Part B

Two siblings Ryan and Jeff Jones, decided to invest in the musical production of Dogs which was to run for several performances in Melbourne and Sydney with the expectation that it would be very successful.

The proposed investment entailed each sibling contributing $300,000 to a partnership in charge of the production. $50,000 would be a cash contribution while the remaining $250,000 would be financed via a bank with the loan agreement stipulating that the bank would only receive income derived from the production as repayment.

There was a total of 10 investors (including the two siblings) who contributed in this way with the partnership recording $3,000,000 in total contributions, but only receiving $500,000 to pay for the production.

Each sibling claimed income tax deductions of $300,000 for their share of the partnerships loss compared to actual expenditure of $50,000 each.

Required:

Assuming the arrangement is not a sham; would the arrangement constitute tax avoidance? Discuss the relevant legislation and case law to support your answer