employee entitlements to employees once those employees become eligible for those payments; and

● to receive contributions from participating employers and hold them until the employee entitlements become payable.

Quantification of the tax benefit

Any difference between the tax position of the Fund under the scheme and under a reasonable alternative postulate constitutes a tax benefit.

The TEC amounts contributed to the Fund under the scheme in both scenarios 1 and 2 will be capital in nature and represent the corpus of the fund. The amounts will not be treated as assessable income under subsection 6-5(1) of the ITAA 1936.

The roles and objectives of the Fund will continue to be the administration of the fund. The tax position under each of the reasonable alternative postulates will not change. As a result, there will be no tax benefit for the Fund under either scenario 1 or 2.

Conclusion

There will be no tax benefit for the Fund under both the annihilation and reconstruction approaches where either scenario 1 or 2 is undertaken.

Question 6

Will the Commissioner exercise his power to cancel a tax benefit under section 177F(1) of the ITAA 1936 under Scenario 1 or Scenario 2?

The Commissioner has the power to 'cancel’ a tax benefit arising under a scheme to which Part IVA applies as stated in subsection 177F(1)(a) of the ITAA 1936 above.

In this case, there is no tax benefit for the Fund, and as such, the Commissioner cannot exercise his powers under section 177F(1) of the ITAA 1936 to cancel the tax benefit.

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