Edited version of private ruling

Authorisation Number: 1011542077202

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Ruling

Subject: Executive Share Trust

Question 1

To the extent that the dividends distributed to the Employee constitute franked distributions for the purposes of Subdivision 207-B of the Income Tax Assessment Act 1997 (ITAA 1997), will the Employee be entitled to tax offsets equal to his/her share of the franking credits on the franked distributions under section 207-45 of the ITAA 1997?

Answer

No.

Question 2

In the event that the Employee will not be entitled to tax offsets equal to his/her share of the franking credits on the franked distributions under section 207-45 of the ITAA 1997, will the Commissioner determine that his/her interest in the allocated shares is to be taken to be vested and indefeasible in accordance with former subsection 160APHL(14) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following periods:

Income Tax Year ended 30 June 2011

Income Tax Year ended 30 June 2012

Income Tax Year ended 30 June 2013

The scheme commences on:

Income Tax Year ended 30 June 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Employer 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 the Employee and other Employees selected by the board of the Employer.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 1A Part IIIAA.

Income Tax Assessment Act 1936 Section 160APHD.

Income Tax Assessment Act 1936 Section 160APHL.

Income Tax Assessment Act 1936 Subsection 160APHL(1).

Income Tax Assessment Act 1936 Subsection 160APHL(2).

Income Tax Assessment Act 1936 Subsection 160APHL(3).

Income Tax Assessment Act 1936 Subsection 160APHL(4).

Income Tax Assessment Act 1936 Subsection 160APHL(7).

Income Tax Assessment Act 1936 Subsection 160APHL(10).

Income Tax Assessment Act 1936 Subsection 160APHL(11).

Income Tax Assessment Act 1936 Subsection 160APHL(12).

Income Tax Assessment Act 1936 Paragraph 160APHL(12)(b).

Income Tax Assessment Act 1936 Subsection 160APHL(13).

Income Tax Assessment Act 1936 Subsection 160APHL(14).

Income Tax Assessment Act 1936 Subparagraph 160APHL(14)(c)(i).

Income Tax Assessment Act 1936 Subparagraph 160APHL(14)(c)(ii).

Income Tax Assessment Act 1936 Subparagraph 160APHL(14)(c)(iii).

Income Tax Assessment Act 1936 Subparagraph 160APHL(14)(c)(iv).

Income Tax Assessment Act 1936 Subsection 160APHM(2).

Income Tax Assessment Act 1936 Subsection 160APHM(3).

Income Tax Assessment Act 1936 Section 160APHO.

Income Tax Assessment Act 1936 Subsection 160APHO(3).

Income Tax Assessment Act 1936 Section 160APHP.

Income Tax Assessment Act 1936 Subsection 160APHP(2).

Income Tax Assessment Act 1997 Section 207-45.

Income Tax Assessment Act 1997 Subsection 207-50(3).

Income Tax Assessment Act 1997 Subsection 207-150(1).

Does Part IVA apply to this ruling?

Part IVA of the ITAA 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the Employee.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

To the extent that the dividends distributed to the Employee constitute franked distributions for the purposes of Subdivision 207-B of the ITAA 1997, will the Employee be entitled to tax offsets equal to his/her share of the franking credits on the franked distributions under section 207-45 of the ITAA 1997?

No.

A franked distribution flows indirectly

Under subsection 207-50(3) of the ITAA 1997, a franked distribution flows indirectly to a beneficiary of a trust in an income year if, and only if:

· the distribution is made to the trustee of the trust, or flows indirectly to the trustee from another trust distribution; and

· the beneficiary has a share of the trust net income for that year.

Therefore, if a franked distribution is made to the Trustee and the Employee receives a share of the trust net income for that income year, a franked distribution is taken to flow indirectly to the Employee.

Entities to whom a franked distribution flows indirectly in an income year may be entitled to a tax offset for that income year, equal to the amount of their share of the franking credits attached to the distribution as provided under section 207-45 of the ITAA 1997, subject to the operation of subsection 207-150(1) of the ITAA 1997.

Qualified person

Where a franked distribution flows indirectly to an entity in an income year, subsection 207-150(1) of the ITAA 1997 will deny a tax offset otherwise provided under section 207-45 of the ITAA 1997 if the taxpayer is not a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the ITAA 1936.

Broadly, to be a qualified person in relation to a distribution, a taxpayer as a beneficiary of a non-widely or widely held trust must satisfy the holding period rule under former section 160APHO or 160APHP of the ITAA 1936 respectively. To satisfy the holding period rule, ordinary shares to which the distribution relates must have been held at risk for 45 days or more. In determining whether the holding period requirements are satisfied for the prescribed minimum period, no account is taken of any days on which the taxpayer has materially diminished risks of loss and opportunities for gain in respect of the shares as prescribed under former subsection 160APHO(3) of the ITAA 1936 (for a non-widely held trust) or former subsection 160APHP(2) of the ITAA 1936 (for a widely held trust).

A taxpayer is taken to have materially diminished risks of loss and opportunities for gain with respect to shares if their 'net position' results in them having less than 30 per cent of the risks and opportunities relating to the shares, as provided by former subsection 160APHM(2) of the ITAA 1936. A taxpayer's net position is worked out using the financial concept known as delta (former subsection 160APHM(3) of the ITAA 1936). Broadly, to have a net position equal to 30 per cent of the risks and opportunities with respect to a share requires a delta of +0.3.

Former section 160APHL of the ITAA 1936 applies as the shares are acquired after 31 December 1997. Accordingly, former subsection 160APHL(7) of the ITAA 1936 operates to attribute a delta of +1 to the interest in the shares held by a beneficiary of a non-widely or widely held trust. Therefore, the Employee will have a long position with a delta of +1 in relation to any shares held by the Trust under this provision.

As a family trust election has not been and will not be made and the Employee's interest in the shares is not an employee share scheme security (as defined under former section 160APHD of the ITAA 1936), former subsection 160APHL(10) of the ITAA 1936 may attribute additional positions to the Employee. These additional positions are:

· a short position equal to his/her long position, as determined under former subsection 160APHL(7) of the ITAA 1936; and

· a long position equal to so much of the Employee's interest in the trust holding that is a fixed interest.

As the Employee has a long position with a delta of +1 in relation to the shares under former subsection 160APHL(7) of the ITAA 1936, he/she will have a corresponding short position with a delta of -1 under former subsection 160APHL(10) of the ITAA 1936.

Under former subsection 160APHL(10) of the ITAA 1936, an additional long position will arise in relation to so much of the Employee's interest in the trust holding as is a fixed interest. Former subsection 160APHL(11) of the ITAA 1936 states that a beneficiary's interest in a trust is a fixed interest to the extent that the interest is constituted by a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding. For these purposes, the trust holding is the share or interest in a share that has paid the trust a dividend (see former subsections 160APHL(1) and (3) for non-widely held trusts and former subsections 160APHL(2) and (4) for widely held trusts). The interest being tested under former subsection 160APHL(11) is the actual interest held by the Employee in so much of the corpus of the trust as is comprised by the share.

Indefeasible interest

It is considered that any interest that the Employee would have in specific assets of the Trust (including dividend yielding shares) would be defeasible. This conclusion is made on the basis that the Trustee has the power under the Trust Deed to make and vary investments of the Trust.

As such, it is considered that the Employee would not have an indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding.

Certain interests in trust holding taken to be defeasible - former subsection 160APHL(12) of the ITAA 1936

Former subsection 160APHL(12) of the ITAA 1936 provides that certain trust interests are taken to be defeasible interests in certain circumstances.

Under former paragraph 160APHL(12)(b) of the ITAA 1936, an interest is taken to be defeasible where a taxpayer has an interest in a unit trust and the value of the interest may be materially reduced by the issue of further units. However, this will not be the case if it is stipulated in the trust deed that the issue of new trust units is for a price determined on the basis of the unit trust's net asset value, according to Australian accounting principles at the time of the issue, as provided under former subsection 160APHL(13) of the ITAA 1936.

In relation to the issue of units under the plan, the Trust Deed provides that the Trustee may from time to time cause units to be created and may increase the number of units in issue by accepting in whole or in part applications for units in accordance with the terms of the Trust Deed.

The Trust Deed also provides that the Trustee may from time to time, when requested by the Employer and where no salary amounts have been paid by the Trustee to the Employee on behalf of the Employer from repayments of loan, issue (for no consideration) bonus units to the Employee in respect of units (other than bonus units) held by the Employee.

The Trustee may use any income, cash or property of the Trust Fund to pay the cancellation entitlements to bonus unit holders. The cancellation entitlement of a bonus unit is the redemption distribution, defined as shares or rights to shares which at the date of cancellation have a market value equal to the lower of the issue price or the unit distribution entitlement of the unit in relation to which the bonus unit was issued.

The Trust Deed may operate to ensure that the assets of the Trust allocated to units is available to the Trustee so as to fund the redemption distribution for bonus units, thereby resulting in a possible transfer of value from units to bonus units.

As the Trustee may at its discretion issue bonus units on terms determined by the Employer, and the issue of bonus units involves a redemption value that may transfer value from units to bonus units upon the latter's cancellation, the Employee's interest in the Trust will be taken to be defeasible because the issue of bonus units by the Trustee may have the effect of materially reducing the value of the Employee's relevant interest in accordance with former paragraph 160APHL(12)(b) of the ITAA 1936.

Therefore, the Employee's interest in the Trust is taken to be defeasible in accordance with former subsection 160APHL(12) of the ITAA 1936.

As the Employee's interest in the trust holding is not considered to be a fixed interest to the extent that the interest is constituted by an indefeasible interest, he/she will not have any additional long positions for the purposes of former subsection 160APHL(10) of the ITAA 1936.

Conclusion

The Employee will have a long position with a delta of +1 under former subsection 160APHL(7) of the ITAA 1936 and a short position with a delta of -1 under former subsection 160APHL(10) of the ITAA 1936, resulting in a net position of zero in relation to the shares held by the Trust. Given that the Employee's delta in relation to the shares held by the Trust is less than +0.3, it follows that he/she will have materially diminished risks of loss or opportunities for gain in relation to the shares.

As a result, the Employee will not be able to satisfy the holding period rule of former section 160APHO or 160APHP of the ITAA 1936 and is not considered to be a qualified person in relation to the distribution on the shares for the purposes of Division 1A of former Part IIIAA of the ITAA 1936. Accordingly, pursuant to the operation of subsection 207-150(1) of the ITAA 1997, the Employee will not be eligible to tax offsets relating to any imputation credits attached to the dividends distributed to him/her from the Trust.

Question 2

In the event that the Employee will not be entitled to tax offsets equal to his/her share of the franking credits on the franked distributions under section 207-45 of the ITAA 1997, will the Commissioner determine that his/her interest in the allocated shares is to be taken to be vested and indefeasible in accordance with former subsection 160APHL(14) of the ITAA 1936?

No.

Under the Trust Deed, the exercise of the Trustee's powers in relation to investments and the reduction of the value of the interest which may occur on redemption render the Employee's interest defeasible.

Having regard to the matters set out in former subparagraphs 160APHL(14)(c)(i)-(iv) of the ITAA 1936, the Commissioner does not consider it appropriate to determine the Employee's interest as vested and indefeasible.