The recent decision by the AAT in the case of Yip v FC of T 2011 ATC 10-214; [2011] AATA 785 has created a doubt on how the courts will identify an acceptable counterfactual in Part IVA cases.
In this case the Tribunal
held, in relation to a two private rulings, that amounts (salary) sacrificed to an employment trust arrangement remained assessable to the employee under s 6-5(4) of ITAA 1997. The trust funds were to be used to provide loans to the employee in order to enable the employee to make application for share units in the trust. The arrangement provided that the trustee would use the application money to purchase shares in the employer or its holding company. The loan to the employee would be fully repayable.
After having decided that the amount salary sacrificed remained assessable income of the employee, the Tribunal went to hold that Part IVA also applied to the arrangement.
Rejecting the counterfactual put forward by the employee, namely that it is reasonable to assume that the employee might have asked the employer to place the sacrificed part of the salary into a complying superannuation fund rather than entering the scheme and secured a deduction from the salary. In rejecting this counterfactual the Tribunal said that the monies would not be regarded as fringe benefit.
The Tribunal said that had the shares been offered for purchase, the employee would have purchased them from post taxed money, which position was acceptable to the Tribunal.
After a steam of Part IVA cases where the Commissioner failed to establish counterfactuals acceptable to the court this case appears to have slowed that trend. The lesson from this case is that It is crucial that the taxpayer has a reasonable counterfactual when it comes to challenging a Part IVA determination by the Commissioner.
