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Ruling

Subject: PAYG withholding - trust distributions made to employees

Question 1

Is the Trustee of the Trust required to withhold tax under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from the trust distributions it makes to employees of certain companies (the Employees)?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

A lending company will provide loans to some of the Employees to fund their investment in the Trust.

The lending company will provide a loan to an employee in the ordinary course of its business at an arm's length interest rate. The loan will be a limited recourse loan. The loan amount will be equal to the investment amount. The term of the loan will be equal to the term of the investment. The interest on the loan will be payable annually in advance. An employee's employer will make a payment to discharge in whole or in part the obligation of the employee to pay the interest pursuant to a valid salary sacrifice arrangement.

The minimum investment amount will be approximately $250,000. The term of the investment will be approximately 12 months. An employee will not be able to withdraw from the investment before the maturity date.

An employee will purchase units in the Trust. There will be two classes of units. Both classes of units will provide exposure to Australian equities. The first class will provide a positive return when the equities go up in value. The second class will provide a positive return when the equities go down in value.

At maturity both classes of units will return the capital invested.

Both classes of units will pay two distributions. The distributions will consist of a fixed amount determined by multiplying the investment amount by the distribution rate and a variable amount determined by the performance of the underlying securities.

An employee will provide a valid tax file number to the trustee of the Trust.

The Trust was established and is administered to provide a range of structured investment products to wholesale and retail investors. It is expected that most of these investors will not be Employees.

All of the Employees are eligible to purchase units in the Trust.

An employee's employer does not determine whether the employee is eligible to purchase units in the Trust.

An employee's employer does not provide funds to the Trust to enable it to pay the distributions to the employee.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Section 12-35.

Reasons for decision

Summary

The Trustee of the Trust is not required to withhold tax under section 12-35 of Schedule 1 to the TAA from the trust distributions it makes to the Employees.

Detailed reasoning

Division 12 of Schedule 1 to the TAA relates to payments from which tax must be withheld.

The only provision in Division 12 that may require the Trustee of the Trust to withhold tax from the trust distributions it makes to the Employees is section 12-35.

Section 12-35 provides that an entity must withhold tax from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

A trustee of a trust is an entity for the purposes of Schedule 1 to the TAA. Refer to section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997).

Taxation Ruling TR 2010/6 provides the Commissioner's view on the tax consequences for employers, employees and trustees where bonus units are issued to employees as part of an employee benefits trust arrangement.

TR 2010/6 provides:

· The elements of an employee benefits trust arrangement are as follows:

· A trust is established for or by an employer and administered by the trustee for the purpose of rewarding employees of the employer.

· An employer pays contributions to the trust for the purpose of remunerating or providing incentives to the employees.

· On or shortly after the receipt of a contribution the trustee makes loans to selected employees. The loan amounts are typically equal to or slightly less than the contribution amounts. The loans are ordinarily interest free and of a limited recourse nature.

· An employee uses the loan monies to purchase ordinary units in the trust. An ordinary unit typically gives the employee an interest in or an entitlement to a share of the income of the trust.

· The trustee uses the monies paid by an employee for ordinary units to purchase assets to be held on trust for the trust beneficiaries generally.

· Ownership of ordinary units qualifies an employee to receive bonus units.

· There is an understanding or agreement between an employee and an employer that the employee is to be rewarded by the trustee for work done for the employer through the issue and redemption / cancellation of bonus units subject to the employee satisfying certain performance criteria.

· Bonus units are typically issued by the trustee to an employee at the request of the employer. The number of bonus units issued to the employee will typically be based on the amount paid by them for their ordinary units. However, any number of bonus units may be issued. Bonus units are typically issued at the time the employee can redeem their ordinary units. The employee usually has to satisfy a minimum ordinary unit holding period and / or employment performance criteria before their ordinary units can be redeemed. When the holding period and / or performance criteria are satisfied the employee will receive bonus units and ask the trustee to redeem both their ordinary and bonus units.

· The only right attaching to a bonus unit is its cancellation entitlement which is typically a cash amount specified in the trust deed.

· Contributions paid by an employer to the trust are initially held in a separate employer contribution / unallocated trust capital account and are transferred to an employee's bonus unit account when the bonus units are issued to the employee.

· The issue of a bonus unit to an employee only gives the employee a right to a cancellation entitlement of a fixed cash amount on the redemption / cancellation of the unit. The cancellation entitlement is paid to the employee from contributions made by the employer to the trust for the purpose of rewarding meritorious employees in this way. Hence, the cancellation entitlement is paid to the employee as a reward for services provided by the employee to the employer. Therefore, the cancellation entitlement constitutes a payment of salary or wages or a bonus to the employee and is ordinary income of the employee for the purposes of section 6-5 of the ITAA 1997.

· A bonus unit is issued to an employee under a remuneration scheme having regard to the employee's performance and is issued at the request of the employer. A bonus unit is issued and the cancellation entitlement is paid as a reward for employment services provided by the employee. Hence, the cancellation entitlement is sufficiently and materially connected to the employee's employment to constitute compensation, benefits or bonuses provided to the employee in respect of their employment for the purposes of section 15-2 of the ITAA 1997.

Application to your circumstances

The Trustee of the Trust is an entity for the purposes of section 12-35 of Schedule 1 to the TAA.

The Employees are employees for the purposes of section 12-35 of Schedule 1 to the TAA.

Therefore, the Trustee of the Trust is required to withhold tax under section 12-35 of Schedule 1 to the TAA from the distributions it makes to the Employees if the distributions constitute salary, wages or bonuses for the purposes of section 12-35 of Schedule 1 to the TAA.

The Trust was not established and is not administered for the purpose of rewarding the Employees for services provided to their employers.

All of the Employees are eligible to purchase units in the Trust. An employee's employer does not determine whether an employee is eligible to purchase units in the trust. Entities other than the Employees are also eligible to purchase units in the trust.

The distributions will not be made from funds contributed by an employee's employer to the trust for the purpose of rewarding an employee for services provided to the employer by the making of the distributions.

Whether an employee is entitled to a distribution, when an employee is entitled to a distribution and the amount of the distribution an employee is entitled to will not be determined by the employee's employer and / or on the basis of the employee's work performance.

There is no connection between an employee's employment and the issue of units or the making of distributions to the employee. The distributions are not made to an employee as a reward for services provided by the employee to the employer.

Therefore, the distributions do not constitute salary, wages or bonuses for the purposes of section 12-35 of Schedule 1 to the TAA.

TR 2010/6 supports this view.

Consequently, the Trustee of the Trust is not required to withhold tax under section 12-35 of Schedule 1 to the TAA from the distributions.

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