Purported prepayment of service fees designed to postpone tax liability

A trading entity purportedly borrows funds from a financial entity that is associated with the promoter of the arrangement. 2. These funds are purportedly used by the trading entity to prepay for services to be provided by a service entity. 3. The purported borrowing and the purported prepayment are made as follows: i. A cheque is drawn in favour of the trading entity by a financial entity associated with the promoter. ii. The cheque is endorsed by the trading entity in favour of the service entity. iii. The service entity further endorses the cheque in favour of the original drawer, the financial entity, for the purported purpose of a 'deposit' with that financial entity. iv. The cheque is to be held by the financial entity well after it becomes a stale instrument, but is never presented or banked for payment. 4. The promoter entity advises the trading entity that three conditions must be attached to the cheque, being that: i. the cheque will not be presented and banked for payment, ii. the cheque will not form the basis of a claim or marked for payment, and iii. the cheque will be retained after it becomes stale. 5. In some cases, the services may not actually be provided by the service entity in the following income year. 6. The trading entity claims a deduction for the amount of the cheque in the first year. 7. The service entity declares the assessable income in the later year. 8. Due to the deferral of tax for each year, the trading entity enters into a subsequent arrangement the following year, with an ever-increasing amount of tax involved.