Edited version of private advice

Authorisation Number: 1052046429461

Date of advice: 24 October 2022

Ruling

Subject:Employer remuneration trust

Question 1

If the contribution of monies, being an amount of $X, by the Employer to the Trustee pursuant to the Trust Deed are not included in the assessable income of the Contractor under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in the income year in which the contribution of monies is made to the Trustee by the Employer, has the Contractor obtained a tax benefit in respect of those contributions in connection with a scheme, as defined in section 177C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

If the Contractor has obtained a tax benefit in respect of the contribution of monies by the Employer to the Trustee pursuant to the Trust Deed (referred to in Question 1 above), will the Commissioner make a determination pursuant to paragraph 177F(1)(a) of the ITAA 1936 to cancel the tax benefit obtained by the Contractor?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Relevant facts and circumstances

The employer entity intends to implement an equity plan for the purpose of providing an equity incentive structure to deliver equity based benefits to employees and/or contractors selected by the board of the employer entity.

Assumptions

1.    The contractual relationship between the Eligible Contractor and the Employer is a contract for services and the Eligible Contractor is considered to be an independent contractor.

2.    The Eligible Contractor will have an ABN and be registered for GST purposes.

3.    The Eligible Contractor accounts for GST on a cash basis.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 paragraph 177C(1)(a)

Income Tax Assessment Act 1936 section 177CB

Income Tax Assessment Act 1936 subsection 177CB(3)

Income Tax Assessment Act 1936 subsection 177CB(4)

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 paragraph 177D(2)(a)

Income Tax Assessment Act 1936 paragraph 177D(2)(b)

Income Tax Assessment Act 1936 paragraph 177D(2)(c)

Income Tax Assessment Act 1936 paragraph 177D(2)(d)

Income Tax Assessment Act 1936 paragraph 177D(2)(e)

Income Tax Assessment Act 1936 paragraph 177D(2)(f)

Income Tax Assessment Act 1936 paragraph 177D(2)(g)

Income Tax Assessment Act 1936 paragraph 177D(2)(h)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1936 paragraph 177F(1)(a)

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Division 83A

Reasons for decision

Question 1

Part IVA of the ITAA 19361 gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained by a taxpayer in connection with a scheme to which Part IVA applies.

The application of Part IVA depends on the existence of:

1)    a scheme entered into by a taxpayer or taxpayers within the meaning of section 177A

2)    a taxpayer obtains or would have obtained a tax benefit in connection with the scheme, but for the operation of section 177F, and

3)    the dominant purpose of the scheme was for a taxpayer or taxpayers to obtain a tax benefit, considering the factors contained in section 177D.

Scheme

The definition of the 'scheme for the purposes of subsection 177A(1) is broad, and the identification of the events and circumstances that make up the scheme depends on the facts of the particular case. Here, the scheme for the purposes of subsection 177A(1) comprises of all or any of the following steps (the Scheme):

      i.        The Trust Deed is executed.

     ii.        The Employer and the Contractor enter into the Contractor Agreement.

    iii.        The Employer and the Contractor subsequently enter into the Contractor Written Agreement which, in conjunction with the Contractor Agreement, governs the terms of the agreement between the Employer and the Contractor.

   iv.        Under the Contractor Written Agreement, the Employer agrees to provide the Contractor with 'fringe benefits' being an amount of $X worth of investments in the Trust as part of the Contractor's remuneration. The reference to 'fringe benefits' is a reference to that term as defined in the Contractor Agreement.

     v.        The Employer makes a contribution to the Trust in respect of its employees and contractors comprising of an undissected lump sum amount. Included as part of this contribution is an amount of $X paid by the Employer to the Trustee intended for or in respect of the Contractor.

   vi.        After the contribution is made, the Contractor is invited to apply for Allocated Investments up to or for the value of $X.

  vii.        The Contractor accepts the invitation, by completing the Participant Application Form or equivalent document, and requests a loan for $X from the Trustee or an amount equal to the Allocated Investment, to be applied to the acquisition of an interest in the Allocated Investments.

viii.        The Trustee makes a loan of $X to the Contractor. The loan is subject to the terms contained in the Trust Deed. No interest is charged by the Trustee to the Contractor in respect of the loan. The loan is made by book entry in the Trustee's books and records. No actual cash advance of monies is made by the Trustee to the Contractor.

   ix.        The funds loaned by the Trustee to the Contractor are applied as Application Moneys for the Issue Price of the Allocated Investment. The application of the loaned funds for the Issue Price is by way of book entry in the books and records of the Trust. There is no transfer of cash by the Contractor to the Trustee.

     x.        The Trustee notifies the Contractor of the acceptance of the Contractor's application to participate in the Trust, and issues certificate(s) to the Participant, stating the value of the Allocated Investment. The Contractor becomes a beneficiary of the Trust and as a Participant, may become entitled to distributions of net income, capital of the Trust and be considered for distribution on the winding up of the Trust. The Contractor becomes entitled to the rights of a Participant under the Trust Deed.

   xi.        The Trustee applies the $X to acquire Allocated Investments, being publicly listed shares or units.

  xii.        Upon the cancellation of the Allocated Investments under clause C of the Trust Deed, the Trustee pays the $X to the Contractor on the direction of the Employer under clause JJ of the Trust Deed.

Counterfactual

The identification of a tax benefit requires consideration of the income tax consequences that would have occurred or might reasonably be expected to have occurred, but for the operation of Part IVA. To identify the tax benefit requires consideration of an 'alternative hypothesis' or an 'alternative postulate', referred to in this reasons for decision as the 'counterfactual'.

The counterfactual is what would have happened or might reasonably be expected to have happened if the particular scheme has not been entered into or carried out. A conclusion that the tax effect:

•         'would have' occurred if the scheme had not been entered into or carried out is made based on a postulate comprising all of the events or circumstances that actually occurred, other than those that form part of the Scheme, alternatively

•         'might reasonably be expected to have occurred' if a scheme had not been entered into or carried out must be made on the basis of a postulate that is a reasonable alternate to the scheme, having regard to the substance of the scheme, the consequences for the taxpayer and disregarding potential tax results and consequences.

Section 177CB applies to deciding, under section 177C, whether any of the following (referred to as 'tax effects') would have occurred, or might reasonably be expected to have occurred, if a scheme had not been entered into or carried out:

•         an amount being included in the assessable income of the taxpayer

•         the whole or a part of a deduction not being allowable to the taxpayer, or

•         the whole or a part of a capital loss not being incurred by the taxpayer.

Subsection 177CB(3) provides that:

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.

Subsection 177CB(4) provides that:

In determining for the purposes of subsection (3), whether a postulate is 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).

The objective circumstances of the Scheme indicates that if the Scheme had not been entered into or carried out, it might reasonably be expected that the amount of $X contributed by the Employer to the Trust, which was then loaned by the Trustee to the Contractor, to enable the Contractor to become a Participant in the Trust, would have or might reasonably be expected to have been paid directly to the Contractor, or directed by the Contractor, to enable the Contractor to invest, apply or otherwise deal with the amount of $X for the purpose of the Contractor's investment.

Should the Contractor have wished to participate in the investment directly, or as a Participant of the Trust, it could have done so with its $X being subject to income tax.

The Explanatory Memorandum to the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 (which introduced section 177CB) states that:

1.103 An examination of the substance of a scheme [Schedule 1, item 5, subparagraph 177CB(4)(a)(i)] requires a consideration of its commercial and economic substance as distinct from its legal form or shape.

The commercial and economic substance of the scheme is that the Contractor has been remunerated by an amount of $X.

The Contractor Written Agreement provides that the payment of the $X of fringe benefits is part of the Contractor's remuneration and is provided over and above invoiced amounts.

The invitation for the Contractor to participate in the Scheme is not based on established or stated performance criteria that forms part of the Contractor Agreement or stated in the Contractor Written Agreement.

Unlike an Eligible Employee, clause C of the Trust Deed does not allow for the Employer to cancel the Contractor's Allocated Investment. Thus, once the Employer has made the Contribution to the Trust for the Contractor, the Employer cannot then cancel the Contractor's participation in the Trust.

The Contractor can continue to hold their interest in the Trust after the Contractor ceases to provide any services to the Employer and can continue to receive income from the Allocated Investment. The Contractor's continued interest in the Trust is not premised on any performance criteria.

The Plan is structured so that the Contractor applies for and receives a loan to fund their participation in the Trust, so as to then acquire an investment of an amount, from monies equal to a similar amount of monies that have already been allocated and contributed by the Employer.

The provision of the loan by the Trustee to the Contractor, when the agreement between the Employer and the Contractor under the Contractor Written Agreement is considered, provides no commercial purpose, as the Employer and the Contractor had already agreed that the Employer will make a contribution to the Trust so as to provide the Contractor with $X worth of investments in the Trust.

The contribution could have been made by the Employer to the Trust, for the Trustee to hold the Contribution on trust for the Contractor, without the need for the loan to be made by the Trustee to the Contractor.

Instead, requiring the Contractor to undertake a loan to acquire the Allocated Investment as a Participant, in circumstances where the Employer directs the Trustee to pay that amount to the Contractor on the cancellation of the Allocated Investment, has the effect of deferring the receipt of those monies as income in the hands of the Contractor.

The commercial and economic substance of the Scheme is that the income of the Contractor, being the $X, is utilised by the Contractor before tax, by way of a loan and investment in the Trust, in circumstances where the $X was not for services actually rendered by the Contractor.

Thus, although the form of the Trust Deed requires the making of the loan by the Trustee to the Contactor, in practice, as no funds move from the Trust to the Eligible Contractor in providing the loan, it is, in substance, the cash contributions from the Employer that are applied to acquire the Investments.

The Explanatory Memorandum to the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 also states that:

1.107 An examination of the results or consequences for the taxpayer that would be achieved by the scheme (tax results aside) [Schedule 1, item 5, subparagraph 177CB(4)(a)(i)] requires a consideration of any financial or other consequences for the taxpayer that would be accomplished or achieved as an end result of the scheme having been entered into and carried out.

The financial or other consequences for the Contractor, is that the Contractor is able to access funds originally paid or contributed by the Employer, being an amount of $X, enabling the Contractor to have the immediate benefit of pre-taxed funds to invest and to generate income from those monies.

By enabling the Contractor to retain their Allocated Investment in the Trust, as a Participant, after ceasing to provide services to the Employer, effectively enables the Contractor to defer the income arising from the Employer's payment of the $X to an undetermined future time, and effectively allows the Contractor to choose when they become assessable on the $X.

That is, the Scheme enables the deferment of the payment of the $X to the Contractor to an undetermined time, while enabling the Contractor to receive the full economic benefit of the untaxed $X almost immediately on the contribution by the Employer.

If the effect of this deferment of the $X is removed, the consequence is that the Employer directs the payment of $X to the Contractor, which the Trust Deed acknowledges as being a payment of "... some other form of ordinary assessable income." The basis for enlivening the payment by the Trustee to the Contractor under the Trust Deed is the direction by the Employer to the Trustee, for a payment to be made to the Contractor.

It follows then that the counterfactual is reasonable.

Tax benefit

Under paragraph 177C(1)(a), a reference to obtaining a tax benefit in connection with a scheme is read as a reference to '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.'

It is considered that the scheme gives rise to a tax benefit under paragraph 177C(1)(a).

The tax benefit that the Contractor receives in connection with the Scheme is an amount of up to $X not being included in the assessable income of the Contractor under section 6-5 of the ITAA 1997 in the income year in which a contribution is made to the Trust by the Employer.

Question 2

Whether the Commissioner will make a determination pursuant to paragraph 177F(1)(a) requires there be:

1)    a scheme entered into by a taxpayer or taxpayers within the meaning of section 177A

2)    a taxpayer obtains or would have obtained a tax benefit in connection with the scheme, but for the operation of section 177F, and

3)    the dominant purpose of the scheme was for a taxpayer or taxpayers to obtain a tax benefit, considering the factors contained in section 177D.

Question 1 concluded that there was a 'scheme' and that the Contractor obtains or would have obtained a tax benefit in connection with the Scheme.

In light of the above conclusions, where the Commissioner makes a determination pursuant paragraph 177F(1)(a), then the Contractor obtains or would have obtained a tax benefit from the Scheme, but for the operation of section 177F.

In determining whether the Commissioner will make such a determination, this Question will focus on whether, objectively ascertained, the dominant purpose of the Scheme was for the Contractor to obtain a benefit, pursuant to section 177D.

Consideration of section 177D

Section 177D focuses on the objective purpose of the taxpayers that are a party to the scheme in which the taxpayer has obtained a tax benefit, so as to determine, after having regard to eight specified factors, whether it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling the taxpayer to obtain the tax benefit.

Having regard to the eight factors in subsection 177D(2), the Commissioner considers that one or more of the persons who entered into or carried out the Scheme, did so for the dominant purpose of enabling the Contractor to obtain the tax benefit in connection with the scheme. The eight factors are considered below.

The first factor in paragraph 177D(2)(a) - manner in which the scheme was entered into or carried out

Under the scheme, the Contractor's services are provided to the Employer and in lieu of cash payments for those services, the Contractor is offered participation in the Plan. The Plan is structured so that the Contractor has to take out a loan and fund their participation in the Trust.

The Employer's discretion to invite the Contractor to participate in the Plan is not based upon the Contractor meeting any nominated performance criteria or being required to maintain any specified performance standards.

The contribution made by the Employer to the Trust, the income that the Contractor receives from the Allocated Investments while a beneficiary of the Trust, and the Contractor's right to a payment arising in respect of a Cancellation Entitlement and under clause JJ of the Trust Deed arises by virtue of the terms of the Trust Deed. There is no expressed contractual interconnectivity between the terms of the Trust Deed and the Contractor Agreement.

Although the Employer makes a lump sum contribution to the Trust, this lump sum comprises of an amount that is intended to be allocated to specified employees and contractors. The contribution of the lump sum amount that includes the $X, enables the Contractor to pay the Issue Price and acquire the Allocated Investments via a loan, using the same amount of $X.

The loan by the Trustee to the Contractor is not made on commercial terms as:

•         the Contractor is not charged interest on the loan

•         the Contractor is not required to repay any amount of the loan until the Allocated Investment is cancelled, and

•         the repayment of the principle of the loan is limited to the lesser value of either Issue Price or value of the realised Investment.

Where the Contractor defers cancelling the Allocated Investment, the Contractor defers the repayment of the loan, and the subsequent direction by the Employer to the Trustee under clause JJ of the Trust Deed.

The direction by the Employer to the Trustee to pay an amount to the Contractor pursuant to clause JJ of the Trust Deed has the effect of negating an amount of the loan repayment.

A similar outcome, to the effect of clause JJ of the Trust Deed, would be for the Employer to pay the same amount of the contribution made to or for the Contractor so as to acquire the same investment.

The Contractor, pursuant to the Trust Deed, will have a number of rights, in respect of the Investment, that include or are similar to rights they would have as if they are the owner of the Investment.

On withdrawal of investments in the Trust Deed, the Contractor gets the loan refunded to them. There is no vesting or performance conditions required by the Employer that are linked to the Contractor:

•         being required to maintain a beneficial interest in the Trust, or

•         on withdrawing their entitlement to Allocated Investments in the Trust.

The Contractor can access and withdraw the money invested in the Trust at any time.

The second factor in paragraph 177D(2)(b) - the form and substance of the scheme

There is a clear divergence between the form and the substance of the scheme.

The form of the Scheme requires the Contractor be invited to participate in the Plan. In doing so, the Contractor is able to apply for a loan so as to acquire Allocated Investments in the Trust.

To allow this to occur, the Employer nominates the Contractor to participate and makes a lump sum contribution to the Trust prior to the Contractor being a Participant of the Trust.

Although the Employer and Contractor may negotiate what the Trust will acquire as the Investment, under the terms of the Trust Deed, the Contractor has little discretion as to the nature of the Investment that the Trustee may invest in respect of the Allocated Investments.

The Trust Deed specifies terms of the loan that the Trustee may make to the Contractor to enable the Contractor to acquire Allocated Investments at the Issued Price.

The Contractor has no direct legal ownership in the Investments of the Trust.

The Contractor, as a Participant, is limited by the Trust Deed to requesting the Trustee to cancelling some or all of their Allocated Investments to two times per year.

The Allocated Investments shall be cancelled by the Trustee upon notification by either the Employer or the Participant, being the Contractor. Where the Employer instructs the Trustee, the Trustee will make a payment to the Contractor pursuant to clause JJ of the Trust Deed.

However, in substance, when the lump sum contribution is made by the Employer to the Trust, it is made so that of that the amount of the $X can then be offered to the Contractor as a loan by the Trustee to the Contractor.

The loan between the Contractor and the Trustee is made through the books and records of the Trustee and no actual funds are advanced. The substance of the loan is non-commercial, as stated above, the Contractor:

•         is not charged interest on the loan

•         is not required to repay any amount of the loan until the Allocated Investment is cancelled, and

•         is only required to repay the principle of the loan, limited to the lesser value of either Issue Price or value of the realised Investment.

Where the Contractor defers cancelling the Allocated Investment, the Contractor defers the repayment of the loan.

This right to cancel is at the discretion of the Contractor.

The direction by the Employer to the Trustee to pay an amount to the Contractor pursuant to clause JJ of the Trust Deed has the effect of negating an amount of the loan repayment.

Although the Trustee remains the legal owner of the Investments, in substance the Contractor holds significant ownership rights in respect of the Investments as:

•         The Contractor obtains rights under the Trust Deed, as a Participant, that include some rights that are akin to ownership rights of or in the Investment.

•         The Contractor is entitled to the income generated by the Investment.

•         The Contractor is able to realise the Investment by requesting the Trustee cancel the Allocated Investment.

The Contractor, as a Participant, is able to cancel their Allocated Investment immediately following becoming a Participant, thereby realising any gains made in respect of the Investment, and they receive the payment under clause JJ of the Trust Deed. In such circumstances, the Trust offers no ability or incentive to retain the Contractor for the Contractor's services.

Alternatively, the Contractor may retain the Allocated Investment after the Contractor Agreement has terminated, allowing the Contractor to retain the right, as a Participant, and not provide any services to the Employer, or have any connection to the Employer. Thus, the Trust offers no ability or incentive for the Contractor to remain a Contractor of the Employer.

The invitation for the Contractor to participant in the Trust is not premised on any stated performance criteria, nor is the Contractor's continued right to the Allocated Investment dependent upon the Contractor's services subject to any specific criteria or performance.

Instead, as the Employer will direct the Trustee to pay the amount pursuant to clause JJ of the Trust Deed, the Contractor may receive the monies contributed by the Employer when they choose, and prior to cancelling their interest in the Allocated Investment, receive the tax free benefit of those monies for investment purposes.

The loan is utilised to demonstrate that the Contractor "pays" for any benefits under the Plan. However, given the loan amounts, once repaid, are then ultimately paid out to the Contractor, the substance of the scheme is that the Contractor has not, in substance, genuinely "paid" for any benefits under the Plan.

Although the form of the Employer contribution to the Trust enables the provision of the loan by the Trustee to the Contractor, which then enables the Contractor to benefit from the income generated by Trust investments, in substance, the $X that is contributed to the Trust by the Employer is able to be utilised by the Contractor in a tax free form, in respect of Investments that the Contractor has effective control over, and enables the Contractor to defer the payment of income tax in respect of the receipt of the $X.

The third factor in paragraph 177D(2)(c) - the time at which the scheme was entered into and the length of the period during which the scheme will be carried out

The timing of the steps of the scheme is significant.

Services are provided by the Contractor to the Employer and in lieu of cash payments (or bonuses) for those services, Allocated Investments (or interests in the Trust) are granted to the Contractor.

At the time the Contractor is invited to participate in the Plan and the lump sum contribution is made to the Trust, the contribution is an undissected lump sum, the total of which is not directly referrable to any particular Employee or Contractor.

At the time the contribution is made to the Trust, the Contractor does not include an amount for the contribution, as part of their assessable income.

There is no requirement under the Trust Deed for the Contractor to redeem their entitlement on the cessation of providing services to the Employer. The Contractor may retain their interest, as a Participant, in the Allocated Investment until, potentially, the vesting of the Trust.

The Contractor obtains the immediate benefit of the contribution made by the Employer for the Contractor, at the time the Allocated Investment is acquired and the Contractor is recorded in the Register. Such benefits include the receipt of income arising from the Investment made with the funds from the contribution, and some entitlements similar to that of ownership.

The payment by the Trustee in respect of clause JJ of the Trust Deed effectively defers the timing of the Contractor's receipt of that income for income tax purposes, from the time when the contribution is made to the Trust in respect of the Contractor, until the Allocated Investment is cancelled by the Trustee.

Thus, the Contractor is able to enjoy the benefits akin to some rights of ownership of the Allocated Investments, on which no tax has been paid until a time of the Contractor's choice, being when the Allocated Investments are cancelled. On that event, the contributed sums are subsequently applied in making a payment to the Contractor under clause JJ of the Trust Deed.

Thus, the timing of the cancellation of the Allocated Investments is determined by the Contractor, and therefore the Contractor can effectively choose when to be assessed on an amount that the Contractor already has the economic benefit from.

The fourth factor in paragraph 177D(2)(d) - the result in relation to the operation of this Act that, but for this part, would be achieved by the scheme

As a result of the operation of the Scheme, the Contractor receives an entitlement to the income generated by the Allocated Investment, and as the Participant, the Contractor holds a number of rights in the Investment as if they were the owner.

Despite obtaining such rights, but for the operation of Part IVA, the result of the operation of the taxation acts is that the Contractor does not incur any income tax on the receipt of such rights or upon the making of the contribution by the Employer.

Instead, the Scheme enables the Contractor to defer deriving income tax from the receipt of the contribution until the payment made by the Trustee to the Contractor under clause JJ of the Trust Deed whilst obtaining the full economic benefit of the income by enjoying the benefits of ownership of the Allocated Investments which are invested or acquired with equivalent funds on which no tax has been paid.

The fifth factor in paragraph 177D(2)(e) - change in financial position of the relevant taxpayer that has resulted, will result, or may be reasonably expected to result, from the scheme

For the duration of the scheme, the Contractor's financial resources are increased as the scheme allows the Contractor to use the gross amount of income which would otherwise have been assessable to them to acquire the Allocated Investments. The Contractor could not have obtained the same amount of Allocated Investments from the after-tax amount of remuneration that would otherwise have been paid to them.

In participating in the Scheme, the Contractor is able to derive income that is generated by the value of the Allocated Investment acquired using the untaxed amount of the contribution. Had the Contractor been paid the amount of the contribution directly by the Employer, or directed the Employer to acquire the same Investment that was acquired by the Trustee as the Allocated Investment, the Contractor would have been subject to income tax on that payment or direction.

The deferment of the payment of income tax on the contribution, being the time between which the Employer makes the contribution to the Trust and the payment by the Trustee, pursuant to clause JJ of the Trust Deed, enables the Contractor to utilise funds that the Contractor would have had to use to pay in respect of that income tax, for that duration.

It follows then that as a result of the Scheme, the Contractors' financial position benefits from the deferment of income tax in connection with the contribution and the increased potential income generation arising from the Trust acquiring an Allocated Investment from the full amount of the contribution.

The sixth factor in paragraph 177D(2)(f) - change in the financial position of any person who has, or has had, any connection with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme

Under the scheme, the Employer has a connection with the Contractor pursuant to the Contractor Agreement and Contractor Written Agreement which govern the terms of the agreement between the two parties.

The financial position of the Employer in making the cash contributions would result in deficiency of funds as the contribution is voluntary and does not discharge any existing, current or immediate obligation or liability.

The Trustee's right of indemnity under the Trust Deed enables the Trustee to have a lien over the Trust Fund for any liabilities that the Trustee properly incurs. However, the Employer, not the Contractor (as a Participant of the Trust) is to reimburse the Trustee for all costs and expenses incurred by the Trustee in the operation of the Trust.

Thus, the Employer, not the Contractor, effectively pays for all expenses incurred by the Trustee in the operation of the Trust under the Scheme.

The seventh factor in paragraph 177D(2)(g) - any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out

As outlined above, the Trustee's loan to the Contractor is made on non-commercial terms.

The lack of any interest charged by the Trustee, the Trustee's limited ability to recover the principal amount of the loan to the lesser of the realisable value of the Allocated Investment or the loan, and the deferment of the repayment of the loan until the notification that the Allocated Investment is to be cancelled, means the Contractor bears no risk in the Investment or the loan.

The Contractor is not required to meet specified performance criteria for the Employer to make the Contribution to the Trust, nor is the Contractor's continued interest in the Trust dependent upon the Contractor maintaining a level of performance. Instead, the Contractor and the Employer agree for the Employer to make a contribution to the Trust for the $X, and the Contractor can then choose when that contribution is effectively the Contractor's income.

As the Contractor's interest in the Trust is not related to or contingent upon an objective performance and retention incentive of the Contractor, the purpose of the Trust cannot be said to be for the retention and performance of the Contractor. By not requiring any level of performance to have or maintain the Contractor's interest in the Trust, yet enable the Contractor to choose when to declare an amount of income that has been effectively deferred from the time the Employer made the contribution for the Contractor, the Plan has the appearance of artificiality.

The eighth factor in paragraph 177D(2)(h) - the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f)

The relevant taxpayer is a Contractor of the Employer. They are in a business relationship and the terms of agreement between the two parties is governed by the Contractor Agreement and the Contractor Written Agreement.

The Representative is a business associate of the Employer.

The Contractor is not an associate of the Employer.

The Trustee is an associate of the Employer.

Conclusion as to purpose after considering the eight factors in relation to the scheme

Having had regard to all of these factors individually and to the scheme overall, it is reasonable to conclude that the dominant purpose for entering into or carrying out the Scheme is that of enabling the Contractor to obtain a tax benefit, being an amount of $X not being included in the Contractor's assessable income in the income year in which a contribution is made to the Trust by the Employer.

In these circumstances, the Commissioner will exercise his discretion under paragraph 177F(1)(a) to cancel the tax benefit and determine that the whole or a part of the contributed monies of $X shall be included in the assessable income of the Contractor under section 6-5 of the ITAA 1997 in the income year in which they were contributed to the Trustee by the Employer.

1 All subsequent legislative references are to the ITAA 1936, unless otherwise stated.