1012821785828 | Legal database

Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012821785828

Date of advice: 11 June 2015

Ruling

Subject: Employee Share Trust

Question 1

Will the contribution of money to the Trustee, pursuant to the Trust Deed, be included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a contribution of money to the ERT.

Question 2

Will the contribution of money to the Trustee pursuant to the Trust Deed be included in your assessable income under section 15-2 of the ITAA 1997?

Answer

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a contribution of money to the ERT.

Question 3

Will the contribution of money to the Trustee pursuant to the Trust Deed be included in your assessable income under section 21A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a contribution of money to the ERT.

Question 4

Will the loans of money to the Trustee pursuant to the Trust Deed be included in your assessable income under section 6-5 of the ITAA 1997?

Answer

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a loan, at law.

Question 5

Will the loans of money to the Trustee pursuant the Trust Deed be included in your assessable income under section 15-2 of the ITAA 1997?

Answer

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a loan, at law.

Question 6

Will the loans of money to the Trustee pursuant the Trust Deed be included in your assessable income under section 21-A of the ITAA 1997?

Answer

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a loan, at law.

Question 7

Will the issue of the Share Units to you give rise to any assessable income under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 8

Will the issue of the Share Units to you give rise to any assessable income under section 15-2 of the ITAA 1997?

Answer

It is not necessary to answer this question as the issue of Share Units is your ordinary income, assessable under section 6-5 of the ITAA.

Question 9

Will the issue of the Share Units to you give rise to any assessable income under section 21A of the ITAA 1936?

Answer

Question 10

Will the 'loan' provided from the Trustee to you for the purpose of acquiring the Share Units constitute assessable income under section 6-5 of the ITAA 1997?

Answer

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a loan, at law.

Question 11

Will the 'loan' provided from the Trustee to you for the purpose of acquiring the Share Units constitute assessable income under section 15-2 of the ITAA 1997?

Answer

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a loan, at law.

Question 12

Will the 'loan' provided from the Trustee to you for the purpose of acquiring the Share Units constitute assessable income under section 21A of the ITAA 1936?

Answer

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a loan, at law.

Question 13

If the answer to question 12 is yes, will the taxable value of the non-cash business benefit constituted by the loan be reduced to nil by the application of subsection 21A(3) of the ITAA 1936?

Answer

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a loan, at law.

Question 14

Will the first element of the Capital Gains Tax (CGT) cost base of the Share Units acquired by you, in accordance with section 110-25 of the ITAA 1997, equal the amount paid for those Share Units?

Answer

It is not necessary to answer this question as the Commissioner is of the view that you hold the Share Units on revenue account. Any profit or loss you make from the disposal of the Share Units should be accounted for as a profit or loss from an isolated transaction and included under section 6-5 or 8-1 of the ITAA 1997.

Question 15

(a) Will your assessable income include your share of a franked distribution that flows indirectly to you from the Trust?

Answer

Yes, if you are liable to be assessed on the share amount as provided in subparagraphs 207-50(4)(b)(i) or 207-50(4)(b)(ii).

(b) If the answer to question 15(a) is yes, will you be entitled to a tax offset for franking credits attached to franked dividends received by you from the Trust in respect of the Allocated Shares?

Answer

No.

Question 16

Will the proceeds received by you upon redemption of the Share Units constitute assessable income under section 6-5 of the ITAA 1997?

Answer

The Commissioner is of the view that you hold the Share Units on revenue account. Any profit or loss you make from the disposal of the Share Units should be accounted for as a profit or loss from an isolated transaction and included under section 6-5 or 8-1 of the ITAA 1997.

Question 17

Will the proceeds received by you upon redemption of the Share Units constitute assessable income under section 15-2 of the ITAA 1997?

Answer

No.

Question 18

Will the proceeds received by you upon redemption of the Share Units constitute assessable income under section 21A of the ITAA 1997?

Answer

No.

Question 19

To the extent that any proceeds received on the redemption of the Share Units constitute your assessable income under the provisions of section 6-5 or 15-2 of the ITAA 1997, or section 21A of the ITAA 1936, will the net proceeds (i.e. gross proceeds less the cost of the Share Units) be assessable, rather than the gross proceeds?

Answer

Question 20

Where the Trustee disposes of the Allocated Shares which are allocated to your Share Units, and makes a capital gain from that disposal, will that capital gain be treated as your capital gain pursuant to Subdivision 115-C of the ITAA 1997?

Answer:

This question does not need to be answered. The profits from disposal of the Allocated Shares are included in the net income of the Trust estate, as ordinary income.

Question 21

(a) Will the redemption of the Share Units constitute a CGT event as set out in Division 104 of the ITAA 1997?

Answer:

This question does not need to be answered. The Commissioner is of the view that you hold the Share Units on revenue account. Any profit or loss you make from the disposal of the Share Units should be accounted for as a profit or loss from an isolated transaction and included under section 6-5 or 8-1 of the ITAA 1997.

(b) Will the proceeds received by you upon the redemption of the Share Units be taken into account in calculating your net capital gain under Division 102 of the ITAA 1997?

Answer:

(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?

Answer:

(d) To the extent the proceeds are distributed by the Trustee and paid to you in respect of Subdivision 115-C of the ITAA 1997 (whether due to present entitlement or specific entitlement), as part of the consideration for redemption of their Share Units will the CGT Event arising from the redemption of your Share Units as per question 21(b) above be the sole taxing event in respect of that distribution?

Answer:

This question does not need to be answered. The Commissioner is of the view that the trustee holds the Shares that it acquires on revenue account and you hold the Share Units on revenue account.

Question 22

To the extent that the proceeds from any given redemption of Share Units are included in the assessable income under a provision of the ITAA 1997 or ITAA 1936 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:

Yes. The section 118-20 of the ITAA 1997 reduces the capital gain by the amount included in assessable income by section 6-5 of the ITAA 1997.

Question 23

If the Trustee, pursuant to of the Trust Deed, decides to pay an amount to you on behalf of the Trustee, will the amounts paid to you be included in your assessable income under section 6-5 of the ITAA 1997?

Answer

It is not necessary to answer this question as the Trustee is not authorised to make payments to you under the terms of the Trust Deed.

Question 24

If the Trustee, pursuant to the Trust Deed, decides to pay amounts to you, which had been paid from your own after tax personal resources to repay the loans pursuant to clause x, will those amounts constitute a non-assessable return of capital?

Answer

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a loan, at law.

Relevant facts and circumstances

In this ruling, capitalised terms (except to the extent that they are proper nouns) are specifically defined in the Trust Deed, the Plan Rules and the Plan Administration Agreement.

1. The entity is an Australian resident company and is the trustee for a Trading Trust ("You").

Contract with Company

2. You entered into an agreement with the company to create a Design package.

3. As consideration for the development of the Package, you and the company agreed that they would pay you an amount in cash to be paid in instalments, across a number of payment milestones. This consideration was calculated to include the costs of development you were to incur as well as additional allowances.

4. In the same agreement, the Company would also provide you with Share Units in their existing Share Plan.

5. You agreed that the Share Units would be valued and the required number of Share Units would be issued.

6. You have acquired the Share Units in the course of a business or commercial transaction entered into with the Company.

7. The Share Units would be provided as part of the remuneration package to:

7.1. Incentivise the timely delivery of the package; and

7.2. Promote the ongoing relationship between the two companies, for this package and future projects.

8. The Share Units were subject to following vesting conditions comprising the reaching of certain milestones.

9. Achievement of the milestones as part of the "vesting conditions" meant that when you redeemed the Share Units, you were entitled to receive a cancellation payment equivalent in value to the market value of the shares in the Company at the time of redemption. Failure to achieve the milestones (and therefore the vesting conditions) meant that when you redeemed the Share Units, you were only entitled to receive a cancellation payment equivalent in value to the Issue Price of the units, not the market value of the shares in the Company at the time of redemption.

10. Under the terms of the agreement you entered into with the Company, you have agreed to provide the services under that agreement in return for a cash payment and Share Units to the (herein referred to as the 'equity consideration').

11. You satisfied all of the milestones.

Operation of the IERST

Application and Allocation of Share Units

12. Consistent with the agreement entered into with you, the Trustee was issued ordinary shares in the Company. The Shares were issued from the company's freshly issued share capital and allotted to you.

13. You completed an application form to apply for the issue of the Share Units.

14. As part of the application form, and in accordance with the Trust Deed, you applied to the Trustee for what you described as a 'loan', equal to the total Issue Price of the Share Units.

15. The Trustee allocated Share Units with a designated issue price to you, and allocated the Shares to your Share Units.

16. The terms of the 'loan' were contained in the application form and the Trust Deed.

17. However at a meeting with representatives of the Company you agreed that you would not be required to repay the 'loan'. You agreed that you would receive 100% of the benefit from the sale of the shares without any requirement to repay the loan.

17.1. This agreement was confirmed by email.

17.2. The email provides that the Company would apply for a private ruling on your behalf at its own costs, and will provide an indemnity for any income tax liability that may arise prior to the receipt of cash consideration. "For avoidance of doubt, this indemnity shall expire once the share units are redeemed from the trust and you have received cash consideration."

17.3. The email further requested that you sign the attached application form the Share Units. It stated that the "application form [would] be held in escrow subject to [your] satisfaction" with the terms of the email.

18. This agreement was referenced in the Proposal.

19. You did not provide any cash consideration for the Share Units. The only consideration that you provided for the issue of the Share Units was the performance of services under the package. There is no evidence to indicate that the Share Units were gifted to you by the Trustee.

Entitlements as a Share Unit Holder

20. As a Share Unit Holder, you are presently and specifically entitled to the income of the Trust Fund that is attributed to your particular Share Unit Distribution Entitlement (SUDE). The SUDE was defined as a sum equal to any income of the Trust Fund received by the Trustee in relation to your Allocated Shares or assets referable to your particular Share Units. However:

20.1. The Trustee may in its absolute discretion determine whether any income or expenditure is on the income or capital account. However, dividend or interest payments received in respect of an Allocated Share will always be income of the Trust Fund and cannot be held on capital account. Where the Trustee fails to make a determination, then the income of the Trust Fund will be comprised of the dividends and interest received by the Trustee; and

20.2. Any income that is not attributed to a particular SUDE can be distributed to Share Unit Holders at the discretion of the Trustee. If no discretion is exercised then the income will be distributed pro rata according to the employees' Share Unit holdings.

21. As a Share Unit Holder, you are also entitled to:

21.1. Request that the Trustee pass a resolution to cancel the Share Units;

21.2. Receive a Cancellation Entitlement;

21.3. Voting rights in respect of the Share Units; and

21.4. Direct the Trustee as to how the voting rights attached to the Allocated Shares would be exercised.

Cancellation of the Share Units and Cancellation Entitlement

22. The Trustee by resolution shall cancel some or all the Share Units registered in your name on the happening of any of the following events:

22.1. You request in writing that the Trustee cancel your Share Units;

22.2. You do not meet one or more of the vesting conditions by end of December 20XX; and

22.3. You act fraudulently or dishonestly, or are in breach of your obligations to the Company.

23. To the extent that you are required to surrender Share Units because you do not meet vesting conditions, or because you act in breach of your obligations, you will dispose of the equivalent Share Units to the Trustee for consideration equal to the Issue Price of the Share Unit. The Shares allocated to those Share Units will be reallocated to the Unallocated Shares Account, and may be allocated to the Share Units of another employee or contractor.

24. It is clear from all events, should your Share Units be cancelled, you were at least entitled to receive an amount of cash or property equal to the amount of the Issue Price of the Share Unit. Therefore, you have always been entitled to cancel your Share Units for cash or property.

25. Where Share Units are cancelled, once the vesting conditions have been met, you are entitled to receive a Cancellation Entitlement as either cash equal to the market value of the Allocated Shares that is referrable to the Share Unit, or as the in specie distribution of the Allocated Share.

26. For the purpose of meeting any Cancellation Entitlement, the Trustee may transfer or assign the Allocated Shares to you.

27. If you elect to receive your Cancellation Entitlement in respect of a Share Unit in cash, the Allocated Share that is referrable to that Share Unit shall be redesignated as an Unallocated Share and reassigned to the Unallocated Share Account.

28. The Trustee then must redeem the Unallocated Share to the Company for its market value, to fund the distribution of the Cancellation Entitlement, except in circumstances where the Trustee simultaneously needs to acquire Shares for a nominated Eligible Employee who is entering the scheme. In this case, the Trustee may assign the Unallocated Share as Allocated Shares referable to the Share Units of the Eligible Employee entering the scheme. Your Cancellation Entitlement is funded by the loan application monies of the Eligible Employee who is entering the scheme.

29. You have not yet cancelled any of the vested Share Units

Trustee's Discretion

30. In exercising the powers, authorities and discretions vested in it by the Trust Deed, the Trustee shall have absolute and uncontrolled discretion, and may exercise or enforce all or any of those powers, authorities and discretions at any time, or may refrain from exercising all or any of them from time to time or at all

Assumption(s)

Consultancy and Commercial Terms Agreements

31. You entered into a contract with the company. For the purposes of this Ruling, it is assumed that there is nothing contained in the documents -Consultancy Agreement that materially alters the scheme as we have described it.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 21A

Income Tax Assessment Act 1936 section 160APHO

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-2

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 Subdivision 115-C

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 116-25

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 Subdivision 207-B

Income Tax Assessment Act 1997 section 207-35

Income Tax Assessment Act 1997 section 207-45

Income Tax Assessment Act 1997 section 207-50

Income Tax Assessment Act 1997 section 207-55

Income Tax Assessment Act 1997 section 207-58

Income Tax Assessment Act 1997 section 207-150

Taxation Administration Act 1953 Schedule 1 section 12-35

Taxation Administration Act 1953 Schedule 1 subparagraph 359-35(2)(a)

ATO view documents

ATO Interpretative Decision ATO ID 2014/10

Draft Taxation Ruling TR 2014/D1

Taxation Determination TD 2000/32

Taxation Determination TD 2014/25

Taxation Ruling No. IT 2606

Taxation Ruling TR 98/1

Taxation Ruling TR 2005/16

Taxation Ruling TR 2006/11

Law Administration Practice Statement PS LA 2008/3

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

Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation (1965) 114 CLR 314

Constable v. Federal Commissioner of Taxation (1952) 86 CLR 402

Cranstoun v. Federal Commissioner of Taxation 84 ATC 4876

Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540

Federal Commissioner of Taxation v. McArdle 89 ATC 4051

Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199

Federal Commissioner of Taxation v. White [2010] FCA 730

Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355

Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1

McArdle v. Federal Commissioner of Taxation 88 ATC 4222

Re Yip and Federal Commissioner of Taxation [2011] AATA 785

Richard Walter Pty Ltd v. Federal Commissioner of Taxation 95 ATC 4440

Sent v. Federal Commissioner of Taxation (No 2) [2012] FCAFC 187

Smith v. Federal Commissioner of Taxation 87 ATC 4883

Anti-avoidance rules

You have not requested that we consider the application of the general anti-avoidance rules in Part IVA of the ITAA 1936. We have therefore not included a consideration of Part IVA in this ruling.

Reasons for decision

Question 1: Will the contribution of money to the Trustee, pursuant to the Trust Deed, be included in your assessable income under section 6-5 of the ITAA 1997

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a contribution of money to the ERT.

Question 2: Will the contribution of money to the Trustee pursuant to the Trust Deed be included in your assessable income under section 15-2 of the ITAA 1997?

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a contribution of money to the ERT.

Question 3: Will the contribution of money to the Trustee pursuant to Trust Deed be included in your assessable income under section 21A of the ITAA 1936?

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a contribution of money to the ERT.

Question 4: Will the loans of money to the Trustee pursuant to the Trust Deed be included in your assessable income under section 6-5 of the ITAA 1997?

It is not necessary to answer this question as on the scheme presented, there has not been a transaction entered into that constitutes a loan, at law. Please refer to our answers to question 10 for further explanation.

Question 5: Will the loans of money to the Trustee pursuant to the Trust Deed be included in your assessable income under section 15-2 of the ITAA 1997?

Question 6: Will the loans of money to the Trustee pursuant to the Trust Deed be included in your assessable income under section 21A of the ITAA 1936?

Question 7: Will the issue of the Share Units to you give rise to any assessable income under section 6-5 of the ITAA 1997?

Section 6-5 of the ITAA 1997 states:

(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

…

(4) In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

As such, for an amount to be assessable under section 6-5 of the ITAA 1997, it must be derived directly or indirectly by you.

Amounts Derived

The Commissioner's view on when shares are assessable in exchange for services is stated in Taxation Determination TD 93/234 Income tax: is the value of the shares received as consideration for providing services for research and development activities assessable income in the hands of an independent contractor? This TD states that:

1 Yes. Shares in a company issued to an independent contractor as consideration for services performed….constitutes assessable income of the independent contractor under section 6-5 of the ITAA 97. That is, the value of the shares constitutes gross income derived by the contractor for the purposes of section 6-5. The amount of assessable income is the value of the shares at the time they are issued.

3. ….it was held that it was the market value of the shares ….that was the correct amount to be assessed to the taxpayer for the services rendered to the company.

When an amount is derived, in the context of providing services in exchange for equity or property, was recently considered by the Full Federal Court in Tagget v FC of T (2010) ATC 20-210 (Tagget). In that case, the taxpayer had received rights under a deed of agreement which represented legal choses in action. The Full Federal Court was unanimous in its conclusion that the receipt of the rights did not constitute a derivation of ordinary income at that time. In its conclusions, the Court observed (at para 30)-

"In the present case, the exercise of the rights which the appellant received under the deed of November 1998 was conditioned upon certain stages having been reached in the development, and commercial exploitation, of Tanglewood Estate. As pointed out on behalf of the Commissioner, as it happened, the appellant was never in a position unilaterally to call for the transfer of Lot 157. What matters for present purposes is that, in November 1998, he was not in a position to have done so. He was in the position of a person to whom conditional executory promises had been made, under which he would be remunerated for services rendered. Whether he would ever receive the contemplated remuneration was, in 1998, entirely a matter for the future.

The Full Federal Court distinguished Tagget's case from the situation of the taxpayer in Abbott v. Philbin [1961] AC 352-

30. The appellant's case is not analogous to Abbott. There, the House of Lords held that the value of the perquisite received by the taxpayer should be taken in the year when the options were granted because it was in that year that the options were income. The options were unconditional, and could be exercised at any time without any further voluntary act of the grantor.

In your case, you have contracted with the Company to complete work on a certain project. You have agreed to receive consideration for your services to be paid across a number of payment milestones. Similarly, you have agreed to receive equity, being the Share Units, which will vest on the completion of certain milestones. In essence, for services you provide to the Company you in return agreed to consideration, provided by way of cash and due to cash flow restrictions on behalf of the Company, Share Units (the equity consideration).

The vesting milestones are specifically described in terms of certain deliverables which you have to complete. These include the signing of certain agreements and the delivery of certain elements of the package to a certain agreed standard. However, based on the agreement entered into by you with the Company the equity consideration was not conditional on the absolute achievement of reaching the milestones as you were always entitled to receive the Share Units. It is therefore reasonable to conclude that there is no practical difference between the agreement you reached for the payment in cash, and the equity consideration.

We consider your factual scenario analogous to that which arose in Abbott v. Philbin [1961] A.C. 352 and later in Donaldson v. Federal Commissioner of Taxation [1974] 1 NSWLR 627; (1974) 74 ATC 4192; (1974) 4 ATR 530. Abbott v. Philbin is authority for the proposition that an option granted by an employer to an employee is able to be turned to pecuniary account and is therefore assessable income to the employee during the year of income in which the option was granted. This decision was considered in Donaldson v. Federal Commissioner of Taxation where Bowen C.J. observed that it is not unusual for companies to give to senior employees rights of varying kinds to take up shares upon terms which are beneficial to the employee and that it was fair to say that such benefits are regarded as being in the nature of a bonus or an addition to salary and are of an income nature.

Similarly, we consider that the provision of options, shares or units as consideration for services in a business (not employment) context is ordinary income of the business. The Share Units were issued to you unconditionally and in respect of the services to be provided to the Company in the ordinary course of your business. They could be cancelled and redeemed at any time. Once the Share Units were issued to you, you were in a position to unilaterally call for payment in exchange for the Share Units.

Time of Derivation

In the case of Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation (1965) 114 CLR 314 (Arthur Murray), the High Court considered whether amounts received prior to them being earned - being, in this case, amounts prepaid for dance lessons - were derived at the time of receipt or at the time of earning. In Arthur Murray, the court held in their joint judgment:

Likewise, as it seems to us, in determining whether actual earning has to be added to receipt in order to find income, the answer must be given in the light of the necessity for earning which is inherent in the circumstances of the receipt. It is true that in a case like the present the circumstances of the receipt do not prevent the amount received from being immediately the beneficial property of the company; for the fact that it has been paid in advance is not enough to affect it with any trust or charge, or to place any legal impediment in the way of the recipient's dealing with it as he will. But those circumstances nevertheless make it surely necessary, as a matter of business good sense, that the recipient should treat each amount of fees received but not yet earned as subject to the contingency that the whole or some part of it may have in effect to be paid back, even if only as damages, should the agreed quid pro quo not be rendered in due course. The possibility of having to make such a payment back… is an inherent characteristic of the receipt itself. In our opinion it would be out of accord with the realities of the situation to hold, while the possibility remains, that the amount received has the quality of income derived by the company.

In your case, whilst the Share Units were subject to vesting conditions, being milestones that you would be expected to meet throughout the course of the project, failure to meet these vesting conditions did not mean the Share Units would be subject to forfeiture. You held these Share Units unreservedly and without restriction at the time they were issued to you. There was never a possibility that the Share Units had to be handed back without recompense. Therefore, you derived income, in the form of the Share Units, at the time they were issued to you.

Question 8: Will the issue of the Share Units to you give rise to any assessable income under section 15-2 of the ITAA 1997?

For the reasons given in question 7 we consider that the Share Units are your ordinary income under section 6-5 of the ITAA 1997.

As such, we do not consider it necessary to answer this question further.

Question 9: Will the issue of the Share Units to you give rise to any assessable income under section 21A of the ITAA 1936?

No. Section 21A of the ITAA 1936 operates in respect of income received by a taxpayer that is not convertible to cash. The Commissioner is of the view that the Share Units are convertible to cash and does not need to consider this matter further.

Question 10: Will the 'loan' provided from the Trustee to you for the purpose of acquiring the Share Units constitute assessable income under section 6-5 of the ITAA 1997?

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

In your case, you have argued that the Trustee will make a 'loan' to you, in order for you to acquire the Share Units.

Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements provides the following in relation to loans within the ordinary meaning:

What amounts to an ordinary loan was explained by Sackville and Lehane JJ in Federal Commissioner of Taxation v. Radilo Enterprises Pty Ltd (Radilo ) (1997) 72 FCR 300; 97 ATC 4151; (1997) 34 ATR 635 as follows:

A loan involves an obligation on the borrower to repay the sum borrowed. The matter is put this way by Dr Pannam:

A loan of money may be defined, in general terms, as a simple contract whereby one person ('the lender') pays or agrees to pay a sum of money in consideration of a promise by another person ('the borrower') to repay the money upon demand or at a fixed date. The promise of repayment may or may not be coupled with a promise to pay interest on the money so paid. The essence of the transaction is the promise of repayment. As Lowe J put it in a judgment delivered on behalf of himself and Gavan Duffy and Martin JJ: ''Lend' in its ordinary meaning in our view imports an obligation on the borrower to repay'. ... Repayment is the ingredient which links together the definitions of 'loan' to be found in the Oxford English Dictionary , the various legal dictionaries and the text books. In essence then a loan is a payment of money to or for someone on the condition that it will be repaid.

The essential element of an ordinary loan is obligation to repay a borrowed amount. The fact that a debt exists is not, of itself, sufficient to characterise an arrangement as a loan. For example, in Prime Wheat Association Ltd v. Chief Commissioner of Stamp Duties (Prime Wheat Association ) (1997) 42 NSWLR 505; 97 ATC 5015; (1997) 37 ATR 479. Gleeson CJ acknowledged that a share sale agreement which provided for payment by instalments over a 20 year period was a debt and the provision of financial accommodation, but as there was only 'payment' and not 'repayment', there was no loan. Similarly, the Full Federal Court found that the sale and lease-back arrangement in Eastern Nitrogen Ltd v. Commissioner of Taxation (2001) 108 FCR 27; [2001] FCA 366; 2001 ATC 4164; (2000) 46 ATR 474 was a financing arrangement for financial accommodation, but without the obligation to repay a sum advanced, it was not a loan.

Once there is an arrangement for the repayment of an amount advanced, there is an ordinary loan irrespective of whether the rights in respect of that arrangement arise under contract or in equity. Moreover, there is no requirement that an ordinary loan be in writing.

You contend that the agreement which was confirmed by email was a misunderstanding between the parties as to the operation of the plan and should be understood in the context of the Trust Deed. You have stated that you understand the loan to operate as follows- .

• Under the terms of the Trust Deed the Share Unitholder is required to repay the loan when the Share Unit is cancelled, by set-off against the Cancellation Entitlement.

• The Trustee is then required to provide benefits on behalf of the Contracting Entity to the Eligible Contractor from the repayments of the loan as payments of ordinary assessable income or the provision of discounted rights to shares.

However , labelling a transaction as a "loan" does not make it one. In Inglewood & Districts Community Enterprises v FC of T 2011 ATC 10-202, F O'Loughlin SM notes that what matters under the law is not the label but the substance of the transaction:

9. The appropriate principles concerning the extent to which nomenclature and labels govern characterization of payments and obligations have been described in the following terms:

"The law has been and remains clear: it is not what you call something that counts, it is "what it really is" that matters. A mere label is not sufficient and never will be.

In Commissioner of Taxation v BHP, the Full Federal Court said:

'The true position is that the label that a party uses to characterise payment, in the present case the word "interest", will not be determinative, although it may have some relevance: cf NM Superannuation Pty Ltd v Young, referred to by the learned trial Judge in this context. What that relevance may be will depend on the particular circumstances of the case. A licence does not become a lease because the parties chose to call it one, if it is in truth a licence: Radaich v Smith. A person does not cease to be an employee and become an independent contractor because the parties use the latter description: Hannan & Allen v Australian Mutual Provident Society. So, it may be said that an amount payable does not become interest, if the parties chose to adopt that word, if in law it is not'.

In your case, prior to the 'loan' being entered into, you agreed with all relevant parties that:

• The 'loan' would be put into place 'on paper' only, and no physical money would change hands between you and the Trustee;

• The 'loan' would be made on favourable terms - including that no interest would be payable, and the 'loan' would be limited recourse; and

• You would not be required to repay any amount of the 'loan' in order to receive the full benefit from the disposal of the Share Units.

As such, it is our view that the arrangement you have entered into does not meet the definition of a 'loan', because there is insufficient evidence to conclude that there were funds advanced (ie, that there was payment) with an obligation to repay those funds (ie: there was an obligation to make a repayment). When looking at the practical realities of the implementation of the scheme, the Trustee received shares in the Company. It is not readily apparent that the Trustee had funds available to lend to you. Furthermore, we consider that you had already agreed to provide services in return for the issue of the Share Units and that this was the extent of the consideration provided. We consider that the circumstances surrounding the loan was analogous to the factual situation surrounding the loan made in Munnery v FC of T [2012] AATA 175, as the following extract evidences-

30. There are a number of problems which arise when the clause in the trust deed regarding the loan is analysed. The first, and most obvious, is that the monies do not move from the Plan Trustee to the employee and back to the Plan Trustee. At best, the loan can be described as notional. Therefore, there is a real question about whether or not a loan is in fact made to an employee under the trust deed. The second point is that although the trust deed describes the loan as being able to be only used for the purposes of providing consideration for the unrestricted shares, because consideration has already moved from the employee by way of having forgone salary to which the employee was legally entitled, the notional loan, even if used to pay money to the Plan Trustee, is not used for the purpose of providing consideration for the unrestricted shares. In fact the expression unrestricted shares is defined in the trust deed as shares which have been acquired by a Participant under the Plan and are no longer subject to restrictions on disposal pursuant to Clause 8 of the Trust Deed. The third point is, if it be needed, those employees who choose not to apply for a loan may nevertheless have their shares preserved in the plan.

31. Therefore, I find that the notional loan cannot properly be described as monies paid or monies required to be paid in respect of acquiring the shares. Nor is anything which the employee is required to do to preserve (retain) the shares in the plan properly described as the market value of any other property given in respect of acquiring the shares. It cannot fall within the first element of section 110-25(2) of ITAA 1997…..

In Munnery, Senior Member Fice concludes that-

…. the payment, which is made by a so-called loan provided by the Plan Trustee for the so-called preservation of unrestricted shares in the plan, which is also said to be consideration for shares which the employee already owns beneficially and for which he has already given consideration, being the foregoing of salary to which the employee was legally entitled, does not satisfy any of the five elements of the cost base set out in s 110-25 of the ITAA 1997. I find that the sole purpose of the so-called payment was to increase the cost base of the acquired shares to their market value at the ESS deferred taxing point. That of course would have the consequence of ensuring that no tax was payable by the employee as a result of acquiring shares by salary sacrifice.

Therefore, it is our view that no loan has been entered into by you.

It is therefore not necessary to answer this question further.

Question 11: Will the 'loan' provided from the Trustee to you for the purpose of acquiring the Share Units constitute assessable income under section 15-2 of the ITAA 1997?

Question 12: Will the 'loan' provided from the Trustee to you for the purpose of acquiring the Share Units constitute assessable income under section 21A of the ITAA 1936?

Question 13: If the answer to question 12 is yes, will the taxable value of the non-cash business benefit constituted by the 'loan' be reduced to nil by the application of subsection 21A(3) of the ITAA 1936?

Question 14: Will the first element of the CGT cost base of the Share Units acquired by you, in accordance with section 110-25 of the ITAA 1997, equal the amount paid for those Share Units?

It is not necessary to answer this question as the Commissioner is of the view that you hold the Share Units on revenue account. Any profit or loss you make from the disposal of the Share Units should be accounted for as a profit or loss from an isolated transaction and included under section 6-5 or 8-1 of the ITAA 1997.

Question 15(a): Will your assessable income include your share of a franked distribution that flows indirectly to you from the Trust?

Subdivision 207-B of the ITAA 1997 considers the circumstances in which a franked dividend received by the trustee of a trust may be included in the assessable income of a beneficiary of the trust.

Subsection 207-50(4) of the ITAA 1997 relevantly states:

A *franked distribution flows indirectly to the trustee of a trust in an income year if, and only if:

(a) during that income year, the distribution is made to the trustee, or *flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or (3); and

(b) the trustee is liable or, but for another provision in this Act, would be liable, to be assessed in respect of an amount (the share amount) that is:

(i) a share of the trust's *net income for that income year under section 98 of the Income Tax Assessment Act 1936; or

(ii) all or a part of the trust's net income for that income year under section 99 or 99A of that Act;

(whether or not the share amount becomes assessable income in the hands of the trustee); and

(c) the trustee's *share of the distribution under section 207-55 is a positive amount (whether or not the trustee actually receives any of that share).

Item 3 of the table in subsection 207-55(3) of the ITAA 1997 applies to your circumstances.

Column 2 of item 3 states that the trustee's share of the franked distribution, if the trust has a positive amount of net income for the income year, is the amount of the franked dividend. Otherwise, the trustee's share is nil.

Column 3 of item 3 states that the beneficiary's share of the franked distribution is the amount in subsection 207-55(4) of the ITAA 1997. Subsection 207-55(4) of the ITAA 1997 relevantly states:

For the purposes of column 3 of item 3 of the table in subsection (3), the amount is the sum of:

(a) so much of the amount worked out under column 2 of item 3 of the table in subsection (3) to which:

(i) … the focal entity is specifically entitled;…

(b) if there is an amount of the franked distribution to which no beneficiary is specifically entitled - that amount multiplied by:

(i)… the focal entity's adjusted Division 6 percentage of the income of the trust for the relevant income year…

The term 'specifically entitled' is defined in subsection 207-58(1) of the ITAA 1997 as:

A beneficiary of a trust estate is specifically entitled to an amount of a franked distribution made to the trust estate in an income year equal to the amount calculated under the following formula:

Franked distribution x Share of net financial benefit

Net financial benefit

Where:

Net financial benefit means an amount equal to the financial benefit that is referrable to the franked distribution (after any application by the trustee of expenses that are directly relevant to the franked distribution.)

Share of net financial benefit means an amount equal to the financial benefit that, in accordance with the terms of the trust:

(a) the beneficiary has received, or can be reasonably expected to receive; and

(b) is referrable to the franked distribution… and

(c) is recorded, in its character as referable to the franked distribution, in the accounts or records of the trust no later than the end of the income year.

Under the Trust Deed, you, in your capacity as Share Unitholder, are considered to be presently and absolutely entitled to the income of the Trust Fund derived during an Accounting Period that is 'attributed to their particular Share Unit Distribution Entitlement' (SUDE).

Your SUDE is defined in the Trust Deed as being, in respect of an Accounting Period: 'a sum equal to any income of the Trust Fund received by the Trustee during that Accounting Period on Allocated Shares or other assets referable to that Share Unit'.

In these circumstances, you will have a fixed present entitlement to a sum equal to the amount of any dividends arising from the Allocated Shares referable to your Share Units. You can therefore be reasonably expected to receive any franked distributions referable to your Allocated Shares under the terms of the Trust Deed. Your share of the franked dividend in respect of Allocated Shares will be 100% of that dividend, as the shares are allocated to the Share Units of specific employees and not referable to employees generally.

Under the Trust Deed, the Company has agreed to reimburse the Trustee for all expenses incurred in the operation of the Plan. The Trustee will therefore not apply any of the franked dividends towards the meeting of expenses directly related to the dividends.

As such, for the purposes of section 207-58 of the ITAA 1997, you will be specifically entitled to a share in the Trustee's net income represented by the following equation:

Franked Dividends received by the Trustee in respect of all Allocated Shares	x	Your share of the Franked Dividends received by the Trustee
		Franked Dividends received by the Trustee in respect of all Allocated Shares

You will therefore include, for the purposes of column 3 of item 3 of the table in subsection 207-55(3) of the ITAA 1997, the amount to which you are specifically entitled as per the formula above provided that you are liable to be assessed on the share amount as provided in subparagraphs 207-50(4)(b)(i) or 207-50(4)(b)(ii). To the extent that there are any Unallocated Shares for which the Trustee will receive franked dividends, and the Trustee exercises its discretion to deem you presently entitled to a share in the income of the trust estate other than dividends, you will also include a percentage of these franked dividends in your amount for the purposes of subsection 207-55(3) of the ITAA 1997 provided that you are liable to be assessed on the share amount as provided in subparagraphs 207-50(4)(b)(i) or 207-50(4)(b)(ii).

As such, under section 207-50 of the ITAA 1997, where Ignite pays a franked dividend to the Trustee:

(a) There will be a distribution made to the Trustee;

(b) Under the Trust Deed, you will be presently entitled to a share in the Trust income that represents, as a minimum, the dividends and interest earned by the Trust in respect of your Allocated Shares; and

You will therefore include that share in your assessable income for an income year provided that you are liable to be assessed on the share amount as provided in subparagraphs 207-50(4)(b)(i) or 207-50(4)(b)(ii).

Question 15(b): If the answer to question 15(a) is yes, will you be entitled to a tax offset for franking credits attached to franked dividends received by you from the Trust in respect of the Allocated Shares?

Under section 207-45 of the ITAA 1997, you will be entitled to a tax offset equal to your share of franking credits distributed to you through a Trust if you are liable to be assessed on a share of, or all or a part of, your net income under section 98, 99 or 99A of the ITAA 1936 (subsection 207-45(c)).

However paragraph 207-150(1)(a) of the ITAA 1997 denies a tax offset if the entity to whom a franked distribution flows indirectly is not a qualified person in relation to the distribution for the purposes of Division 1A of Part IIIAA of the ITAA 1936.

Under former section 160APHO of the ITAA 1936, a taxpayer who holds shares or an interest in shares on which a dividend or distribution has been paid is a qualified person in relation to the dividend if the taxpayer has held the shares or interest in shares at-risk, not counting the day of acquisition or disposal, for at least 45 days (or 90 days for certain preference shares).

In calculating the number of days for which the taxpayer continuously held the shares, any days on which the taxpayer has 'materially diminished' risks of loss or opportunities for gain in respect of the shares or interest are to be excluded (former subsection 160APHO(3)).

A taxpayer is taken to have 'materially diminished' the risks of loss or opportunities for gain on a particular day in respect of shares held by the taxpayer or in respect of an interest in shares held by the taxpayer, if the taxpayer's 'net position' on that day in relation to the shares or interest in shares has less than 0.3 of those risks or opportunities (former subsection 160APHO(2) of the ITAA 1936).

A taxpayer's net position is worked out using the financial concept known as delta (see former section 160APHJ of the ITAA 1936). The net position of a taxpayer in relation to shares or an interest in shares is calculated by adding the following two positions:

• long position is a position with a positive delta, and

• short position is a position with a negative delta (former section 160APHJ).

Former subsection 160APHL(7) of the ITAA 1936 attributes a positive delta of +1 (long position) to the interest in the relevant share. However as none of the exceptions (family trust election, deceased estate or employee share scheme) applies to your arrangement, former subsection 160APHL(10) attributes a short position i.e. a negative delta, equal to the unit holder's long position, in this case -1. At this stage your net position is zero.

In your case, you will not reach a delta position of 0.3 to satisfy the qualified person rules due to the following:

• You will obtain the Share Units, which grant you an interest in the shares, for nil consideration. To the extent that the shares fall in value, you will still receive the value of the Initial Price of the Share Units. This means that you will be protected from any risk of the shares making a loss to value of the Initial Price. This effectively contains a put option, and a delta can be calculated in relation to this notional option. A put option is a short position, with a negative delta.

• Your entitlement is subject to vesting conditions. Should those vesting conditions not be met, you have agreed to surrender your Share Units to the Trustee. You will not have any entitlement to the Shares until such time as the vesting conditions are met. As such, you not only have limited risk of loss from the Shares, but you also have limited opportunity to benefit from the growth of the Share value until such time as the vesting conditions are satisfied.

• You further have the opportunity to elect to receive cash rather than an in specie distribution of the Shares - this means that you may never receive a vested and indefeasible interest in the Shares themselves.

We therefore consider that you will not be entitled to a tax offset for franking credits attached to the franked distributions received by you from the Trust in respect of the Allocated Shares.

Question 16: Will the proceeds received by you upon redemption of the Share Units constitute assessable income under section 6-5 of the ITAA 1997?

Yes. The Commissioner is of the view that you hold the Share Units on revenue account. Any profit or loss you make from the disposal of the Share Units should be accounted for as a profit or loss from an isolated transaction and included under section 6-5 or 8-1 of the ITAA 1997.

Taxation Ruling TR 92/3 articulates the Commissioner's position in relation to when profits from an isolated transaction are to be included in assessable income. We consider that you are carrying on a business. However, this business is in respect of the provision of services. You have acquired Share Units in the broader context of the business you are carrying on, but the transaction entered into by you is outside of the ordinary course of your business.

Therefore, we consider that any gain you make upon redemption of the Share Units is made in the course of your business, although not within the ordinary course of that business. In order then for the gain to be ordinary income, you must have entered the transaction with the intention or purpose of make a profit.

The intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Further, it is sufficient if profit making is a significant purpose and the purpose is tested at the time the transaction is entered into (when you acquired the Share Units).

We have concluded that on an objective consideration of the facts and circumstances surrounding your acquisition of Share Units (including the acquisition of the Share Units in relation to the Package, the unconditional and unfettered right to immediately dispose of those Share Units, the quick turnaround required by the contract entered into with the Company and the relatively short period of time in which the vesting conditions and project milestones are to be achieved), you acquired those Share Units with a significant purpose of disposing of those Share Units for profit or gain.

This net profit or gain will therefore be your income and assessable to you under section 6-5 of the ITAA 1997 notwithstanding that the transaction was extraordinary, judged by reference to your ordinary business (FC of T v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693).

Applying the same rationale, where your intention or purpose in acquiring the Share Units is to make a profit or gain, any net loss generated is incurred in gaining or producing assessable income and shall be deductible under section 8-1.

Question 17: Will the proceeds received by you upon redemption of the Share Units constitute assessable income under section 15-2 of the ITAA 1997?

No.

Question 18: Will the proceeds received by you upon redemption of the Share Units constitute assessable income under section 21A of the ITAA 1997?

No. Section 21A of the ITAA 1936 operates in respect of income received by a taxpayer that is not convertible to cash. The Commissioner is of the view that the proceeds received by you upon redemption of the Share Units will be paid in cash or in a form that is readily convertible to cash and does not need to consider this matter further.

Question 19: To the extent that any proceeds received on the redemption of the Share Units constitute your assessable income 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?

Question 20: Where the Trustee disposes of the Allocated Shares which are allocated to your Share Units, and makes a capital gain from that disposal, will that capital gain be treated as your capital gain pursuant to Subdivision 115-C of the ITAA 1997?

Not necessary to answer as the profits from disposal of the Allocated Shares are included in the net income of the Trust estate, as ordinary income.

Question 21(a): Will the redemption of the Share Units constitute a CGT event as set out in Division 104 of the ITAA 1997?

Section 118-20 of the ITAA 1997 will apply to reduce any capital gain you make from a CGT Event if, because of the event, a provision of the ITAA 1997 or ITAA 1936 includes an amount in your assessable income.

Question 21(b): Will the proceeds received by you upon the redemption of the Share Units be taken into account in calculating your net capital gain under Division 102 of the ITAA 1997?

Question 21(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?

You will reduce your capital gain you make from a CGT Event in accordance with section 118-20 of the ITAA 1997 as described at Step 1 in working out your net capital gain in section 102-5 of the ITAA 1997. Once you have calculated your Step 1 amount and also applied any previously unapplied net capital losses from earlier years of income, Step 3 contained in section 102-5 requires you to reduce by the discount percentage each amount of a discount capital gain which remains.

Question 21(d): To the extent the proceeds are distributed by the Trustee and paid to you in respect of Subdivision 115-C of the ITAA 1997 (whether due to present entitlement or specific entitlement), as part of the consideration for redemption of their Share Units will the CGT Event arising from the redemption of your Share Units as per question 21(b) above be the sole taxing event in respect of that distribution?

Question 22: To the extent that the proceeds from any given redemption of Share Units are included in the assessable income under a provision of the ITAA 1997 or ITAA 1936 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?

The Commissioner is of the view that you hold the Share Units on revenue account. Any profit or loss you make from the disposal of the Share Units should be accounted for as a profit or loss from an isolated transaction and included under section 6-5 or 8-1 of the ITAA 1997.

Question 23: If the Trustee, pursuant to the Trust Deed, decides to pay an amount to you on behalf of the Company, will the amounts paid to you be included in your assessable income under section 6-5 of the ITAA 1997?

The Trust Deed states:

When the Share Unit is cancelled, the Trustee will provide on behalf of the Contracting Entity amounts to the Eligible Employee and/or the Eligible Contractor from repayments of loan as salary minus amounts withheld as Pay As You Go tax instalments.

The Trust Deed therefore only authorises payments made that would be considered salary and paid from repayments of loan. The Trustee is therefore not entitled to make a payment to you under the Trust Deed as you are not an employee, do not derive salary nor do you have an obligation to make repayments on a loan to the trustee (which would fund the payment).

We therefore do not consider it necessary to answer this question.

Question 24: If the Trustee, pursuant to the Trust Deed, decides to pay amounts to you, which had been paid from your own after tax personal resources to repay the loans, will those amounts constitute a non-assessable return of capital?

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