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Ruling

Subject: Income Tax: Assessable income and deductions. Part IVA

Question 1

Is the document titled 'XX' a lease agreement between the taxpayer and a resident?

Yes

Question 2

Is the payment made to an outgoing resident by the taxpayer under a lease arrangement a deduction pursuant to section 8-1 of the ITAA 1997 in the income year in which the payment is made?

Yes

Issue 2

What is the tax treatment of certain ingoing and outgoing payments under the document titled 'YY'?

Question 1

Is the document titled 'YY' a loan agreement between the taxpayer and a resident?

Yes

Question 2

Is the amount received by the taxpayer as an interest free loan from a resident under 'YY' assessable income pursuant to subsection 6-5(2) of the ITAA 1997?

No

Question 3

Is the amount paid by the resident under 'YY' assessable income of the taxpayer pursuant to subsection 6-5(2) of the ITAA 1997?

Yes

Issue 3

Does Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply in respect of transactions made under the loan arrangement scheme?

Question 1

Does the replacement of the lease agreement (XX) for residents to the area by the loan agreement (YY) constitute a scheme as defined in subsection 177A(1) ITAA 1936?

Yes

Question 2

Does the implementation of the YY result in a tax benefit for the taxpayer pursuant to section 177C of the ITAA 1936?

Yes

Question 3

Can it be objectively concluded that the dominant purpose of the scheme ie the implementation of YY for residents is to obtain a tax benefit for the taxpayer pursuant to section 177D of the ITAA 1936?

No

This ruling applies for the following period

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011to 30 June 2012

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

The scheme commenced on

1 July 2009

Relevant facts

The taxpayer purchased a residency complex from A Co.

A Co continued on as manager of the residency complex.

The taxpayer assumed management of the residency complex when there was a downward trend in occupancy rates.

The taxpayer injected capital to rejuvenate the residency complex and replaced the tenancy contract with a tenancy agreement in line with what is now regarded as the industry standard.

The new tenancy contract gave certainty to outgoing tenants or their estates that the incoming contribution would be refunded to them within 6 months of exiting the residency complex.

Following the change in management occupancies increased.

The taxpayer intends to phase in the new contract as tenants exit under the old contract.

'XX"

The former tenancy contract called 'XX' is a non-assignable contract.

The contract requires the tenant to pay an incoming payment in the form of a licence fee in full before the tenant is 'entitled to possession of the unit".

On termination of "XX" certain costs are to be paid by the departing tenant including a deferred management fee from the payment of the new tenant's incoming contribution.

The deferred management fee consists of a percentage of the tenant's incoming contribution and a percentage of the share of capital appreciation.

The capital appreciation payment is the difference between the exiting tenant's incoming contribution and the new tenant's incoming contribution.

The contract 'XX" requires the taxpayer to provide a unit and its chattels to a tenant from the commencement date for a defined maximum period or until the contract is terminated earlier for specific reasons.

The tenant is required to:

· pay a service charge towards operating costs of the complex which includes the upkeep of communal areas, vehicles managers and caretakers.

· keep the unit in good repair

· pay all utility charges assessed against the unit

· insure the contents of the unit

· permit the taxpayer access within reasonable hours for the proper maintenance of the unit but this right of inspection is not to interfere with the tenant's right of quiet enjoyment

The tenant occupies the unit at the tenant's own risk.

The contract provides for a tenant's right to quiet enjoyment of the unit of accommodation and access to common areas and communal facilities.

'YY'

The new tenancy contract is 'YY' which is a non-assignable lease. The incoming tenant's payment is in the form of an interest-free loan to the taxpayer which must be paid before the tenant can take possession of the residence.

The taxpayer must repay the loan either:

· xx years after the contact commences (termination date) or

· six months after the tenant's right to occupy the premises ceases under the lease and the premises are vacated

whichever is the soonest event.

The tenant is required to pay ongoing service fees to cover complex operating costs for communal facilities and a long term maintenance fund.

Tenants are required to pay their own telephone connection as well as contents and liability insurances. The cost of the maintenance of the residence is the tenant's responsibility.

At exit the tenant is entitled to repayment of the loan and a share of any capital appreciation of the residence right. Payment to the outgoing tenant of their share of the capital appreciation is required to be made within x months of the tenant vacating the premises.

In the event a new tenant has not been procured by the time the taxpayer is required to repay the loan to the exiting tenant, the value of the loan is the value of the tenant's incoming contribution.

On the day the taxpayer repays the loan amount to the departing tenant, the tenant must pay

· the departure fee consisting of a percentage of the incoming contribution.

· Real estate costs

· refurbishment costs.

· any remaining service fees

Provided the tenant advances an interest free loan to the taxpayer and agrees to the covenants, the taxpayer will lease the residence and its inclusions to the tenant.

The contract includes a commencement date and a termination date.

When the contract is terminated the taxpayer is to repay the loan to the tenant including a percentage share of the capital appreciation of the tenancy right.

The Commissioner recognises the interest free loan arrangement as one of several contractual arrangements common in the industry.

Taxpayer's contentions

The taxpayer considers the former tenancy contract is a lease and not a licence.

The taxpayer considers the current tenancy contract is a loan agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997)

Section 8-1

Subsection 6-5(2)

Income Tax Assessment Act 1936 (ITAA 1936)

Part IVA

Section 177A

Section 177C

Section 177D

Reasons for decision

Issue 1

Question 1

Is the document titled 'XX' a lease agreement between the taxpayer and a tenant?

You have contended that the document 'XX which permits a tenant to have occupancy rights at the residency complex is in fact a lease.

The title of the residence agreement suggests the contract is a licence. However in considering whether the rights granted by the parties constitute a lease or a licence, the court will have regard to the substance of the transaction and not its form and may construe the rights granted as a lease although the parties have specifically provided that the transaction shall not be so construed.

The distinction between a lease and a licence was identified by Vaughan CJ in the case of Thomas v Sorrell (1673) Vaugh. 330 [124 E.R. 1098] when he stated:

"A dispensation or licence properly passeth no interest, nor alters or transfers property in anything but only makes an action lawful which without it had been unlawful":

A lease is an estate or interest in land whereas a licence is not. A lease provides a tenant with the legal possession to the land for a term that is certain and is for less than the term for which the landlord holds the land in fee simple. A proprietary right is created in the tenant, denying the landlord the right to possession for the duration of the lease in consideration for a premium or periodical payment. The tenant has a right to exclusive possession.

The taxpayer owns the land and the buildings. The taxpayer operates a business of selling the tenancy rights to the property it owns to tenants for specified periods.

There must be certainty of term in the lease through two aspects: commencement date and duration. The maximum duration of a lease must be certain or capable of being rendered certain before the lease takes effect. If the maximum duration of the lease is certain the possibility that the lease may end at an earlier time does not render it void. The term of the lease cannot commence earlier than the date on which the lease is granted.

The contract has a defined commencement date and is for a fixed period with a defined end date. Although the contract may be terminated earlier for several reasons this does not render the contract void.

The tenant enjoys exclusive possession of the unit. The contract stipulates that a new tenant shall pay an incoming fee in the form of a licence fee, in full before the tenant is entitled to 'possession of the unit.' The tenant is required to pay the up front payment as a premium to secure a right of residence in the specified unit within the residency complex. In return the tenant receives the right to sole occupancy and enjoys exclusive occupation of the unit. The tenant is entitled to live in the unit for a maximum period of xx years with the right of quiet enjoyment. The contract allows the taxpayer access within reasonable hours for the proper maintenance of the unit but this right of inspection is not to interfere with the tenant's right of quiet enjoyment. Except for this right of owner entry, the tenant has the right to exclude all others from the assigned unit. These factors support the tenant's surety of exclusive possession to the unit.

The contract also includes the shared consensual responsibilities of the taxpayer as the owner and of the tenant to sell the residence right. Any proceeds from the sale of the tenancy right are paid to the taxpayer first. The clause also indentifies parties entitled to a share of the sale proceeds and their proportion of the proceeds. The parties are the owner, the administrator company and the tenant. The tenant therefore has an interest, through a tenancy right, over property owned by the taxpayer.

A licence arrangement may entail the provision of certain additional services and costs as part of the fee paid for accommodation. Under the 'XX' contract other costs and services are not incorporated into the incoming contribution described as the 'licence fee.' The tenant is responsible for the utility expenses and insurance of the contents of the unit. A service charge is paid on a regular basis towards the operating costs of the complex but this is an additional charge to the 'licence fee' paid to secure the tenancy right.

The tenant occupies the unit at his own risk. The contract indicates a level of independence and responsibility that is not evident in a licence.

The 'XX' contract is a written agreement that sets out the terms of occupation of the tenant and precisely defines the area of occupation as being a specified unit of accommodation within the residency complex. A lease will specify the area leased. A licence would allow the taxpayer to move a tenant to another unit as the area of occupation is not precisely defined and can terminate the occupation on little or no notice. There is no provision in the contract for the residence right to be transferred at the taxpayer's direction to another unit in the residency complex at some other point in time. In common with a lease, the tenant also has a corresponding interest in the common property.

The intent of the contract is clear that changes to the property owned by the taxpayer or the sale of the right of residence are a shared responsibility where both parties' rights are subject to the other party's interest. It does not reflect a tenant/landlord relationship as would be found under a licence contract.

The contract in its entirety supports the view that it was the intent of the taxpayer and the tenant to enter into an agreement whereby exclusive possession in a specified unit is afforded the tenant for a defined period in exchange for a premium paid to the taxpayer at the beginning of the contract. The contract provides the tenant with a greater surety of occupation than merely a personal privilege to occupy the unit.

The legal rights in the contract support a conclusion that the 'XX' contract is a lease and not a licence. Accordingly the incoming contribution paid by the tenant to the taxpayer is correctly classified as a lease premium and is assessable when derived.

Question 2

Is the payment made to an outgoing tenant by the taxpayer under a lease arrangement a deduction pursuant to section 8-1 of the ITAA 1997 in the income year in which the payment is made?

We have concluded after an examination of the legal rights of the parties to the lease arrangement, that the incoming contribution is a lease premium and is assessable income in the year in which it is derived.

Under the terms of the lease agreement, the taxpayer is only required to make a payment to an outgoing tenant (or their estate) when a new tenant pays a new lease premium for a tenancy right to a unit. However expenses are listed that are deducted from the new incoming contribution before the remainder is paid to the departing tenant. The costs listed are the deferred management fee, any administrative fees and real estate charges and commission, refurbishment costs.

The deferred management fee consists of a percentage of the original lease premium and a percentage of the capital appreciation. By default, the departing tenant will receive the remainder of their original incoming contribution and the capital appreciation less the other residual expenses already mentioned.

The taxpayer as the complex operator is engaged in the business of leasing tenancy rights to residency complexes it owns. Income from the leases is on revenue account and assessable income pursuant to subsection 6-5(2) of the ITAA 1997. Conversely, a payment to terminate a lease agreement will be on revenue account. The payment is not a capital or private outgoing nor prevented from being a deduction by another provision of the ITAA 1997. It is an expense incurred in gaining or producing the taxpayer's assessable income and is necessarily incurred in carrying on the business of leasing tenancy rights to units.

The payment made to an outgoing tenant by the taxpayer on termination of the lease is a deduction to the taxpayer pursuant to section 8-1 of the ITAA 1997 in the income year in which the payment is made.

Issue 2

Question 1

Is the document titled ''YY' a loan agreement between the taxpayer and the tenant?

You have contended that the current tenancy contract 'YY' is an interest free loan agreement.

A standard definition of 'loan' is found in Chitty on Contracts 25th Ed., (1986) Sweet & Maxwell, 541, which defines a loan as:

.'. a contract whereby one person lends or agrees to lend a sum of money to another, in consideration of a promise express or implied to repay that sum on demand, or at a fixed or determinable future time, or conditionally upon an event which is bound to happen, with or without interest.'

In Re Securitibank Ltd (No. 2) [1978] 2 NZLR 136 at 167, Richardson J stated that

"... the essence of a loan of money is the payment of a sum on condition that at some future time an equivalent amount will be repaid".

A loan of money therefore requires the payment of an amount of money by one person to another and an obligation on the part of the recipient of the money to repay the entire amount at some time in the future, with or without full recourse to the recipient's assets.

The Commissioner recognises in a taxation ruling that there can be a misdescription of labels as to whether an amount that is an incoming contribution is a lease premium or a loan and notes that where it is a security deposit or an interest free loan that the amount will be capital in nature.:

The conditions of the loan require an incoming tenant to advance a loan to the taxpayer on or before the commencement date of the tenancy right. The loan amount is detailed in the contract. The taxpayer is not required to pay interest on the loan but must repay the loan in full on the earlier of the termination date or x months after the tenant terminates the occupancy right. Repayment of the loan and a share of the capital appreciation is to be made to the tenant or their estate. The loan is always paid in full by the taxpayer to the tenant. Simultaneously the tenant must pay to the taxpayer a deferred management fee which is a percentage of the original incoming contribution and other miscellaneous cost such as real estate and service fees. In return for a residence right, a tenant advances an interest free loan to the taxpayer who is obligated to repay the borrowed money in full to the tenant within a predetermined time of the earliest occurrence of the termination date or six months after the tenant terminates the tenancy right.

As the repayment of the loan to the tenant is not dependent on a new incoming contribution from a new tenant, the contract has all the characteristics of a loan. We conclude that the document titled 'YY' is a loan agreement between the taxpayer and the tenant.

Question 2

Is the amount received by the taxpayer as an interest free loan from an incoming tenant assessable income pursuant to section 6-5(2) of the ITAA 1997?

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

In some circumstances an amount paid to a residency complex operator for a right to occupy a unit will be treated as an assessable lease premium. However, in other circumstances the amount is fully repayable to the tenant on termination of the lease or right to occupy. In this case the amount payable by the tenant is treated as a loan. The receipt and repayment of the loan made by the tenants are on capital account.

As the tenant's contract specifies that the amount is fully refundable, if the tenant leaves the complex, the amount paid by the tenant can be characterised as a loan.

A loan amount, even though it may be described as an 'interest-free loan' or a 'security deposit', may be regarded as a lease premium and therefore included in assessable income under subsection 6-5(2) of the ITAA 1997 if the repayment of the loan is contingent upon a new tenant being found.

In this case the repayment of the loan is not reliant on a new tenant being found. The loan is required to be repaid at the termination date of the contract or 6 months after the tenant terminates the tenancy right. In these circumstances the amount is not considered to lose its character as a loan and will not be treated as a lease premium.

Accordingly the amount paid by tenants is treated as a loan and is not included in the taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.

Question 3

Is the deferred management fee (called departure fee in the contract) paid by the outgoing tenant under the loan agreement assessable income for the taxpayer pursuant to subsection 6-5(2) of the ITAA 1997?

The deferred management fee is called the departure fee in the loan agreement and is calculated according to the formula laid out in the contract which sets a percentage of the incoming contribution from the tenant.

The departing tenant pays this fee on the same date that the tenant is repaid the loan by the taxpayer which occurs on the termination date or x months after the tenant has terminated the occupancy right. Until the loan is repaid to the tenant, the fee does not mature into a recoverable debt.

The Commissioner's view is that the deferred management fee payable to the taxpayer becomes a recoverable debt on the date the loan is repaid to the tenant by the taxpayer. As a tenant taxpayer, the taxpayer's assessable income is ordinary income derived directly or indirectly from all sources during an income year. The deferred management fee is therefore assessable income pursuant to subsection 6-5(2) of the ITAA 1997 in the income year in which the loan is repaid.

Issue 3

Does Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply in respect of transactions made under the loan arrangement scheme?

Question 1

The Commissioner may seek to apply the general anti-avoidance provisions in Part IVA of the ITAA 1936 where he is of the opinion that a transaction or part of a transaction constitutes a scheme undertaken for the dominant purpose of obtaining a tax benefit.

Specifically Part IVA applies where a tax benefit is obtained by the taxpayer as a result of entering into a scheme, where the sole or dominant purpose of the taxpayer is to obtain the tax benefit. Where these criteria are satisfied, the Commissioner may apply section 177F of the ITAA 1936 to deny the tax benefit that arises under the scheme. The application of Part IVA requires the presence of the following:

· a scheme,

· a tax benefit and

· an objective conclusion that the scheme was entered into for the sole purpose or dominant purpose of obtaining a tax benefit.

Does the replacement of the existing lease agreement for incoming tenants to the residency complex by the loan agreement constitute a scheme as defined in subsection 177A(1) ITAA 1936?

Subsection 177A(1) of ITAA 1936 defines a scheme as:

(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.

Prior to a certain date the tenants obtained a right to reside in the residency complex after paying an incoming contribution as a lease premium as required by the terms of the contract 'XX'. The incoming contribution was on the taxpayer's revenue account and assessable in the year in which it was paid which was the year the tenant entered the residency complex. A deferred management fee was paid to the taxpayer by the departing tenant after a new incoming contribution was paid by a new tenant. After a certain date the taxpayer entered into loan agreements with new tenants. The terms of this contract required an interest free loan to be made by the tenant to the tax payer before the tenant obtained occupancy rights in the residency complex. The loan is repaid to the tenant on termination of the occupancy right. The interest free loan is on capital account. The taxpayer is entitled to receive a deferred management fee on the tenant's departure which is assessable income of the taxpayer in the year in which it is derived. The loan arrangement is an express agreement that is legally enforceable. The change in the tenancy contracts means the incoming contribution is moved from revenue account in the year the tenant enters the residency complex to capital account with assessable income derived by the taxpayer in the form of a deferred management fee only after the loan is repaid to the exiting tenant. It is clearly a scheme as defined in subsection 177A(1) of the ITAA 1936.

Does the implementation of the loan agreement result in a tax benefit for the taxpayer pursuant to section 177C of the ITAA 1936?

Part IVA of the ITAA 1936 will only apply where a scheme has been entered into or carried out to obtain a tax benefit and it can be concluded the dominant purpose of entering the scheme was to obtain a tax benefit. In such situations, the Commissioner can apply the provisions to deny the tax benefit obtained.

The tax benefit that could be regarded as a product of the scheme is as described in paragraphs 177C(1)(a) and (b) where

(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 of that year of income if the scheme had not been entered into or carried out; or

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or

Under the lease arrangement the incoming contributions are assessable income to the taxpayer and the exit payments to the tenants are a deduction for the taxpayer. Introducing a loan agreement for incoming tenants has the effect of altering the nature of the incoming contributions from tenants to payments of capital and the loan repayments by the taxpayer to the outgoing tenant as a return of that capital. As the amounts will not be on revenue account, they effectively will not be included as assessable income when the loan is received by the taxpayer pursuant to section 6-5 of the ITAA 1997 or as a deduction pursuant to section 8-1 of the ITAA 1997 when the loan is repaid to the tenant. Therefore the amounts of incoming contributions will no longer be included as assessable income for the taxpayer in the year in which the tenant moves into the residency complex. The implementation of the loan agreement results in a tax benefit pursuant to paragraph 177C(1)(a) of the ITAA 1936.

Can it be objectively concluded that the dominant purpose of the scheme ie the implementation of the loan agreement for incoming tenants, is to obtain the tax benefit for the taxpayer pursuant to section 177D of the ITAA 1936?

Section 177D of the ITAA 1936 provides eight criteria to assist with objectively determining whether a taxpayer or another person entered into, or carried out a scheme for the dominant purpose of obtaining a tax benefit after 27 May 1981.

The taxpayer has implemented a scheme from which it will obtain a tax benefit of no longer declaring incoming contributions from tenants as assessable income.

SECTION 177D

177D  SCHEMES TO WHICH PART APPLIES  

This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), 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;

From a certain date the loan agreement has been phased in gradually as tenants with a lease arrangement contract leave the complex and are replaced by new incumbents. The loan agreement is an interest free loan arrangement, recognised by the Commissioner as a common contract in the industry. This is a factor against the dominant purpose of the scheme being a tax benefit for the taxpayer.

(ii) the form and substance of the scheme;

The taxpayer is progressively changing the contract for the tenancy right from the lease arrangement where the incoming contribution is a lease premium to the loan agreement where the incoming contribution is an interest- free loan. Under the lease arrangement, the lease premium is assessable to the taxpayer in the year the tenant enters the residency complex. Under the new the loan agreement the tenant's incoming contribution is an interest free loan that is not assessable to the taxpayer.

The form and substance of the scheme is a factor that indicates the dominant purpose of the scheme is to provide a tax benefit for the taxpayer.

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

The loan agreement is being phased in, gradually replacing the lease arrangement as tenants terminate their tenancy rights. The taxpayer has not entered the scheme abruptly to deliver a tax benefit to the taxpayer immediately. The gradual introduction of the loan agreement is unlikely to be a factor that weighs for a tax benefit purpose.

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

The taxpayer will no longer declare the incoming tenant's contribution as assessable income. A deduction will not be available to the taxpayer when the loan is repaid to the departing tenant. The incoming contributions are a loan advance, and the loan repayments are on the taxpayer's capital account. This factor argues for the dominant purpose of the scheme as being a tax benefit for the taxpayer.

(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;

The incoming contributions under the lease arrangement were assessable income to the taxpayer on the tenant's entry to the residency complex and were recorded on the revenue account. The incoming contributions under the loan agreement will now be recorded on capital account. Each time a loan agreement is entered into, the taxpayer may be required to recognise additional liabilities on its balance sheet to reflect repayment of the tenant 'loan' and the share of capital appreciation of the tenancy right paid to outgoing tenants. Under both contracts the deferred management fee payable to the taxpayer on a tenant's exit remains as assessable income of the taxpayer. However the calculation of the fee has changed. The lease arrangement provides for the taxpayer to receive a percentage of the incoming contribution and of the capital appreciation of the tenancy right as the deferred management fee. The calculation of the departure fee in the loan agreement is restricted to a percentage of the original incoming contribution only. The share of capital appreciation accrues to the taxpayer who is required to pay a share to the tenant when the loan is repaid. This will result in the taxpayer deriving less income from the deferred management fee and from its share of the capital appreciation. This factor weighs against the dominant purpose of the scheme as being a tax benefit for the taxpayer.

(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;

The other parties impacted by the change from the lease arrangement to the loan agreement are the tenants and the beneficiaries of their estates. There is no immediate and direct change to the financial position of these parties under either of the contracts. The contract the tenant came into the residency complex is the same contract under which a tenant departs.

This factor argues neither for nor against the dominant purpose of the scheme as being a tax benefit for the taxpayer.

(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

The consequences of the loan agreement for a tenant appear to be a higher share of the capital appreciation and payment of a lower deferred management fee. In addition, payment of monies to departing tenants or their estates is no longer contingent on receipt by the taxpayer of a new incoming contribution. The loan agreement provides for payment to the tenant or their estate within xx months of the termination of the tenancy right.

The consequences of the scheme for the taxpayer are increased occupancy levels at the residency complex.

This factor is neither for nor against the argument that the dominant purpose of the scheme is a tax benefit for the taxpayer.

(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);

The connection between the taxpayer and the tenants is that which would be expected in an arm's length, commercial dealing. New tenants enter into the loan agreement out of their own choice and such entry in to the residency complex occurs in a competitive environment. There is distinct potential for commercial gain through capital sharing between the taxpayer and the tenant of the appreciation in the tenancy right. Both parties expect to benefit from this commercial relationship.

This factor is neither for nor against the argument that the dominant purpose of the scheme is as a tax benefit for the taxpayer.

On balance it cannot be objectively concluded that the taxpayer or other have entered into a scheme of a change in tenancy right with the dominant purpose of obtaining a tax benefit for the taxpayer pursuant to section 177D of the ITAA 1936.