(1) The application of the general anti-avoidance provisions in Part IVA to the investment in the cattle breeding program. (2) How any tax risks of such an investment could be reduced if Marie proceeded to invest in the cattle breeding program. You should include brief reasons for your answers
QUESTION 2 (Part)
Marie from question 1 expected to have a substantial income tax liability for the 2023 income year and shortly before 30 June 2023 wanted to adopt some tax planning strategies to reduce that liability. She considered the following two suggestions.
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The second alternative suggestion was a “tax effective” investment scheme that Marie heard about at a city wine bar that was a “certainty” to reduce her income tax liability. The investment was marketed by a brochure that highlighted its tax advantages and was widely
promoted by a cattle investment company. It involves a cattle breeding program under which an investor agrees to lease from the cattle investment company some cows for breeding purposes and pays leasing fees for this, and then makes income from the sale of bred cattle.
The initial lease period is two years during which the investor engages a cattle management company to manage the cows for breeding purposes and pays management fees for these services. An investor is not required to do any more than sign the lease and management agreements and make the initial payments of leasing and management fees required under the agreements.
The lease and management agreements provide that after the initial two years the leasing and management fees payable by the investor are to be paid only from proceeds from the sale of bred cattle. The income from such sales is not projected to arise until the third year and, objectively, is overly optimistic and not commercially realistic.
The investment is funded under a loan agreement that provides for a loan from a finance company to the investor to fund up to 70% of their total leasing and management fees incurred for the investment. The loan is on “limited recourse” terms under which an investor agrees to prepay interest on the loan and also agrees to allow any moneys from the sales of bred cattle, that become payable to the investor by the cattle management company, to instead be paid by the cattle management company directly to the finance company.
In return, the investor is then not personally liable to repay the balance of the loan principal and any further interest on the loan. Given this “limited recourse” nature of the loan, most investors have used it to fund their investment in the cattle breeding program.
In addition, the loan agreement terms direct the finance company to pay the loan moneys directly to the cattle management company in payment of amounts owed by the investor under the management agreement. In fact, the finance company will not make any such payments to the promoter cattle investment company and the cattle management company, as the finance company, the promoter cattle investment company and the cattle management company are all connected with each other.
The investment supposedly reduces an income tax liability by general deductions for 100% of the leasing and management fees and for the prepaid interest that an investor claims in the 2023 income year under the “first limb” of s8-1 as they are not carrying on a business.
2 In regard to the second alternative suggestion of investing in the cattle breeding program, you are required to outline your views on:
(1) The application of the general anti-avoidance provisions in Part IVA to the investment in the cattle breeding program.
(2) How any tax risks of such an investment could be reduced if Marie proceeded to invest in the cattle breeding program.
You should include brief reasons for your answers
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