Edited version of private ruling

Authorisation Number: 1011797638395

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Ruling

Subject: Assessability of shares

Question

Are the shares given to you by Company B assessable income?

Answer: Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling;

· the email from the Managing Director of Company A;

· the letter from the President and Chief Executive Officer of Company B; and

· the fax sent on 3 May 2011 including the Offer document from Company B relating to the issue of the shares.

You were a non equity director of a privately owned Australian company (Company A).

Company A was purchased by Company B during the 2010-11 financial year.

Prior to the sale it was intended that you would purchase shares in Company A as the existing shareholders sold down their share ownership.

The opportunity to purchase the shares was offered following your promotion to a director of the company.

The purchase share price was to be determined in accordance with the Shareholders agreement which was based on a weighted formula of the company's financial performance.

The purchase of shares, had they occurred, would not have been discounted.

Company B, made an offer to purchase Company A and the opportunity for you to purchase shares in Company A was lost due to the better share price offer from Company B over what you would have paid.

You were given shares in Company B, from Company B.

The managing director of Company A advised you these shares were given to you as a gift partly due to the lost opportunity for you to purchase Company A shares.

A letter from the President and Chief Executive Officer of Company B advised that you were being granted the shares as settlement for a Company A obligation related to your service with Company A.

On page 16 of the offer document from Company B, regarding the shares they gave you, under 3.1 Australian Tax Implications it states the following:

An eligible participant will have to include an amount in their assessable income in the year ended 30 June 2011 (FY11) in relation to the issue of the Restricted Stock. This amount will be based on the Australian dollar equivalent of the market price of the shares of Company B stock around the time the Restricted Stock is issued. The amount will be subject to Australian income tax at the eligible participant's marginal rate of tax (plus medicare levy).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-2

Reasons for decision

Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Subsection 15-2(1) of ITAA 1997 states that your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you.

Subsection 15-2(2) of the ITAA 1997 goes on to say this is so whether the things were provided in money or in any other form.

An issue in this case is whether the shares were granted in relation directly or indirectly to your employment.

Taxation Ruling IT 2674 provides the Commissioners view regarding the assessability of gifts to missionaries, ministers of religion and other church workers. The principles set out in IT 2674 can be applied to this case.

Whether a gift is assessable income depends on the quality of the character of the gift in the hands of the recipient. Consideration must be given to the whole circumstances in which the gift is received. IT 2674 explains that the following factors need to be taken into account:

1. how, in what capacity and for what reason the recipient received the gift:

2. whether the gift is made voluntarily;

3. whether the gift is solicited;

4. if the gift can be traced to gratitude engendered by some service rendered by the recipient to the donor, whether the recipient had already been remunerated fully for that service;

5. the motive of the donor; and

6. whether the recipient relies on the gift for regular maintenance of himself or herself and any dependants.

Paragraph 12 of IT 2674 states that if a gift is received because of, in respect of, for, or in relation to any income-producing activity, the gift is assessable income. The income producing activity can arise from an occupation or office or some service rendered or to be rendered. In other words, a gift is assessable income if it is possible to:

1. relate the gift to any income-producing activity ; or

2. point to any employment, personal exertion or other income earning activity of which the receipt of the gift is in a relevant sense a product or incident.

A gift received in the above circumstances is assessable income even if:

1. the donor is not legally obliged to make the gift; or

2. the gift is made by a family friend, friend or fellow worker; or

3. if the taxpayer is an employee, the gift comes not from the employer but from somebody else.

In your case, the payment is made because of, in respect of, for or in relation to your income earning activity. If you had not had an existing employment obligation with Company A, Company B would not have issued you the shares. The payment in shares made in these circumstances by Company B to you is clearly assessable even if there may be no legal obligation to make it.

The leading cases in connection with this question of an indirect or direct relation to employment are Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; (1952) 10 ATD 82 and Scott v. FC of T (1966) 117 CLR 514; 14 ATD 286. In both cases it was decided that the phrase an indirect consequence of employment was not an open ended concept. Rather, there must be a connection between the payment and the employment such that the receipt is in a relevant sense a product of the employment.

In your case, the shares given to you by Company B, were as settlement for a Company A obligation related to your service with Company A. If not for your employment with Company A, Company B would not have presented you with the share offering upon them buying out Company A's shareholding. There was a direct relation to your receiving the shares and your employment which concludes that the receipt of the shares is assessable income.

The Offer Document from Company B advises that the shares will have to be included in your assessable income for the 2011 income year. Their intention in offering you the shares was that the market value at the time of issue would be included in your assessable income.

The shares you received are statutory income as they are made assessable by the operation of section 15-2 of the ITAA 1997. The amount to be included in your assessable income is the Australian dollar equivalent of the market value of the shares when they were issued to you.

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