Taxpayer Alert TA 2007/2: Employee Entitlement Fund
Date of issue: 3 May 2007
Status: Current


Description: The Alert applies to arrangements having the following features: 1. The employer agrees to participate in a domestic or offshore entitlement fund, controlled by a trustee associated with those who market the arrangement. 2. The employer purportedly pays contributions to the entitlement fund on the basis that the contributions are to be set aside to meet entitlements that may arise in the future for employees. 3. The arrangement may be marketed with the claim that the contributions are financed through a promissory note or loan, or that there may be cash or in-specie payments. 4. The entitlement fund purportedly invests the contributions on behalf of the employees, or their nominees, for the purpose of meeting entitlements that may arise in the future. 5. The arrangement may be marketed with the claim that the contributions to the entitlement fund are to be invested in tax-free offshore life insurance bonds. In practice an employer's contribution may be returned to the employer via associates. | 1. The employer agrees to participate in a domestic or offshore entitlement fund, controlled by a trustee associated with those who market the arrangement. 2. The employer purportedly pays contributions to the entitlement fund on the basis that the contributions are to be set aside to meet entitlements that may arise in the future for employees. 3. The arrangement may be marketed with the claim that the contributions are financed through a promissory note or loan, or that there may be cash or in-specie payments. 4. The entitlement fund purportedly invests the contributions on behalf of the employees, or their nominees, for the purpose of meeting entitlements that may arise in the future. 5. The arrangement may be marketed with the claim that the contributions to the entitlement fund are to be invested in tax-free offshore life insurance bonds. In practice an employer's contribution may be returned to the employer via associates. | FEATURES WHICH THE TAX OFFICE CONSIDERS GIVE RISE TO TAXATION ISSUES | The Tax Office considers that the arrangements outlined above give rise to taxation issues which include whether: (a) any legal relations purportedly created reflect the intentions of the parties entering into any and all parts of the arrangement(s); (b) amounts said to be for the cost of establishing and running the entitlement fund, interest claimed in respect of any purported borrowings to fund contributions and the contributions to the entitlement fund are deductible to the employer under section 8-1 of the Income Tax Assessment Act 1997 ; (c) the funds committed to the arrangement are commensurate with the income tax deductions claimed; (d) arm's length employees are provided for under these arrangements; (e) the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 apply. | (a) any legal relations purportedly created reflect the intentions of the parties entering into any and all parts of the arrangement(s); (b) amounts said to be for the cost of establishing and running the entitlement fund, interest claimed in respect of any purported borrowings to fund contributions and the contributions to the entitlement fund are deductible to the employer under section 8-1 of the Income Tax Assessment Act 1997 ; (c) the funds committed to the arrangement are commensurate with the income tax deductions claimed; (d) arm's length employees are provided for under these arrangements; (e) the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 apply. | The Australian Taxation Office is examining these arrangements. | Date of Issue: 3 May 2007 | Date of Effect: 3 May 2007 | Related Rulings/Determinations: TR 2004/3 (paragraphs 14 and 15, and 19 to 22) | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: Employee Entitlement Fund Employee Benefit Arrangements | Legislative References: Income Tax Assessment Act 1997 8-1 Income Tax Assessment Act 1936 Part IVA | Case References: Cameron Brae Pty Ltd v FCT 2006 ATC 4433 63 ATR 488 Walstern v FCT 2003 ATC 5076 54 ATR 423 Kajewski & Others v FCT 2003 ATC 4375 52 ATR 455 Essenbourne v FCT 2002 ATC 5201 51 ATR 629 Spotlight Stores Pty Ltd & Ano v FCT 2004 ATC 4674 55 ATR 745 | Cameron Brae Pty Ltd v FCT 2006 ATC 4433 63 ATR 488 | Walstern v FCT 2003 ATC 5076 54 ATR 423 | Kajewski & Others v FCT 2003 ATC 4375 52 ATR 455 | Essenbourne v FCT 2002 ATC 5201 51 ATR 629 | Spotlight Stores Pty Ltd & Ano v FCT 2004 ATC 4674 55 ATR 745 | Contact Officer: Leanna James Business Line: Aggressive Tax Planning Section: Technical Leadership Phone: (08) 9268 6094





Related documents: TR 2004/3 (paragraphs 14 and 15, and 19 to 22) | PS LA 2005/13 - Taxpayer Alerts | 8-1 | Part IVA | 2006 ATC 4433 | 2003 ATC 5076 | 2003 ATC 4375 | 2002 ATC 5201 | 2004 ATC 4674

This Taxpayer Alert describes an arrangement where an employer seeks to obtain a deduction for contributions purportedly made to an Employee Entitlement Fund (entitlement fund) on the basis that the contributions are to meet entitlements that may arise in the future for employees. The entitlement fund is established for that employer, in Australia or in a foreign country, and is controlled by those who market the arrangement. The contributed funds may be returned to the employer, or put under the employer's control, via associates.