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Ruling

Subject: Employee Investment Trust

Question 1

Will the contributions of money by the employer to the trustee of the trust 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 the trustee 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 the trustee 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 the trustee 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 the trustee from the sale of investments be taken into account in calculating the trustee's net capital gain under Division 102 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

(ii) Will the sale of investments by the trustee which had been allocated to Units of the employee constitute a CGT event under Division 104 of the ITAA 1997?

Answer:

No

(iii) Will the proceeds received by the trustee from the sale of investments allocated to Units of the employee be taken into account in calculating the trustee's net capital gain under Division 102 of the ITAA 1997?

Answer:

No

(iv) Where the proceeds received by the trustee from the sale of investments held by the trustee 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:

The proceeds received by you from sale of investments do not constitute capital gains. As such, it is unnecessary to consider this question further.

Question 6

Will the cancellation of the employee's Units constitute an acquisition of the cancelled Units by the trustee 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 - the trustee's 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 commences on:

22 January 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 16

Fringe Benefits Tax Assessment Act 1986 Subsection 16(1)

Fringe Benefits Tax Assessment Act 1986 Section 18

Fringe Benefits Tax Assessment Act 1986 Subsection 19(1)

Fringe Benefits Tax Assessment Act 1986 Section 67

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

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)

ATO view documents

ATO Interpretative Decision 2003/316

ATO Interpretative Decision 2002/961

Other references (non ATO view, such as court cases)

Commissioner of Taxation v. Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16; 2007 ATC 4236; 65 ATR 369

J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22

Reasons for decision

Question 1

Will the contributions of money by the employer to the trustee of the trust 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:

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

Section 6-5 of the ITAA 1997 includes in the trustee's assessable income any income according to ordinary concepts that the trustee derived directly or indirectly from all sources.

Contributions of money from the employer to the trustee pursuant to the trust deed constitute capital receipts to the trustee, and are therefore not considered to be income according to ordinary concepts. 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 loans of money by the employer to the trustee 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 total assessable income of the trust, calculated as if the trust were a taxpayer in respect of that income, less all allowable deductions.

Section 6-5 of the ITAA 1997 includes in the trustee's assessable income any income according to ordinary concepts that the trustee derived directly or indirectly from all sources.

Loans made by the employer to the trustee pursuant to the trust deed constitute capital receipts to the trustee, and are therefore not considered to be income according to ordinary concepts. 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 the trustee 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 total assessable income of the trust, calculated as if the trust were a taxpayer in respect of that income, less all allowable 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 the trustee's calculation of the 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 the trustee 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, the 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 the trustee from the sale of investments be taken into account in calculating the trustee's net capital gain under Division 102 of the Income Tax Assessment Act 1997 (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.

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 this case, the trustee has advised that it would receive proceeds from the 'sale' of the investments that the trustee acquired in the employer in circumstances where the employee instructs the trustee to cancel his/her Units. In this case, it could be said that the employee has instructed the trustee to transfer his/her beneficial ownership in the underlying investments to the trustee. As such, it could be said that the trustee, on behalf of the employee, has sold the employee's interest in the shares to the trustee in its capacity as trustee.

There will be no other circumstances in which the investments will be sold other than on cancellation, and no other sale is in serious contemplation.

In the Commissioner's view, the relevant asset for the purposes of CGT legislation is the Units themselves and not the underlying shares attached to those shares.

The trustee is required to cancel some or all of the units held by the employee if his/her employment ends, or if he/she requests such a cancellation in writing.

We consider that the cancellation of those units,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 Unit Holder as beneficial owner of the 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 the trustee's net capital gain under Division 102 of the ITAA 1997.

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

Answer:

No. See question 5(i) above.

(iii) Will the proceeds received by the trustee from the sale of investments allocated to Units of the employee be taken into account in calculating the trustee's net capital gain under Division 102 of the ITAA 1997?

Answer:

No. See question 5(i) above.

(iv) Where the proceeds received by the trustee from the sale of investments held by the trustee 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:

The proceeds received by the trustee from sale of investments do not constitute capital gains. As such, it is unnecessary to consider this question further.

Question 6

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

Answer:

Under section 109-5 of the ITAA 1997, the trustee acquires an asset when the trustee becomes its owner. Subsection 109-5(2) of the ITAA 1997 sets out specific rules relating to the time at which the trustee acquires 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 units in the trust by the trustee at the time of redemption of the Units as the units are extinguished when redeemed.

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

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 - the trustee's 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:

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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