TA 2008/13Employee Savings Plans
The ATO view on the arrangement described in TA 2008/13 is set out in TD 2010/10.
FOI status: may be released
|Taxpayer Alerts are intended to be an "early warning" of significant new and emerging higher risk tax planning issues or arrangements that the Australian Tax Office has under risk assessment, or where there are recurrences of arrangements that have been previously risk assessed.
Taxpayer Alerts will provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the Tax Office has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the Tax Office. In these latter cases the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert.
Taxpayer Alerts will give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and will highlight the features which are of concern to the Tax Office. These issues will generally require more detailed analysis to provide the Tax Office view to taxpayers.
Taxpayers who have entered into or are contemplating entering into an arrangement similar to that described in this Taxpayer Alert can seek a formal determination of the Tax Office's position through a private ruling (noting that the Taxation Administration Act 1953 sets out circumstances where the Commissioner may decline to issue such a ruling). Such taxpayers might also contact the tax officer named in the Taxpayer Alert and/or obtain their own advice.
This Taxpayer Alert is issued under the authority of the Commissioner.
This Taxpayer Alert describes arrangements involving employee benefit trust structures that attempt to convert salary or wages income into a capital gain.
The alert applies to arrangements having the following features:
- Under a salary sacrifice arrangement an employee directs or requests that future salary or wages or bonus income otherwise payable by the employer to the employee be paid to a unit trust which is discretionary in nature.
- An amount equivalent to the salary sacrificed is contributed to the trust and ordinarily held by the trustee as an unallocated capital contribution.
- On receipt of the contribution or shortly thereafter, the trustee makes a loan to the employee. The loan amount is equal to the amount previously contributed to the trust. The loan is ordinarily interest free and of a limited recourse nature.
- The employee uses the loan monies to purchase ordinary units in the unit trust.
- As a unit holder in the trust the employee may be entitled to trust income and may be issued bonus units at the trustee's discretion. The value of the bonus units issued to the employee will typically equal the salary previously sacrificed by the employee.
- The employee may have to satisfy minimum holding periods and/or employment related performance hurdles before the units can be redeemed.
- When the holding period has expired and the performance hurdles are met, the employee may ask the trustee to redeem the employee's units.
- Upon redemption, the trustee will:
- calculate the value of the ordinary and bonus units issued to the employee;
- offset that amount against the employee's outstanding loan balance; and
- pay to the employee the balance of the proceeds.
- The value of the bonus units will usually equal the outstanding loan balance, and therefore extinguish the loan. The employee will also redeem their ordinary units which will usually equal the previously sacrificed salary plus any capital appreciation.
Arrangements may also have additional features identified in Taxpayer Alert TA 2008/14. This Alert should be considered in conjunction with TA 2008/14.
DIAGRAM OF A TYPICAL ARRANGEMENT
FEATURES WHICH CONCERN US
The Tax Office considers that an arrangement of this type gives rise to taxation issues that include whether:
- the arrangement is a bona fide salary deferral arrangement;
- the arrangement is an effective salary sacrifice arrangement and taxed as described in Taxation Ruling TR 2001/10;
- subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) applies to include the deferred salary as assessable income of the employee;
- the receipt of bonus units is in relation to employment and is a derivation of ordinary income by the employee;
- the cash payment on redemption of the units by the employee is in relation to employment and is a derivation of ordinary income by the employee;
- the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply;
- the arrangement may result in the provision of fringe benefits for the purposes of the Fringe Benefits Tax Assessment Act 1986;
- any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953.
The Tax Office is currently reviewing these arrangements.
Date of Issue: 25 June 2008
Date of Effect: 25 June 2008
TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements
Related Practice Statements:
PS LA 2005/13
Salary & wages income
Fringe Benefits Tax
Income Tax Assessment Act 1936
Income Tax Assessment Act 1997
Fringe Benefits Tax Assessment Act 1986
Taxation Administration Act 1953
Related Taxpayer Alerts:
TA 2008/14 Authorised by:
Aggressive Tax Planning
|Contact Officer:||Bruce Collins|
|Business Line:||Aggressive Tax Planning|
|Section:||Technical Case Leadership|
|Phone:||(02) 6216 2710|