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Ruling
Subject: Employee Share Trust Plan
Question 1
Will the contributions of monies by employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
Question 2
Will the contributions of monies by employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 15-2 of the ITAA 1997?
Answer
No
Question 3
Will the loans of monies by employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 6-5 of the ITAA 1997?
Answer
No
Question 4
Will the loans of monies by employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 15-2 of the ITAA 1997?
Answer
No
Question 5
Will the issue of the share units to the employee in return for payment of market value consideration, give rise to any assessable income under section 83A-25 of the ITAA 1997 for the employee?
Answer
No
Question 6
Will the issue of the share units to the employee in return for payment of market value consideration, give rise to any assessable income under section 6-5 of the ITAA 1997 for the employee?
Answer
No
Question 7
Will the issue of the share units to the employee in return for payment of market value consideration, give rise to any assessable income under section 15-2 of the ITAA 1997 for the employee?
Answer
No
Question 8
Will the first element of the CGT cost base of the share units acquired by the employee, in accordance with section 110-25 of the ITAA 1997, equal the amount paid for those share units?
Answer
Yes
Question 9
Will the distribution of dividends included in the calculation of the net income of the trust estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) by the trustee to the employee, to which employee is presently entitled, be included as assessable income of the employee under section 97 of the ITAA 1936?
Answer
Yes
Question 10
Will the proceeds received by the employee upon redemption of the share units constitute assessable income under section 6-5 of the ITAA 1997?
Answer
No
Question 11
Will the proceeds received by the employee upon redemption of the share units constitute assessable income under section 15-2 of the ITAA 1997?
Answer
No
Question 12
To the extent that any proceeds received on the redemption of the share units constitute assessable income for the employee under the provisions of section 6-5 or section 15-2 of the ITAA 1997, will the net proceeds (i.e. gross proceeds less the cost of the share units) be assessable, rather than the gross proceeds?
Answer
This question is not applicable to the scheme upon which this ruling is based.
Question 13
To the extent that the proceeds received on the redemption of the share units do not constitute assessable income under section 6-5 or section 15-2 of the ITAA 1997 for the employee:
a) will the redemption of the share units constitute a CGT event as set out in Division 104 of the ITAA 1997?
Answer
Yes
b) will the proceeds received by the employee upon the redemption of the share units be taken into account in calculating his net capital gain under Division 102 of the ITAA 1997?
Answer
Yes
c) will the CGT discount provisions in Division 115 of the ITAA 1997 apply where the share units were acquired at least 12 months before the CGT event and a capital gain is made?
Answer
Yes
Question 14
To the extent that the proceeds from any given redemption of share units are included in assessable income under section 6-5 or section 15-2 of the ITAA 1997 and are taken into account in calculating a net capital gain, will the anti-overlap provisions of section 118-20 of the ITAA 1997 operate to reduce the capital gain by the amount included in assessable income or to zero in accordance with subsections 118-20(2) and 118-20(3) of the ITAA 1997?
Answer
This question is not applicable to the scheme upon which this ruling is based.
Question 15
If the share units are redeemed at a time that coincides with the cessation of the employee's employment, will the proceeds on redemption be an employment termination payment under section 82-130 of the ITAA 1997?
Answer
No
Question 16
If the trustee, pursuant to the trust deed, decides to pay salary to the employee on behalf of employer, will the amounts paid to employee (including any amounts of Pay As You Go instalments withheld) be included as assessable income of the employee under section 6-5 of the ITAA 1997?
Answer
Yes
Relevant facts and circumstances
The employer entity intends to implement a long-term equity plan for the purpose of providing a long-term equity incentive structure to deliver equity based benefits to employees selected by the board of the employer entity.
Relevant legislative provisions
Income Tax Assessment Act 1936 Subsection 44(1)
Income Tax Assessment Act 1936 Division 6
Income Tax Assessment Act 1936 Section 95
Income Tax Assessment Act 1936 Section 97
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 15-2
Income Tax Assessment Act 1997 Section 82-130
Income Tax Assessment Act 1997 Subsection 83A-10(1)
Income Tax Assessment Act 1997 Section 83A-25
Income Tax Assessment Act 1997 Division 102
Income Tax Assessment Act 1997 Section 102-5
Income Tax Assessment Act 1997 Division 104
Income Tax Assessment Act 1997 Section 104-25
Income Tax Assessment Act 1997 Subsection 104-25(3)
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Subsection 110-25(2)
Income Tax Assessment Act 1997 Division 112
Income Tax Assessment Act 1997 Section 114-1
Income Tax Assessment Act 1997 Division 115
Income Tax Assessment Act 1997 Section 115-10
Income Tax Assessment Act 1997 Section 115-15
Income Tax Assessment Act 1997 Section 115-20
Income Tax Assessment Act 1997 Section 115-25
Income Tax Assessment Act 1997 Section 116-20
Income Tax Assessment Act 1997 Section 118-20
Income Tax Assessment Act 1997 Subsection 118-20(2)
Income Tax Assessment Act 1997 Subsection 118-20(3)
ATO view documents
Taxation Ruling TR 2001/10
Reasons for decision
Question 1
Will the contributions of monies by employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No
Detailed reasoning
The employee will not derive assessable income in respect of contributions of monies by employer to the trustee pursuant to the trust deed under section 6-5 of the ITAA 1997 because the amounts contributed to the trustee are not income according to ordinary concepts. In any case, none of these contributions are actually received by the employee or taken to have been received by him.
Question 2
Will the contributions of monies by employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 15-2 of the ITAA 1997?
No
Detailed reasoning
The contributions of monies by employer to the trustee pursuant to the trust deed are not statutory income of the employee under section 15-2 of the ITAA 1997 because the contributions are not allowances, gratuities, compensation, benefits, bonuses or premiums provided to the employee or applied or dealt with in any way on the employee's behalf or as the employee directs.
Question 3
Will the loans of monies by employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 6-5 of the ITAA 1997?
No
Detailed reasoning
The employee will not derive assessable income in respect of loans of monies by employer to the trustee pursuant to the trust deed under section 6-5 of the ITAA 1997 as the amounts loaned to the trustee are not income according to ordinary concepts and, in any case, are not actually received by the employee or taken to have been received by him.
Question 4
Will the loans of monies by employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 15-2 of the ITAA 1997?
No
Detailed reasoning
Loans of monies by employer to the trustee pursuant to the trust deed are not statutory income of the employee under section 15-2 of the ITAA 1997 because the loans are not allowances, gratuities, compensation, benefits, bonuses or premiums provided to the employee or applied or dealt with in any way on the employee's behalf or as the employee directs.
Question 5
Will the issue of the share units to the employee in return for payment of market value consideration, give rise to any assessable income under section 83A-25 of the ITAA 1997 for the employee?
No
Detailed reasoning
Section 83A-25 of the ITAA 1997 includes the amount of any discount given in relation to an ESS interest you acquire. The share units acquired by the employee under this arrangement fall within the definition of ESS interest in subsection 83A-10(1) of the ITAA 1997. However, as the payment for the share units are made by the employee and the application moneys are used by the trustee to pay full market value for the shares, then any interest the employee acquires in the shares is not acquired at a discount, thus section 83A-25 of the ITAA 1997 will not apply.
Question 6
Will the issue of the share units to the employee in return for payment of market value consideration, give rise to any assessable income under section 6-5 of the ITAA 1997 for the employee?
No
Detailed reasoning
The issue of the share units to the employee in return for payment of market value consideration, does not give rise to any assessable income under section 6-5 of the ITAA 1997 for the employee because their issue does not constitute income received or taken to have been received by the employee.
Question 7
Will the issue of the share units to the employee in return for payment of market value consideration, give rise to any assessable income under section 15-2 of the ITAA 1997 for the employee?
No
Detailed reasoning
Where the employee pays market value consideration for share units in the trust, the share units provided to the employee do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums provided to the employee or applied or dealt with in any way on the employee's behalf or as the employee directs for the purposes of section 15-2 of the ITAA 1997.
Question 8
Will the first element of the CGT cost base of the share units acquired by the employee, in accordance with section 110-25 of the ITAA 1997, equal the amount paid for those share units?
Yes
Detailed reasoning
Subsection 110-25(2) of the ITAA 1997 provides that the first element of the cost base of a CGT asset is the total of the money paid, or required to be paid and the market value of any other property given or required to be given in respect of acquiring the CGT asset. This provision is subject to the modification rules in Division 112 of the ITAA 1997; however none of these apply in this case. Accordingly, the first element of the CGT cost base of the share units acquired by the employee will equal the amount he pays or is required to pay for those share units
Question 9
Will the distribution of dividends included in the calculation of the net income of the trust estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) by the trustee to the employee, to which the employee is presently entitled, be included as assessable income of the employee under section 97 of the ITAA 1936?
Yes
Detailed reasoning
If the employee is a beneficiary presently entitled to a share of the income of the trust estate, that share of the net income of the trust estate for the purposes of section 95 of the ITAA 1936 is included in the employee's assessable income under section 97 of the ITAA 1936.
The trustee will include in its calculation of net income, as defined in section 95 of the ITAA 1936, the total assessable income of the trust estate calculated under Division 6 of the ITAA 1936 as if the trustee were a taxpayer in respect of that income less all allowable deductions.
Under subsection 44(1) of the ITAA 1936, the assessable income of a resident shareholder in a company includes dividends that are paid to the shareholder by the company out of profits derived by it from any source.
Therefore, to the extent that a dividend is received by the trustee as a shareholder and included by the trustee in its calculation of net income for the purposes of Division 6 of the ITAA 1936, the employee's proportionate share of the section 95 net income of the trust estate for the purposes of section 97 of the ITAA 1936 will be the proportionate share of the income of the trust estate to which the employee is presently entitled in the relevant income year.
Question 10
Will the proceeds received by the employee upon redemption of the share units constitute assessable income under section 6-5 of the ITAA 1997?
No
Detailed reasoning
The redemption of share units acquired by the employee is a realisation of a capital asset. The redemption proceeds are capital in nature and so do not constitute income according to ordinary concepts assessable under section 6-5 of the ITAA 1997.
Question 11
Will the proceeds received by the employee upon redemption of the share units constitute assessable income under section 15-2 of the ITAA 1997?
No
Detailed reasoning
The redemption of share units acquired by the employee is a realisation of a capital asset and the redemption proceeds do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums assessable under section 15-2 of the ITAA 1997.
Question 12
To the extent that any proceeds received on the redemption of the share units constitute assessable income for the employee under the provisions of section 6-5 or section 15-2 of the ITAA 1997, will the net proceeds (i.e. gross proceeds less the cost of the share units) be assessable, rather than the gross proceeds?
This question is not applicable to the scheme upon which this ruling is based.
Detailed reasoning
Refer to Questions 10 and 11 above. On the facts provided, no part of the proceeds from the redemption of the share units constitutes assessable income under either section 6-5 or section 15-2 of the ITAA 1997. However, other payments at the time of the cancellation of the share units may be assessable, refer to Question 16 below.
Question 13
To the extent that the proceeds received on the redemption of the share units do not constitute assessable income under section 6-5 or section 15-2 of the ITAA 1997 for the employee:
a) will the redemption of the share units constitute a CGT event as set out in Division 104 of the ITAA 1997?
Yes
Detailed reasoning
The redemption of share units by the employee is done by way of a surrender of those share units. Each Share Unit is a CGT asset as defined in section 108-5 of the ITAA 1997; surrender of which will constitute a CGT event C2 under section 104-25 of the ITAA 1997.
b) will the proceeds received by the employee upon the redemption of the share units be taken into account in calculating his net capital gain under Division 102 of the ITAA 1997?
Yes
Detailed reasoning
The redemption of share units by the employee is a surrender of CGT assets. Subsection 104-25(3) of the ITAA 1997 provides that you work out your capital gain (loss) on surrender of a CGT asset by comparing cost base (reduced cost base) and capital proceeds. The method statement in section 102-5 of the ITAA 1997 requires you to add up the capital gains you make in a year of income in working out your net capital gain for the year.
As the proceeds received by the employee from the redemption of share units are capital proceeds under section 116-20 of the ITAA 1997, they are taken into account in working out his capital gain or loss on the redemption of the share units and in turn in calculating his net capital gain under Division 102 of the ITAA 1997
c) will the CGT discount provisions in Division 115 of the ITAA 1997 apply where the share units were acquired at least 12 months before the CGT event and a capital gain is made?
Yes
Detailed reasoning
A capital gain will be a discount capital gain under Division 115 of the ITAA 1997 if it is made (relevantly):
· by an individual (section 115-10 of the ITAA 1997)
· after 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999 (section 115-15 of the ITAA 1997)
· on a CGT asset that does not have an indexed cost base (section 115-20 of the ITAA 1997)
· on a CGT asset acquired at least 12 months before the CGT event (section 115-25 of the ITAA 1997).
In this case:
· the employee is an individual
· the CGT events will be after 21 September 1999
· the share units cannot have an indexed cost base as they will be acquired after 21 September 1999 (section 114-1 of the ITAA 1997)
As the first three requirements for a discount capital gain are met, it follows that any capital gain made by the employee from CGT event C2 happening to share units that were held by the employee for at least 12 months will be a discount capital gain.
Question 14
To the extent that the proceeds from any given redemption of share units are included in assessable income under section 6-5 or section 15-2 of the ITAA 1997 and are taken into account in calculating a net capital gain, will the anti-overlap provisions of section 118-20 of the ITAA 1997 operate to reduce the capital gain by the amount included in assessable income or to zero in accordance with subsections 118-20(2) and 118-20(3) of the ITAA 1997?
This question is not applicable to the scheme upon which this ruling is based.
Detailed reasoning
Refer to Questions 10 and 11 above. On the facts provided, no part of the proceeds from the redemption of the share units constitutes assessable income under either section 6-5 or section 15-2 of the ITAA 1997. However, other payments made at the time of the cancellation of the share units may be assessable, refer to Question 16 below.
Question 15
If the share units are redeemed at a time that coincides with the cessation of the employee's employment, will the proceeds on redemption be an employment termination payment under section 82-130 of the ITAA 1997?
No
Detailed reasoning
Section 82-130 of the ITAA 1997 provides that an employment termination payment is a payment in consequence of termination of employment. The disposal of share units held by the employee at a time that coincides with the cessation of his employment is a realisation of a capital asset. The proceeds are received in consequence of the redemption of the units rather than the termination of his employment. They are therefore not an employment termination payment as defined in section 82-130 of the ITAA 1997.
Question 16
If the trustee, pursuant to the trust deed, decides to pay salary to the employee on behalf of employer, will the amounts paid to the employee (including any amounts of Pay As You Go instalments withheld) be included as assessable income of the employee under section 6-5 of the ITAA 1997?
Yes
Detailed reasoning
While Taxation Ruling TR 2001/10 has no direct application in this case, the trust deed appears to allow the trustee to make payments of salary on behalf of employer. Where the trustee, pursuant to the trust deed, pays amounts to the employee on behalf of employer as salary minus amounts withheld as Pay As You Go tax instalments, such amounts (including the amounts of Pay As You Go instalments withheld) will constitute income according to ordinary concepts assessable under section 6-5 of the ITAA 1997.
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