Edited version of your private ruling

Authorisation Number: 1012449485952

Ruling

Subject: Employee Share Plan

Question 1

Will the contributions of money by the employer to you pursuant to the trust deed be included in the calculation of the net income of the trust estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

No

Question 2

Will the loans of money by the employer to you pursuant to the trust deed be included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936?

Answer:

No

Question 3

Will dividends and other income received by you be included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936?

Answer:

Yes

Question 4

Will any part of the net income of the trust estate to which no beneficiary is presently entitled be assessed to you pursuant to section 99A of the ITAA 1936?

Answer:

Yes

Question 5

To the extent that the net income of the trust estate does not include proceeds received on the disposal of investments as ordinary income of the trust estate:

(i) will the proceeds received by you from the sale of investments be taken into account in calculating your net capital gain under Division 102 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No, where the proceeds are received as a result of the 'sale' by you (as instructed by the employee) of allocated shares to you (in your capacity as trustee).

(ii) will the sale of investments by you which had been allocated to share units of the employee constitute a CGT event under Division 104 of the ITAA 1997?

Answer:

Yes, where the proceeds are received as a result of the sale by you (as instructed by the employee) of allocated shares to another entity under a takeover, buyout or ASX listing.

(iii) will the proceeds received by you from the sale of investments allocated to share units of the employee be taken into account in calculating your net capital gain under Division 102 of the ITAA 1997?

Answer:

No, where the proceeds are received as a result of the 'sale' by you (as instructed by the employee) of allocated shares to you (in your capacity as trustee).

(iv) where the proceeds received by you from the sale of investments held by you for at least 12 months are taken into account in calculating a capital gain under Division 102 of the ITAA 1997, will the capital gain be a discount capital gain under Division 115 of the ITAA 1997?

Answer:

Yes, however the amount of capital gain will be doubled as per the operation of paragraphs 115-215(4)(a) and 115-222(4)(b) of the ITAA 1997.

Question 6

Will the cancellation of the employee's share units constitute an acquisition of the cancelled share units by you under section 109-5 of the ITAA 1997?

Answer:

No

Question 7

Will the general anti-avoidance provisions under section 67 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) apply to the scheme described?

Answer:

Decline to rule - your liability to fringe benefits tax is not affected by the outcome of the ruling.

Question 8

Will the general anti-avoidance provisions under Part IVA of the ITAA 1936 apply to the scheme described?

Answer:

No

This ruling applies for the following periods:

Income Tax Year ended 30 June 2013

Income Tax Year ended 30 June 2014

Income Tax Year ended 30 June 2015

Fringe Benefits Tax year ended 31 March 2013

Fringe Benefits Tax year ended 31 March 2014

Fringe Benefits Tax year ended 31 March 2015

The scheme commenced:

During the income tax year ended 30 June 2013.

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

Fringe Benefits Tax Assessment Act 1986 Section 67

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Subsection 99A(4)

Income Tax Assessment Act 1936 Subsection 99A(4A)

Income Tax Assessment Act 1997 Division 102

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 8-1(1)

Income Tax Assessment Act 1997 Subsection 8-1(2)

Reasons for decision

Question 1

Will the contributions of money by the employer to you pursuant to the trust deed be included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936?

Answer:

Section 95 of the ITAA 1936 defines the 'net income of the trust estate' as the assessable income of the trust, calculated as if the trust were a taxpayer in respect of that income, less all relevant deductions.

Subsection 6-5(2) of the ITAA 1997 includes in your assessable income any income according to ordinary concepts that you derived directly or indirectly from all sources.

Contributions of money from the employer to you pursuant to the trust deed constitute capital receipts to you, and are therefore not considered to be income according to ordinary concepts. There are also no specific provisions in the ITAA 1997 or ITAA 1936 which apply to assess you on capital contributions. These contributions are thus not included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936.

Question 2

Will the loan of money by the employer to you pursuant to the trust deed be included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936?

Answer:

As stated above, section 95 of the ITAA 1936 defines the 'net income of the trust estate' as the assessable income of the trust, calculated as if the trust were a taxpayer in respect of that income, less all relevant deductions.

Subsection 6-5(2) of the ITAA 1997 includes in your assessable income any income according to ordinary concepts that you derived directly or indirectly from all sources.

Loans made by the employer to you pursuant to the trust deed constitute capital receipts to you, and are therefore not considered to be income according to ordinary concepts. There are also no specific provisions in the ITAA 1997 or ITAA 1936 which apply to assess you on capital contributions. As such, the contributions are not included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936.

Question 3

Will dividends and other income received by you be included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936?

Answer:

As stated above, section 95 of the ITAA 1936 defines the 'net income of the trust estate' as the assessable income of the trust, calculated as if the trust were a taxpayer in respect of that income, less all relevant deductions.

Section 44 of the ITAA 1936 includes in the assessable income of a shareholder in a company dividends that are paid to the shareholder by the company out of profits derived by it from any source.

If dividends and other income are received by the trustee, those amounts are included in the Trustee's calculation of its net income for a year of income under section 95 of the ITAA 1936.

Question 4

Will any part of the net income of the trust estate to which no beneficiary is presently entitled be assessed to you pursuant to section 99A of the ITAA 1936?

Answer:

Subsection 99A(4A) of the ITAA 1936 states that, where there is part of the net income of the trust estate of a trust that:

(a) is not included in the assessable income of a beneficiary under section 97 of the ITAA 1936;

(b) is not assessed to the trustee under section 98 of the ITAA 1936; and

(c) does not represent income attributable to sources out of Australia and a period in which the relevant beneficiary was not a resident of Australia;

the trustee of the trust estate is liable to pay tax on that part of the net income.

As such, in circumstances where there is a part of the net income of the trust to which no beneficiary is presently entitled, you, in your capacity as trustee, will be assessed and liable to pay tax on that part of the net income of the trust.

Question 5

To the extent that the net income of the trust estate does not include proceeds received on the disposal of investments as ordinary income of the trust estate:

(i) Will the proceeds received by you from the sale of investments be taken into account in calculating your net capital gain under Division 102 of the ITAA 1997?

Answer:

Subsection 102-5(1) of the ITAA 1997 provides that your assessable income includes your net capital gain, if any, for an income year.

Under section 102-20 of the ITAA 1997, you can make a capital gain or a capital loss if and only if a CGT event happens to you.

Under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. You make a capital gain if the capital proceeds from the disposal of that asset exceed its cost base, and you make a capital loss of the capital proceeds are less than the reduced cost base of the asset.

Subsection 104-25(a) of the ITAA 1997 states that CGT Event C2 occurs if your ownership of an intangible asset ends by that asset being redeemed or cancelled.

A CGT asset is defined in section 108-5 of the ITAA 1997 as any kind or property, or a legal or equitable right that is not property (paragraphs 108-5(1)(a) and (b) of the ITAA 1997). Note 1 in section 108-5 lists examples of CGT assets and shares in a company and units in a unit trust are specifically listed.

Taxation Determination TD 2000/32 sets out the Commissioner of Taxation's view as to the relevant asset for CGT purposes under a unit trust. TD 2000/32 states:

1. Yes. The unit in the unit trust is the relevant CGT asset irrespective of any interest the unit holder has in the property of the unit trust.

2. The scheme of the Income Tax Assessment Act 1997 is to treat units in a unit trust as the relevant asset for capital gains purposes rather than any interest a unit holder might have in the underlying property of the unit trust. Note 1 to section 108-5 specifically identifies units in a unit trust as examples of CGT assets.

In your case, you have advised that you would receive proceeds from the 'sale' of the shares that you acquired in the employer in circumstances where the employee instructs you to cancel their share units. In this case, it could be said that the employee has instructed you to transfer their beneficial ownership in the underlying shares to you. As such, it could be said that you, on behalf of the employee, has sold the employee's interest in the shares to you in your capacity as trustee.

However, in the Commissioner's view, the relevant asset for the purposes of CGT legislation is the share units themselves and not the underlying shares attached to those shares.

Under the trust deed, you are required to cancel some or all of the share units held by the employee if his employment ends, or if he requests such a cancellation in writing.

We consider that the redemption of share units by you will represent a cancellation of those Share Units, and each cancellation will constitute CGT event C2 under section 104-25 of the ITAA 1997. The ensuing capital gain or capital loss will be assessed to the Share Unit Holder as legal and beneficial owner of the share units.

It is the Commissioner's view that there will be no corresponding CGT event that occurs to the underlying shares.

As such, any proceeds from the 'sale' of the shares will not be taken into account in determining your net capital gain under Division 102 of the ITAA 1997.

(ii) Will your sale of investments which had been allocated to share units of the employee constitute a CGT event of the trust estate under Division 104 of the ITAA 1997?

Answer:

Under section 104-10 of the ITAA 1997, CGT event A1 occurs if you dispose of a CGT asset.

You have advised that, in circumstances where the shares in the employer are to be sold to a third party entity in a takeover or trade sale situation, or where shares are to be listed on the Australian Stock Exchange (ASX), then under the trust deed you are entitled to sell the shares to the third party entity insofar as you are acting in accordance with the direction of the employee.

In these circumstances, the relevant assets being sold to the third party are the shares in the employer, as allocated to the share units of the employee. The share units themselves are not being sold to the third party, but rather the underlying assets which are legally held by you.

Upon selling the shares to the third party, you will be disposing of a CGT asset of the trust. As such, CGT event A1 will apply to the sale of the shares.

(iii) Will the proceeds received by you from the sale of investments allocated to share units of the employee be taken into account in calculating your net capital gain under Division 102 of the ITAA 1997?

Answer:

Subsection 102-5(1) of the ITAA 1997 provides that your assessable income includes your net capital gain, if any, for an income year.

Under section 102-20 of the ITAA 1997, you can make a capital gain or a capital loss if and only if a CGT event happens to you.

As stated above, under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. You make a capital gain if the capital proceeds from the disposal of that asset exceed its cost base, and you make a capital loss of the capital proceeds are less than the reduced cost base of the asset.

As further stated above, we consider that CGT event A1 has occurred where you sell the shares legally owned by the trust to a third party in a trade sale or takeover situation.

As the legal owner of the shares, the CGT event has happened to you, and as such subsection 102-5(1) of the ITAA 1997 will apply to include any capital gain arising from the sale of the shares in your net capital gain.

We note, however, that Subdivision 115-C of the ITAA 1997 provides rules for the allocation and assessment of trust capital gains to beneficiaries. Subdivision 115-C will need to be taken into account when determining the tax implications of capital gains for both you and the employee.

(iv) Where the proceeds received by you from the sale of investments which you held for at least 12 months are taken into account in calculating a capital gain of the trust estate under Division 102 of the ITAA 1997, will the capital gain be a discount capital gain under Division 115 of the ITAA 1997?

Answer:

Subdivision 115-C of the ITAA 1997 applies where a trust has a net capital gain for an income year, which is taken into account in calculating the trust's net income for an income year.

Tax Treatment of Capital Gains which are Assessed to Presently Entitled Beneficiaries

Section 115-215 of the ITAA 1997 applies to capital gains which are assessed through a trust to presently entitled beneficiaries. Subsection 115-215(1) of the ITAA 1997 states:

The purpose of this section is to ensure that appropriate amounts of the trust estate's net income attributable to the trust estate's capital gains are treated as a beneficiary's capital gains when assessing the beneficiary, so:

(a) the beneficiary can apply capital losses against gains; and

(b) the beneficiary can apply the appropriate discount percentage (if any) to gains.

Paragraph 115-215(3)(b) states:

If you are a beneficiary of a trust estate, for each capital gain of the trust estate, Division 102 applies to you as if you had:

…

(b) if the capital gain was reduced under either step 3 of the method statement or Subdivision 152-C but not both… - a capital gain equal to twice the amount mentioned in subsection 115-215(1)…

However, paragraph 115-215(4)(a) states:

For each capital gain of yours mentioned in paragraph (3)(b) or (c):

(a) if the relevant trust gain was reduced under step 3 of the method statement in subsection 102-5(1) - Division 102 also applies to you as if your capital gain were a discount capital gain, if you are the kind of entity that can have a discount capital gain

Step 3 of the method statement in subsection 102-5(1) of the ITAA 1997 states that an entity should reduce any discount capital gains by the discount percentage. These terms are defined in Division 115 of the ITAA 1997.

To be a discount capital gain, a capital gain must have been made by a certain type of entity (including an individual or trust), on a CGT event which occurs after 21 September 1999, in relation to a CGT asset that was acquired 12 months prior to the CGT event and that does not have an indexed cost base.

Under subsection 114-5(2), indexation is not relevant to a capital gain which occurred after 21 September 1999 unless you have chosen that the cost base include indexation.

In your case, the capital gain will be made by a trust, after 21 September 1999, with respect of a CGT asset that you hold for at least 12 months. Unless you elect to index the cost base of the shares, then any capital gain you make will be a discount capital gain.

When the capital gain is applied to the employee as beneficiary of the trust, paragraph 115-215(3)(b) of the ITAA 1997 will apply to double the amount of the discount capital gain to which the employee is presently entitled as a share unit holder. The employee is then entitled to apply their own discount percentage as per paragraph 115-215(4)(a) of the ITAA 1997.

In effect, the capital gain is assessed to the employee as presently entitled beneficiary at the rate as if it were not a discount capital gain. The capital gain is then treated as a discount capital gain in the hands of the employee.

Tax Treatment of Capital Gains which are Assessed to the Trustee

Paragraph 115-222(4)(b) of the ITAA 1997 states:

For each capital gain of the trust estate, increase the amount (the assessable amount) in respect of which you are liable to be assessed (and pay tax) under section 99A of the Income Tax Assessment Act 1936 in relation to the trust estate by:

…

(b) if the capital gain was reduced under either step 3 of the method statement or Subdivision 152-C but not both (even if it was further reduced by the other small business concessions) - twice the amount mentioned in subsection 115-225(1).

Subsection 115-225(1) of the ITAA 1997 states that the amount of a trust's attributable gain is the amount of capital gain remaining under the first four steps in subsection 102-5(1) multiplied by your share of the capital gain. As the third step of the method statement in subsection 102-5(1) states that a discount capital gain is to be applied, then your attributable gain includes the discount percentage.

As such, paragraph 115-222(4)(b) applies to remove the benefit of the CGT discount where a capital gain is assessed to the trustee of the trust where no beneficiary is presently entitled to that gain.

In your case, presuming that you do not choose to index the cost base of the shares, then the capital gain on the sale of the shares will be a discount capital gain. However, under paragraph 115-222(4)(b) of the ITAA 1997, the benefit of the discount will be removed and you will be assessed on the entire capital gain amount.

Question 6

Will the cancellation of the employee's share units constitute an acquisition of the cancelled share units by you under section 109-5 of the ITAA 1997?

Answer:

Under section 109-5 of the ITAA 1997, you acquire an asset when you become its owner. Subsection 109-5(2) of the ITAA 1997 sets out specific rules relating to the time at which you acquire something under relevant CGT events. We note that there is no specific acquisition rule for CGT event C2.

The Commissioner of Taxation has issued CGT Determination Number 40, which sets out the Commissioner's view of the capital gains treatment of units in a unit trust upon redemption. CGT Determination Number 40 states that there is no acquisition of Share Units in the Trust by the Trustee at the time of redemption of the Share Units as the Share Units are extinguished when redeemed.

As such, the cancellation of the employee's share units will not constitute an acquisition of the cancelled share units by you under section 109-5 of the ITAA 1997.

Question 7

Will the general anti-avoidance provisions under section 67 of the FBTAA apply to the scheme described?

Answer:

Subsection 67(1) of the FBTAA provides:

Where:

(a) an employer (in this subsection referred to as the "eligible employer") has obtained or, but for this section, would obtain, a tax benefit in respect of a year of tax in connection with an arrangement under which a benefit is or was provided to a person, being an arrangement that was entered into, or commenced to be carried out, on or after 19 September 1985; and

(b) it would be concluded that the person, or one of the persons, who entered into or carried out the arrangement or any part of the arrangement did so for the sole or dominant purpose of enabling the eligible employer to obtain a tax benefit in connection with the arrangement or of enabling the eligible employer and another employer or other employers each to obtain a tax benefit in connection with the arrangement (whether or not that person who entered into or carried out the arrangement or any part of the arrangement is the eligible employer or is the other employer or one of the other employers),

the Commissioner:

(c) may determine that the aggregate fringe benefits amount (if any) of the eligible employer of the year of tax be increased by the amount of the tax benefit; and

(d) may determine that appropriate adjustments (if any) be made to the aggregate fringe benefits amount of the eligible employer in respect of another year of tax or of another employer in respect of any year of tax,

and any such determination has effect accordingly.

In your case, you are not the employer who would be subject to any adjustments under the FBTAA should it be considered that a tax benefit has arisen in respect of their arrangement. You administer the arrangement, but only in accordance with the direction of the employer.

Similarly, you have not otherwise asked us to rule on any FBT consequences for yourself or the employer as a result of any application of the scheme.

As such, your liability to FBT will not be affected by the outcome of this question. We thus decline to rule on this basis.

Question 8

Will the general anti-avoidance provisions under Part IVA of the ITAA 1936 apply to the scheme described?

Answer:

Provided that the scheme as implemented is materially identical to the scheme described in this ruling it is considered that Part IVA of the ITAA 1936 would not apply in respect of the trustee.

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