SOUBRA v FC of TJudges:
E Fice M
Administrative Appeals Tribunal, Melbourne
MEDIA NEUTRAL CITATION:
 AATA 775
E Fice (Member)
1. In an application dated 1 October 2008, a director of Remuneration Strategies Group (RSG), Mr G Fitton, lodged an application with the Australian Taxation Office (ATO) seeking a private ruling under s 359 of the Taxation Administration Act 1953 (the Administration Act) on behalf of Ms Hadia Soubra. The private ruling sought by Ms Soubra was in respect of the taxation consequences arising from her proposed participation in an employee share plan arrangement. In its application for a private ruling, RSG posed 24 questions to the Commissioner of Taxation (the Commissioner) regarding the proposed employee share plan arrangement. Only the Commissioner's response to one of those questions, question 10, is in issue before me. Question 10, to which the Commissioner replied no, was as follows:
"To the extent that the dividends assessable to Hadia Soubra constitute franked distributions for the purposes of subdivision 207-B of the ITAA 1997, will Ms Soubra be entitled to tax offsets equal to her share of the franking credits on the franked distributions under section 207-45 of the ITAA 1997?"
2. Dissatisfied with the Commissioner's answer to question 10, RSG, on behalf of Ms Soubra, lodged a notice of objection with the Commissioner on 13 November 2008. On 12 February 2009 the Commissioner issued a notice of decision on objection. The Commissioner disallowed Ms Soubra's objection. She now seeks a review of that decision by this Tribunal.
3. The essential issue before me in this matter is the construction of subdivision 207-B of the Income Tax Assessment Act 1997 (ITAA 1997). That subdivision deals with franked distributions received through certain partnerships and trusts. In this case, we are only concerned with the receipt of franked distributions received through a trust.
Review of objection decision
4. There was no question that Ms Soubra was entitled to object to a private ruling. Section 359-60 of the Administration Act clearly provides for that. Furthermore, s 359-60(1) provides that a person can object to a private ruling that applies to them, in the manner set out under Part IVC, if they are dissatisfied. The ruling on an objection is taken to be a taxation decision within the meaning of Part IVC (s 359-60(2)).
5. A decision made by the Commissioner on a taxation objection must be either allowed (wholly or in part) or disallowed (s 14ZY(1) of the Administration Act). Such a decision in Part IVC is called an objection decision (s 14ZY(2)). If a person is dissatisfied with the Commissioner's objection decision that person may, if the decision is both a reviewable objection decision and an appealable objection decision, either apply to the Tribunal for a review of the decision; or appeal to the Federal Court against the decision.
6. The decision in this case is not an appealable objection decision. That expression only applies to an objection decision other than a decision made on a taxation objection under s 14E of the Administration Act. A reviewable objection decision means an objection decision that is not an ineligible income tax remission (s 14ZQ of the Administration Act). The expression ineligible income tax remission decision is defined in s 14ZS. Section 14ZS clearly does not apply in this case and therefore the objection decision made by the Commissioner in this matter is a reviewable objection decision which can be reviewed by this Tribunal (s 14ZZ).
Proposed employee share plan arrangement
7. Australasian Annuities Pty Ltd (Australasian Annuities) is the trustee of the Rowley Family Trust. It carries on the business of supplying human resources (personnel) to an associated company, London Partners Pty Ltd (London Partners). Ms Soubra is an employee of Australasian Annuities. Australasian Annuities proposes to provide Ms Soubra's services to London Partners. By a declaration of trust made on 10 September 2008, Trinity Management Pty Ltd (Trinity Management), as trustee of the London Partners Employee Incentive Plan (the Trust), established an incentive plan to assist in the retention and motivation of key employees of London Partners and any associated company.
8. The purpose of the Trust is to make investments approved by London Partners or its holding company; and to provide rights and interests by way of units in those investments to its employees. The beneficial interests in the trust fund are divided into a number of different classes of units. From time to time, London Partners is to settle on Trinity Management, contributions or loan monies for the benefit of the employees of London Partners as a general class of beneficiaries.
9. The contributions or loan monies thus settled are applied by Trinity Management in making loans to eligible employees to enable them to apply to the trustee for the issue of units in the Trust. Trinity Management is required to use application monies received and accepted exclusively to acquire investments approved by London Partners, which are allocated to units in the Trust. Trinity Management is required to specify the approved investments referable to particular units as soon as practical after the time of issue, therefore, as Mr Fitton submitted, the investments are effectively stapled to units.
10. The issue of a unit and the specifying of approved investments referrable to a unit do not confer any interest in any particular part of the trust fund, nor in any monies, investments or property forming part of the trust fund, except in the case of cancellation of entitlements and distribution of income of the fund.
11. Except for bonus unit holders, all other units entitle the holder to receive a distribution in respect of each accounting period in accordance with the trust deed. Bonus unit holders are entitled to a prescribed redemption amount on cancellation but have no other rights unless expressly conferred by the trust deed.
12. A unit holder has an entitlement to distributions in respect of each ordinary unit. The amount of distribution is equal to the income received or gains realised by Trinity Management during the last accounting period referrable to the unit held and in respect of which the holder of the unit has a present and absolute entitlement after deduction of certain expenses incurred by Trinity Management.
ATC 3152Trinity Management may, by resolution, cancel all of the units or a specified number of units registered in a particular unit holder's name if:
- (a) the unit holder's employment is terminated and London Partners requests that some or all of the units registered in that unit holder's name should be cancelled immediately or on a particular date or dates;
- (b) Trinity Management is notified by London Partners that a unit holder has transferred or assigned or has attempted to transfer or assign a unit, or has created or attempted to create any equitable, contingent, future or partial interest or other security interest in a unit;
- (c) Trinity Management receives a request in writing from the unit holder to cancel one or more of the units; or
- (d) the unit holder dies or commits an act of bankruptcy or is declared a bankrupt or enters into a scheme of arrangement with creditors under Part X of the Bankruptcy Act, or an order is made for the unit holder's estate to be administered under the laws relating to mental health.
14. The entitlement of a unit holder following cancellation is set out in clause 12 of the trust deed. In essence, a unit holder's entitlement on cancellation is:
- (a) an in specie distribution of the approved investments referrable to each unit;
- (b) where a unit holder does not request an in specie distribution, the Unit Distribution Entitlement (as that expression is defined in the trust deed) in respect of the accounting period in which the cancellation occurs; and
- (c) if the date of cancellation is before the Stipulated Date (as that term is defined in the trust deed), the issue price of the unit.
15. Trinity Management, as trustee of the Trust, when exercising the powers, authorities and discretions vested in it by the trust deed, has an absolute and uncontrolled discretion. It also may exercise or enforce all or any of the powers, authorities and discretions at any time and from time to time, or may refrain from exercising all or any of them from time to time or at all.
Ms Soubra's entitlement to a tax offset
16. An eligible recipient of a franked dividend is entitled to the benefit of a franking credit, by way of way of a tax offset, when determining his, her or its taxable income. As Mr P Sest of counsel, on behalf of the Commissioner submitted, the general purpose of the franking credit system is to ensure that distributed profits are only taxed once. However, conditions are prescribed to establish a recipient's eligibility for franking credits. In Ms Soubra's case, it is necessary to examine the conditions for eligibility regarding her status as a beneficiary of the Trust. If distributions made to Ms Soubra are sourced from franked distributions received by Trinity Management, she may be entitled to tax offsets representing the franking credits when determining her taxable income. However, in order to be eligible for the tax offsets, she must satisfy prescribed conditions. These conditions are set out in Subdivision 207B of the ITAA 1997.
Conditions for entitlement to a tax offset
17. Section 207-45 of the ITAA 1997, insofar as it is relevant to Ms Soubra, provides that an entity to whom a franked distribution flows indirectly in an income year is entitled to a tax offset for that income year which is equal to its share of the franking credit on the distribution if it is an individual. The expression flows indirectly is a defined term and, for the present purposes, is defined as the circumstances in which a franked distribution flows indirectly to an entity as set out in s 207-50(3) of the ITAA 1997. Under that section, a franked distribution flows indirectly to the beneficiary of a trust in an income year if, and only if:
- (a) during that income year, the distribution is made to the trustee of the trust, or flows indirectly to the trustee; and
- (b) the beneficiary has a share of the trust's net income for that income year (the share amount).
18. While the above sections of the ITAA 1997 would appear to entitle Ms Soubra to a tax offset in respect of a franked dividend distribution, I also need to take account of Subdivision 207-F. This section provides that a tax offset is not available where the imputation system has been manipulated. Section 207-150
ATC 3153of the ITAA 1997 sets out the circumstances in which the share of distribution is taken to have been manipulated. It relevantly provides:
- "(1) If a *franked distribution *flows indirectly to an entity in an income year in one or more of the following circumstances:
- (a) the entity is not a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936; ...
- (g) the entity is not entitled to a *tax offset under this Subdivision because of the distribution; ..."
19. The expression qualified person is a defined term under Division IA of the former Part IIIAA of the Income Tax Assessment Act 1936 (the 1936 Act). Section 160APHD of the 1936 Act provides that a qualified person in relation to a dividend paid on shares has the meaning given by ss 160APHO, 160APHP, 160APHQ, 160APHR or 160APHT, as that meaning is affected by s 160APHU. Those sections, in essence, determine that a person is qualified based on the time the shares were held and the risk incurred by the holder of those shares.
20. In Ms Soubra's case, the relevant section is s 160APHP. Although that section refers to a taxpayer as a beneficiary of a widely held trust, nothing turns on that. A taxpayer who, as a beneficiary of a widely held trust, has held an interest in shares contained in the trust holding, is a qualified person in relation to a dividend paid on any of the shares to which a distribution from the trust to the taxpayer is attributable if:
- (a) the taxpayer has held an interest in the shares contained in the trust holding as a beneficiary of the trust for a continuous period of not less than 45 days; and
- (b) in calculating the number of days for which the taxpayer continuously held the interest, any days on which the taxpayer had materially diminished risks of loss or opportunities for gain in respect of the interest are excluded.
21. Section 160APHM sets out the circumstances in which there may be a material diminution of risks of loss or opportunities for gain. In particular, s 160APHM(2) provides that a taxpayer is taken to have materially diminished risks of loss or opportunities for gain on a particular day in respect of shares held by the taxpayer, or in respect of an interest held by the taxpayer in shares, if the taxpayer's net position on that day in relation to the shares or interest has less than 30 per cent of those risks and opportunities.
22. A taxpayer's net position is worked out by using the financial concept known as delta (set out in s 160APHJ). An example is given in s 160APHM(3). An option to sell a share with a delta of -0.5 in relation to the share reduces the risk of loss and opportunities for gain by 50 per cent.
23. Section 160APHJ(2) sets out the meaning of position. In relation to shares or an interest in shares, a position is anything that has a delta in relation to the shares or interest, and includes:
- (a) a short sale or future sale of the shares or an interest in the shares;
- (b) a purchase, or future purchase, of property that is substantially similar to, or related to, the shares or interests;
- (c) an option to buy or sell shares or an interest;
- (d) an option to buy or sell property or an interest in property which is substantially similar to, or related to, the shares or interest;
- (e) an option in relation to the shares or interest that is embedded in other property;
- (f) a non-recourse loan made to acquire the shares of interest; and
- (g) an indemnity or guarantee in respect of the shares or interest.
However, if a share or an interest in a share is an employee share scheme security, and a condition is attached to the share or interest; or it is a term of the document which created the interest that the holder of the share or interest is prevented from disposing of it or could result in the share or interest being forfeited, it is not to be regarded as a position in relation to the share or interest.
24. Section 160APHJ(3) defines the expression short position. It is a position that has a negative delta in relation to the shares or interest in shares.
ATC 3154Section 160APHJ(4) defines the expression long position. It is a position that has a positive delta in relation to the shares or interest in shares. To avoid doubt, shares or interests in shares are to be treated as a long position (with a delta of +1) in relation to themselves.
26. The meaning of net position is set out in s 160APHJ(5). The net position of a taxpayer or a fund in relation to shares or an interest in shares, is calculated by adding the taxpayer's or the fund's:
- (a) long positions in the shares or interest (calculated on the bases of their deltas); and
- (b) short positions in the shares or interest (calculated on the bases of their deltas).
27. In respect of a widely held trust, where:
- (a) the trustee holds interests in shares;
- (b) an amount is included in the assessable income of the trust estate because of the trust holding and the whole or part of that amount is a dividend or attributable to a dividend; and
- (c) there is a trust or a trust amount in respect of the trust estate in relation to a taxpayer who is beneficiary of the trust estate being a trust amount that is wholly or partly attributable to the dividend income;
s 160APHL sets out how the taxpayer's interest in the relevant shares is to be calculated when determining whether the taxpayer is a qualified person for the purposes of Subdivision B in relation to a dividend paid on the shares. For the purposes of the application of s 160APHL, in respect of a widely held trust, the trust holding is all the shares and interests in shares that the trustee has held or holds, as mentioned in s 160APHL(2) (s 160APHL(4)).
28. Section 160APHL(7) provides that a taxpayer's interest in the relevant shares worked out under s 160APHL(6) is a long position with a delta of +1 in relation to itself.
29. Section 160APHL(10) sets out additional positions of the taxpayer. In Ms Soubra's case, in addition to any other long and short positions in relation to her interest in the relevant share or shares, she is taken to have a short position equal to her long position under subsection (7), and a long position equal to so much of her interest in the Trust holding as is a fixed interest.
30. Leaving aside for the moment whether Ms Soubra has a long position equal to her interest in the Trust holding attributable to a fixed interest, her position at this point is that she has a zero delta. That is because she has a long position with a delta of +1 because of s 160APHL(7), and a delta of - 1 because of s 160APHL(10). As Mr Sest submitted, this is a net position of less than 30 per cent (or a delta of +0.3) of the risks and opportunities in relation to her interest in the employee share plan. In other words, at this point in time, she must be taken to have materially diminished risks of loss or opportunities for gain for the entire period of her holding. She would therefore not be a qualified person for the purposes of s 160APHP.
31. If I correctly understood Mr Fitton's submissions, up to this point, there appears to be little dispute between the parties; except perhaps for the fact that he appears to have omitted the fact that the taxpayer is also taken to have a short position equal to the taxpayer's long position under subsection (7). In Ms Soubra's case, that must result in her having a zero delta unless she is able to demonstrate that her interest in the Trust holding is a fixed interest and that her fixed interest has a delta of at least +0.3.
Does Ms Soubra have a vested and indefeasible interest?
32. Section 160APHL(11) provides that for the purposes of subsection (10), a taxpayer's interest in the trust holding is a fixed interest to the extent that the interest is constituted by a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding.
33. As Hill J explained in
Dwight v Commissioner of Taxation 92 ATC 4192; (1992) 37 FCR 178, the words vested and indefeasible in the context of trust law are technical legal words of limitation, which have a well understood meaning to property conveyancers. He said, at 192:
"... Estates may be vested in interest or vested in possession, the difference being between a present fixed right of future enjoyment where the estate is said to be
ATC 3155vested in interest and a present right of present enjoyment of the right, where the estate is said to be vested in possession:
Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 at 496 per Griffith CJ, at 501 per Isaacs J. A person with an interest in remainder, subject to a pre-existing life interest, has an interest which is vested in interest, but being a future interest is not yet vested in possession. That person's interest will vest in possession on the death of the life tenant. In the present context the word 'vested' is used in contradistinction to contingent.
An interest is said to be defeasible where it can be brought to an end and indefeasible where it can not. ..."
34. As Mr Sest submitted, the use of the conjunctive phrase vested and indefeasible indicates the right must be absolute: see
Saunders v Vautier (1841) 49 ER 282. Mr Sest submitted an interest is defeasible where it is subject to a condition subsequent. He cited the following examples where this may occur:
- (a) where that is the effect of the trust deed;
- (b) where a beneficiary interest is disposed of by the trustee in the course of administration of the trust prior to vesting day;
- (c) where there exists a contingency that the person may not be a beneficiary as at the vesting date; and
- (d) where the beneficiary's vested interest is able to be divested by the exercise of a power by the trustee (or any other person).
35. According to Mr Sest, the above examples apply to the trust deed of the Trust. Mr Sest submitted that the trust deed contains a number of provisions and powers demonstrating that Ms Soubra's interest in the trust fund, reflective of her entitlement, was subject to modification and alteration by, amongst other things, the exercise of power at the absolute discretion of the trustee and/or by the exercise of power by the trustee following consultation with Australasian Annuities as trustee for the Rowley Family Trust.
36. The first matter to which Mr Sest drew my attention was that the allocation of units is subject to a three-year vesting condition. Although this is not expressly stated in the deed, cancellation of units before the stipulated date results in a cancellation entitlement equal to the issue price of the unit. It is only if the cancellation is on or after the stipulated date that a unit holder may request an in specie distribution of the allocated investment. If the unit holder does not request an in specie distribution of the allocated investment, the unit holder then becomes presently and absolutely entitled to the unit distribution entitlement for that unit in respect of the accounting period in which the cancellation occurs (Clause 12.1 (a) (c)).
37. According to Mr Fitton, the allocation of units in the Trust is subject to a three-year vesting condition. As I understand it, that means the stipulated date will be set in each case providing for the three-year period to pass prior to vesting. According to Mr Sest, this provision itself renders Ms Soubra's interest defeasible. Although Mr Fitton submitted that the possibility of the vesting condition not being achieved is very low, I agree with Mr Sest that this is not to the point. The fact that vesting is subject to a three-year holding condition necessarily means that the interest is defeasible. In my opinion, that in itself is sufficient for me to find that Ms Soubra's interest in the Trust is not a fixed interest. In any event, there are further indicators that Ms Soubra does not have a vested and indefeasible interest.
38. Mr Sest submitted that Trinity Management's powers exercisable in relation to investments demonstrate that Ms Soubra does not have a vested and indefeasible interest. Clause 15 of the trust deed sets out the powers of the trustee. Clause 15.5(b) vests in the trustee the power to purchase or otherwise acquire and to sell or otherwise dispose of property, rights and privileges on such terms and conditions as it thinks fit. Mr Sest submitted that the power contained in this clause is sufficient to include dividend yielding investments, such as shares. Although the expression property, rights or privileges is not defined, I agree with Mr Sest's submission. This is despite the fact that Mr Fitton submitted that allocated investments are, in effect, stapled to units (Clause 5.3 of the trust deed). In fact, Clause 5.4 of the trust deed provides that the issue of a unit, and the
ATC 3156specification of allocated investments referrable to a unit, does not confer any interest in any particular part of the trust fund, nor in any monies, investments or property forming part of the trust fund, other than in the circumstances set out in Clauses 12 and 14 of the trust deed. Clause 12 deals with cancellation entitlements and Clause 14 with income distribution.
39. Trinity Management also has the power to make adjustments, from time to time, to the division of allocated investments between units but only with the consent of all relevant unit holders. Clause 9.11 also provides that any adjustment made by the trustee shall be at its absolute discretion but shall only be made after consultation with the relevant employer. While the addition of this final sentence adds some confusion to the way in which Clause 9.11 should be interpreted, as Mr Sest submitted, the fact that the consent of the shareholders must be first obtained simply constitutes a condition precedent to the operation of the power. It does not remove it. In my opinion, it is not clear that Clause 9.11 demonstrates that Ms Soubra does not have a vested and indefeasible interest. However, there is some doubt about the operation of that clause because of the final sentence.
40. Section 160APHL(12)(a) of the 1936 Act deems certain interests in a trust holding to be defeasible. It provides:
"Subject to subsection (13) if the taxpayer has an interest in the trust holding and either:
- (a) the interest may be redeemed under the terms of the trust for less than its value; or
- (b) valued of the interest may be materially reduced by:
- (i) if the trust is unit trust - the issue of further units; or
- (ii) otherwise - the creation of other interests under the trust;
the interest is taken to be defeasible."
41. Section 160APHL(13) provides that an interest is not defeasible if:
- "(a) the trust is a unit trust and the taxpayer holds units in the unit trust; or
- (b) the units are redeemable or further units are able to be issued; and
- (c) ... ;
- (d) where the units are not listed as mentioned in paragraph (c) - the units held by the taxpayer will be redeemed, or any further units will be issued, for a price determined on the basis of the unit trust's net asset value, according to Australian Accounting Principles, at the time of the redemption or issue;
Then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the taxpayer's interest, as a unit holder, insomuch of the corpus of the trust as is comprised by the trust holding is defeasible."
42. Mr Sest submitted that Ms Soubra's interest in the trust holding would be taken to be defeasible by the operation of s 160APHL(12) because her interest may be redeemed under the terms of the trust deed for less than its value. Mr Sest directed my attention to Clauses 11 and 12 of the trust deed. Clause 11 sets out a number of circumstances in which the trustee may, by resolution, cancel all or a specified number of units registered in a particular unit holder's name. They include:
- "a. termination of the Unit Holder in other than Special Circumstances together with a request by the employer that some or all of the Units registered in the Unit Holder's name should be cancelled immediately or on a particular date or dates;
- b. termination of employment of the Unit Holder in Special Circumstances [a defined term];
- c. upon notification by the relevant Employer to Trinity of Unit Holder transferring or assigning or attempting to transfer or assign, a Unit or creating or attempting to create any equitable, contingent, future or partial interest or other security interest in a Unit;
- d. notification by the Employer that the Unit Holder's employment with the Employer has been Terminated for Cause;
- e. upon the request in writing from the Unit Holder;
- f. upon the death or bankruptcy of the Unit Holder, or if his or her estate is to be administered under the laws relating to mental health."
43. Where units are cancelled pursuant to the events specified in Clause 11.1(a) or Clause 11.1(e), if the date of cancellation is before the stipulated date, the unit holder is only entitled to the issue price of the unit. The same applies where a unit is cancelled pursuant to the events specified in Clause 11.1(c), (d) or (f). In all of those circumstances, given that allocated investments are attached to those units, it is likely that the unit holder's interest will be redeemed for less than the value of the unit. In those circumstances, the unit holder's interests in the Trust are taken to be defeasible in accordance with s 160APHL(12). Section 160APHL(13) will not apply as there is no provision in the trust deed for the redemption of units based on the Trust's net asset value.
44. Mr Sest further submitted that Ms Soubra's interest in the trust holding would be taken to be defeasible under s 160APHL(12) because the value of her interest may be materially reduced by the issue of further units. Clause 5.2 of the trust deed provides that the trustee may alter the number of units in issue by issuing new units pursuant to Clause 9. Clause 9.1 of the trust deed provides that the trustee may, from time to time, cause units to be created and increase the number of units on issue by accepting in whole or in part, applications for units in accordance with the terms of Clause 9.1 or as the trustee may otherwise determine. Furthermore, under Clause 9.7 of the trust deed, the trustee may from time to time, when requested by the relevant employer, issue, for no consideration, bonus units to a unit holder in respect of units, held by the unit holder.
45. Mr Fitton submitted that any new units issued to employees would have allocated to them a specific share or shares. Those shares would either be newly acquired or allocated from the unallocated share account of the Trust. Therefore, according to Mr Fitton, the unallocated shares will represent the net asset value of the Trust in accordance with Australian Accounting Principles. However, with all due respect to Mr Fitton, it seems to me that any issue of new units from time to time must necessarily result in an overall diminution of the value of previously issued units. In accordance with the definitions in the trust deed, unallocated investment account means the account in which the investments have been placed pending allocation of investments by the trustee to particular units. Also defined is the expression unallocated investment, which means those investments that the trustee has placed in an unallocated investment account; which may or may not be due to a cancellation being made in accordance with Clause 9.11.
46. Clause 9.11, as I have set out above, enables the trustee to adjust the division of allocated investments between units. Therefore, if units are issued to replace units which have been cancelled or if further units are issued, it is inevitable that there is likely to be a reduction in the value of units should redemption subsequently be sought. In any event, Ms Soubra cannot take advantage of s 160APHL(13)(d) because there remains the possibility that her units would be redeemed or further units would be issued for a price which is not determined on the basis of the Trust's net asset value. The issue price of a unit, except for a bonus unit, is $1.00. That is irrespective of the trust net asset value.
47. Bonus units are issued at no cost to the receiver of those units. A bonus unit entitles the holder to payment of the redemption amount on cancellation. The redemption amount is a defined term and it means, in relation to a bonus unit, $1.00 or shares or rights to shares which have a value determined by the trustee of $1.00. Bonus units which are cancelled entitle the holder of those units to the redemption amount (Clause 12.5). Although Mr Fitton submitted that the cancellation of bonus units did not enable the trustee to access or transfer any income or property of the trust fund to pay the cancellation entitlements to bonus unit holders, I assumed that Mr Fitton intended to say that on the cancellation of bonus units, the trustee could not access income or property of the Trust.
48. However, Clause 15.5 of the trust deed gives the trustee wide-ranging powers, including the general powers set out in 15.5(a) to:
"... do all acts, matters or things which it may deem expedient for the purpose of giving effect to any carrying out the trusts,
ATC 3158authorities, powers and discretions conferred upon the Trustee by the Deed."
Quite clearly, because bonus units are issued at no cost to unit holders, and their redemption value is fixed at $1.00, redemption of bonus units must result in a diminution of the value of remaining units in the Trust.
49. Mr Fitton also submitted that on the redemption of bonus units, full value would be maintained because of Clause 11.4, which requires repayment of the loan on cancellation of the units. The problem with this submission is that the trustee is empowered to lend to eligible employees an amount equal to the total issue price payable for units to be acquired. When a unit is cancelled, the unit holder must repay the monies borrowed from the trustee which were used to acquire the units. Therefore, at best, the monies recovered will only represent the issue price of ordinary units which may not necessarily reflect the value of the units based on the trust net asset value. In any event, the trustee will need to find funds, presumably out of trust assets, to repay holders of bonus units. Accordingly, in my opinion, s 160APHL(12) does apply to the Trust and s 160APHL(13) cannot be satisfied so as to negate the effect of subsection (12).
50. Mr Fitton submitted that the Commissioner's ruling in this matter contradicts earlier private rulings made in similar circumstances for employees. Mr Fitton referred to ATO ruling Authorisation N° 73297. However, even if the Commissioner made private rulings which contradict the ruling made in this case, as the ruling itself states, edited versions of a written binding advice as published on the Register of Private Binding Rulings cannot be relied upon as precedent by any other entity.
51. Furthermore, the ruling in Authorisation N° 73297 dealt with very different issues to that raised in the ruling which is the subject of this objection decision. In essence, that ruling dealt with the question of whether an employee derived assessable income in respect of loans for contributions to the trust plan or in respect of units issued from the unit trust. It also dealt with capital gains tax considerations because of the amount paid as consideration for units. In my opinion, it does not in any way bear upon the issues raised by the scheme proposed in the Trust.
52. Finally, Mr Fitton submitted that the Commissioner should in any event exercise his discretion under s 160APHL(14) and determine an interest to be vested and indefeasible. Section 160APHL(14) provides:
- "(14) If:
- (a) the taxpayer has an interest in so much of the corpus of the trust as is comprised by the trust holding; and
- (b) apart from this subsection, the interest would not be a vested or indefeasible interest; and
- (c) the Commissioner considers that the interest should be treated as being vested and indefeasible, having regard to:
- (i) the circumstance in which the interest is capable of not vesting or the defeasance can happen; and
- (ii) the likelihood of the interest not vesting or the defeasance happening; and
- (iii) the nature of the trust; and
- (iv) any other matter the Commissioner thinks relevant;
the Commissioner may determine that the interest is to be taken to be vested and indefeasible."
53. The problem with Mr Fitton's final submission is that while the discretion provided for in subsection (14) is wide, I must have regard to the matters set out in (c)(i)-(iv) above. Although Mr Fitton submitted that the likelihood of an interest not vesting was very slight, I do not agree. In fact, the Trust will generally apply a three-year holding period prior to vesting; it was said, to encourage employees to remain with their employer for that period.
54. Although Mr Fitton submitted that the industry norm for vesting conditions and performance hurdles being achieved has a risk of possibly 20 per cent, in my view that in itself indicates at least a one-in-five possibility of employees not meeting the vesting conditions. Coupled with that are the circumstances which I have dealt with above, indicating that a unit holder's interest may be redeemed for less than its value. In fact, there are a number of
ATC 3159circumstances in which the interest may be defeasible and the likelihood of the interest not vesting is certainly not so low as would encourage the exercise of the discretion provided for under s 160APHL(14). Therefore, I decline to exercise the discretion provided for under that subsection.
55. In my opinion, Ms Soubra is not a qualified person within the meaning of Division 1A of Part IIIAA of the 1936 Act. That is because, in accordance with Division 1A, she is taken to have a materially diminished risk and cannot satisfy the condition of holding her interest in the Trust at risk for a continuous period of at least 45 days. She has a delta of +0.3 in respect of any shares she holds attached to units issued under the trust. In order to satisfy that requirement, she needs to demonstrate that her interest in the Trust holding is a fixed interest. That is because s 160APHL(11) deems a vested and indefeasible interest to be a fixed interest.
56. The problem for Ms Soubra is that under the trust deed as currently drafted, there exists a three-year vesting period. That, by itself, is sufficient to render Ms Soubra's interest defeasible. On that basis alone, she cannot satisfy the requirement that her interest constitutes a fixed interest for the purposes of the 1936 Act. However, in addition to that, the exercise of the trustee's powers in relation to investments; the cancellation of entitlements of unit holders under the trust deed; and the reduction of the value of the interest which may occur on redemption, all render Ms Soubra's interest defeasible. Finally, having regard to the matters set out in s 160APHL(14)(c)(i)-(iv) of the 1936 Act, I do not consider it appropriate to exercise the Commissioner's discretion to regard Ms Soubra's interest as vested and indefeasible.
57. It follows from the above that the Commissioner's answer no to question 10 in the private ruling was correct. Therefore, the objection decision made by the Commissioner on 12 February 2009 was correct and I affirm that decision.