A high-rate taxpayer may be able to divert a low-rate taxpayer’s income to a low-rate taxpayer or convert a low-taxed form of highly taxed income. However, this is pointless unless the high-rate taxpayer can be rewarded for diverting or converting his or her income into a low-tax category in a low-taxed form. In a low-tax form, the income has to come back. Tax Shark has some nice tips on this. The benefit must also exceed the expense of the transaction. This is the third necessary condition for tax arbitrage to take place.This conclusion follows that individuals can always compensate themselves for transferring or diverting revenue to a low tax rate. Income splitting through, for example, the use of family trust, is an example of such simple tax arbitrage involving a family unit. A straddle is an example of simple tax arbitrage involving a single taxpayer whereby a dealer in financial assets causes losses, say shares, and defers earnings while retaining an economic interest in the shares through the use of options. More sophisticated instances of the same principles are transfer pricing and thin capitalization practises through which non-residents minimise their tax liabilities. Multi-party arbitrage is more complex; the need to comply with condition 3 above, that is, to ensure that the high-rate taxpayer receives a net profit, makes the complexity necessary. This process typically involves a tax-exempt (or tax-loss or tax-haven) entity and a taxpaying entity in simpler cases of multi-party income tax arbitrage. Income shall be transferred to the tax-exempt entity and expenditure shall be transferred to the taxpaying entity. Finally, by receiving non-taxable income or a non-taxable advantage, such as a capital gain, the taxpaying entity is compensated for diverting income and assuming expenses. Many have taken part in numerous instances of such tax arbitrage over the years using elements of the legislation at the time.