Edited version of private advice

Authorisation Number: 1052046432082

Date of advice: 24 October 2022

Ruling

Subject:Employer remuneration trust

Question 1

If the contribution of monies by the Employer to the Trustee pursuant to the Trust Deed are not included in the assessable income of the Employee 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 Employee 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 Employee 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 Employee?

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.

Relevant legislative provisions

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

Taxation Administration Act 1953 Chapter 2 of Schedule 1

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 a 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 Employee enter into the Employment Contract which governs the terms of the contractual relations between them. The Employee provides services to the Employer under the Employment Contract.

    iii.        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 monies paid by the Employer to the Trustee intended for or in respect of the Employee (the Contributed Amount).

   iv.        The Employee is invited to apply for Allocated Investments up to or for the value of the Contributed Amount.

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

   vi.        The Trustee makes a loan of an amount equal to the Contributed Amount to the Employee. The loan is subject to the terms contained in the Trust Deed. No interest is charged by the Trustee to the Employee 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 Employee.

  vii.        The funds loaned by the Trustee to the Employee 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 Employee to the Trustee.

viii.        The Trustee notifies the Employee of the acceptance of the Employee's application to participate in the Trust, and issues certificate(s) to the Participant, stating the value of the Allocated Investment. The Employee 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 Employee becomes entitled to the rights of a Participant under the Trust Deed.

   ix.        The Trustee applies the Contributed Amount to acquire Allocated Investments, being publicly listed shares or units.

     x.        Upon the cancellation of the Allocated Investments under clause C of the Trust Deed, the Trustee either pays an amount equal to the Contributed Amount to the Employee on the direction of the Employer under clause JJ of the Trust Deed, or alternatively, provides the Employee discounted rights to shares from the repayment of the loan pursuant to clause KK 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 equivalent to the Contributed Amount, contributed by the Employer to the Trust, which was then loaned by the Trustee to the Employee, to enable the Employee to become a Participant in the Trust, would have or might reasonably be expected to have been paid directly to the Employee, or directed by the Employee, to enable the Employee to invest, apply or otherwise deal with the amount equivalent to the Contributed Amount (after PAYG withholding) for the purpose of the Employee's investment.

Should the Employee wish to participate in the investment directly, or as a Participant of the Trust, it could have done so with the amount equivalent to the Contributed Amount (after PAYG withholding), which would have been subject to income tax in the hands of the Employee.

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.

Under the Scheme, the income received by the Employee under the Plan is not provided pursuant to the terms of the Employment Contract, but rather pursuant to the terms of the Trust Deed. The invitation by the Employer to the Employee, for the Employee to participate in the Scheme or even retain their beneficial interest in the Trust, is not based on established or stated performance criteria that forms part of their Employment Contract.

The Employee is not required to cancel their Allocated Investment as a Participant, on the termination of their Employment, and as a Participant, may continue to hold the Allocated Investment after the termination of their employment. In doing so as a Participant, the Employee is entitled to rights in the Allocated Investment which are characterised by the terms of the Trust Deed as being "substantially the same rights in respect of the Investments ... as if the Participants were the legal owners of the Investments".

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

The requirement for the Employee 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 Employee on the cancellation of the Allocated Investment, has the effect of deferring the receipt of those monies as income in the hands of the Employee.

The commercial and economic substance of the Scheme is that the income of the Employee, being the amount of funds equivalent to the Contributed Amount, is accessed by the Employee before tax, by way of a loan and investment in the Trust.

Thus, although the form of the Trust Deed requires the making of the loan by the Trustee to the Employee, in practice, as no funds move from the Trust to the Eligible Employee/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 Employee, is that the Employee is able to access funds originally paid or contributed by the Employer, being an amount equivalent to the Contributed Amount before tax, enabling the Employee to have the immediate benefit of pre-taxed funds to invest and to generate income from those monies.

By enabling the Employee to retain their Allocated Investment in the Trust, as a Participant, after their termination of employment, effectively enables the Employee to defer the income arising from the Employer's payment of an amount equivalent to the Contributed Amount to an undetermined future time, and effectively allows the Employee to choose when they become assessable on an amount equivalent to the Contributed Amount.

That is, under the Scheme the Employer, by contributing the Contributed Amount to the Trust and the Trustee making the loan to enable the Employee to acquire the Investments, enables the deferment of the payment of an amount equivalent to the Contributed Amount to the Employee to an undetermined time, while enabling the Employee to receive the full economic benefit of the untaxed amount equivalent to the Contributed Amount (which has not been subject to withholding) almost immediately on the contribution by the Employer.

If the effect of this deferment of the Employee receiving an amount equivalent to the Contributed Amount is removed, the consequence is that the Employer directs the payment of the Contributed Amount to the Employee, which clause JJ of the Trust Deed acknowledges as being a payment of "salary minus amounts withheld as Pay As You Go tax instalments and/or some other form of ordinary assessable income" The basis for enlivening the payment by the Trustee to the Employee under clause JJ of the Trust Deed is the direction by the Employer to the Trustee, for a payment to be made to the Employee. Alternatively, the operation of clause KK of the Trust Deed and the Trustee providing discounted rights to shares to Employees, occurs when the Employer instructs the Trustee to do so.

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 Employee receives in connection with the scheme is an amount equivalent to the Contributed Amount, not being included in the assessable income of the Employee 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 Employee 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 to

paragraph 177F(1)(a), then the Employee 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 Employee 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 Employee 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

The Employee and Employer contractual obligations inter se arise from the terms of the Employment Contract, which includes the provision of relevant employment services in return for identified and specific remuneration. The Contributed Amount paid by the Employer to the Trust is not recorded by or forms part of the Employment Contract.

The Employer's discretion to invite an employee to participate in the Plan is not based upon the Employee 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 Employee receives from the Allocated Investments while a beneficiary of the Trust, and the Employee's right to a payment arising in respect of an Employee's Cancellation Entitlement and under clause JJ of the Trust Deed or alternatively the receipt of discounted rights to shares under clause KK 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 Employment Contract.

Although the Employer makes a lump sum contribution to the Trust, this lump sum comprises of amounts that is intended to be allocated to specified employees and contractors. The contribution of the lump sum amount that includes an amount equivalent to the Contributed Amount, enables the Employee to pay the Issue Price and acquire the Allocated Investments, using the same amount of value of the Contributed Amount.

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

•         the Employee is not charged interest on the loan

•         the Employee 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 Employee defers cancelling the Allocated Investment, the Employee defers the repayment of the loan, and the subsequent direction by the Employer to the Trustee under clauses JJ or KK of the Trust Deed.

The direction by the Employer to the Trustee to pay an amount to the Employee pursuant to clause JJ of the Trust Deed or alternatively directing the receipt of discounted rights to shares under clause KK of the Trust Deed, has the effect of negating an amount of the loan repayment.

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

It is envisaged that Employees invited to participate in the Plan will do so given they will access additional remuneration that they would not otherwise be entitled to under the Employment Contract.

The Employee will provide input into the type of investment with the Employer, and the Employee 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, the Employee gets the loan refunded to them. There is no vesting or performance conditions required by the Employer that are linked to the Employee:

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

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

The Employee 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 Employee be invited to participate in the Plan. In doing so, the Employee 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 Employee to participate and makes a lump sum contribution to the Trust prior to the Employee being a Participant of the Trust.

Although the Employer and Employee may negotiate what the Trust will acquire as the Investment, under the terms of the Trust Deed, the Employee 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 Employee to enable the Employee to acquire Allocated Investments at the Issued Price.

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

The Employee, 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 Employee. Where the Employer instructs the Trustee, the Trustee will make a payment to the Employee pursuant to clause JJ of the Trust Deed or offer discounted shares pursuant to clause KK 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 equivalent to the Contributed Amount can then be offered to the Employee as a loan by the Trustee to the Employee.

The loan between the Employee 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 Employee:

•         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 Employee defers cancelling the Allocated Investment, the Employee defers the repayment of the loan. The direction by the Employer to the Trustee to pay an amount to the Employee pursuant to clause JJ of the Trust Deed or provide the discounted rights to shares per clause KK 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 Employee holds significant ownership rights in respect of the Investments as:

•         The Employee is able to negotiate with the Employer, for the Employer to recommend the Trustee acquire particular Investments as the Allocated Investments for the Employee.

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

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

The Employee, 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, or a discounted amount of those shares pursuant to clause KK of the Trust Deed. In such circumstances, the Trust offers no ability or incentive to retain the Employee as an employee of the Employer.

Alternatively, the Employee may retain the Allocated Investment after the Employment Contract has terminated. The option that allows for the Employee to retain the right, as a Participant without any contract of employment, or any connection to the Employer, mean the Trust offers no ability or incentive for the Employee to remain an employee of the Employer.

The invitation for the Employee to participant in the Trust is not premised on any stated performance criteria, nor is the Employee's continued right to the Allocated Investment dependent upon the Employee continuing their Employment Contract or undertaking their employment 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 or discounted rights to shares pursuant to clause KK of the Trust Deed, the Employee may receive the monies equivalent to 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 Employee "pays" for any benefits under the Plan. However, given the loan amounts, once repaid, are then ultimately paid out to the Employee, the substance of the scheme is that the employee 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 Employer, which then enables the Employee to benefit from the income generated by Trust investments, in substance, the Contributed Amount that is contributed to the Trust by the Employer is able to be utilised by the Employee in a tax free form, in respect of Investments that the Employee has effective control over, and enables the Employee to defer the payment of income tax in respect of the receipt of an amount equivalent to the Contributed Amount.

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.

At the time the Employee 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 Employee does not include an amount for the contribution, as part of their assessable income.

There is no requirement under the Trust Deed for the Employee to redeem their entitlement on the termination of their employment with the Employer. The Employee may retain their interest, as a Participant, in the Allocated Investment until, potentially, the vesting of the Trust.

The Employee obtains the immediate benefit of the contribution made by the Employer for the Employee (i.e. the Contributed Amount), at the time the Allocated Investment is acquired and the Employee 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 or alternatively the benefit of discounted rights to shares under clause KK of the Trust Deed, effectively defers the timing of the Employee's receipt of that income for income tax purposes, from the time the Contributed Amount is paid to the Trust in respect of the Employee, until the Allocated Investment is cancelled by the Trustee.

Thus, the Employee 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 Employee's choice, being when the Allocated Investments are redeemed. On that event, the contributed sums are subsequently applied in making a payment to the Employee under clause JJ of the Trust Deed or the receipt of the benefit equivalent of the contributed sums pursuant to clause KK of the Trust Deed.

Thus, the timing of the cancellation of the Allocated Investments is determined by the Employee, and therefore the Employee can effectively choose when to be assessed on an amount that the Employee 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 Employee receives an entitlement to the income generated by the Allocated Investment, and as the Participant, the Employee 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 Employee does not incur any income tax on the receipt of such rights or upon the making of the contribution.

Instead, the Scheme enables the Employee to defer deriving income tax from the receipt of the Contributed Amount until the payment made by the Trustee to the Employee under clause JJ of the Trust Deed or the receipt of the benefit equivalent of the contributed sums pursuant to clause KK of the Trust Deed.

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

In participating in the Scheme, the Employee is able to derive income that is generated by the value of the Allocated Investment acquired using the pre-tax amount of the Contributed Amount. Had the Employee been paid the Contributed Amount directly by the Employer, or directed the Employer to acquire the same Investment that was acquired by the Trustee as the Allocated Investment, the Employee would have been subject to income tax on that payment or direction, and the Employer would have been expected to have withheld an amount of monies by reason of the Pay As You Go provisions, under Chapter 2 of Schedule 1 to the Taxation Administration Act 1953 (PAYG Provisions).

As a result of the Scheme, it is expected and may reasonably be expected that the Employee is able to derive a greater income from an Allocated Investment acquired using the value of the Contributed Amount that is not subject to the PAYG Provisions, than would have been derived by the Employee if the same Investment had been acquired with the Contributed Amount that had been the subject of withholding by the PAYG Provisions.

The deferment of the payment of income tax on the Contributed Amount, 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 or the receipt of the benefit equivalent of the Contributed Amount pursuant to clause KK of the Trust Deed, enables the Employee to utilise funds that the Employee 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 Employee's financial position benefited from the deferment of income tax in connection with the Contributed Amount and the increased potential income generation arising from the Trust acquiring an Allocated Investment from the full amount of the Contributed Amount.

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 Employee pursuant to the Employment Contract, which governs 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 Employee (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 Employee, 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

The Trustee loan to the Employee 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 Employee bears no risk in the Investment or the loan.

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 an Employee of the Employer. They are in a business relationship and the terms of agreement between the two parties is governed by the Employment Contract.

The Representative is a business associate of the Employee.

The Employee 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 Employee to obtain a tax benefit, being an amount equivalent to the Contributed Amount, not being included in the Employee'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 being the Contributed Amount shall be included in the assessable income of the Employee 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.