Edited version of private ruling

Authorisation Number: 1011801351978

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Ruling

Subject: Employee Share Trust

Question 1

Part A. Will the irretrievable cash contributions to the Trustee by the company subsidiaries be assessable income of the Employee pursuant to section 44, via the application of Section 109C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer: No.

Part B. Will the irretrievable cash contributions to the Trustee by the company subsidiaries be assessable income of the Employee pursuant to section 44, via the application of Section 318 of the ITAA 1936?

Answer: No

Question 2

Will a capital gains tax (CGT) event arise for the employee at the time when he becomes absolutely entitled to the company shares under Section104-75 of the ITAA 1997?

Answer: Yes

Question 3

Will the acquisition of a Share in the company in return for payment of market value consideration be subject to Division 83A of the ITAA 1997 to the employee?

Answer: No

Question 4

Part A. Will the acquisition of a fixed interest in the Trust by the Employee in return for payment of market value consideration, give rise to any assessable income under section 6-5 of the ITAA 1997 for the employee?

Answer: No

Part B. Will the acquisition of a fixed interest in the Trust by the Employee in return for payment of market value consideration, give rise to any assessable income under section 15-2 of the ITAA 1997 for the employee?

Answer: No

Question 5

Will the proceeds received by the Employee in exchange for their shares constitute assessable income under section 6-5 of the ITAA 1997?

Answer: No

Question 6

Will the first element of the CGT cost base of the fixed interest in the Trust by the employee, in accordance with section 110-25 of the ITAA 97, equal the amount paid for that fixed interest?

Answer: Yes

Question 7

Will the proceeds received by the Employee in exchange for their shares constitute assessable income under section 15-2 of the ITAA 1997?

Answer: No

Question 8

To the extent that the proceeds received in exchange for the shares do not constitute assessable income under section 6-5 or section 15-2 of the ITAA 1997 for the employee:

(a) Will the proceeds received by the Employee in exchange for their shares be taken into account in calculating their net capital gain under Division 102 of the ITAA 1997?

Answer: Yes

(b) Will the CGT discount provisions in Division 115 of the ITAA 1997 apply where the shares were acquired at least 12 months before the CGT event?

Answer: Yes

Question 9

Where the employee receives distributions from the trustee that represent franked dividends paid by the employer to the trustee, will they be entitled to a tax offset for the credits under section 207-40 of the ITAA 1997?

Answer: Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1^st July 2010

Relevant facts and circumstances

The company is a privately owned company which has three wholly owned operating subsidiaries.

The Trustee is currently owned by the company however it is intended that prior to implementation of the arrangements that its ownership will be changed such that the shares in the Trustee will be owned by two directors. The Trustee is currently a non-operating company.

These two directors will have no influence over the arrangement. The Trustee is bound to act in accordance with the Plan Rules and the Trust Deed. The trustee will only act in accordance with its fiduciary duties which are stipulated in the Plan Rules and the Deed and cannot perform actions or duties unless authorised under the Plan Rules and Deed.

These two directors will not be able to benefit from this arrangement as the intention of the arrangement is to offer shares to employees who are not shareholders.

One director does not directly own any shares in the company however he does have an indirect interest in the companies holdings via various other entities. The other director does not own any shares in the company.

The arrangement proposes to offer Class B shares in the company to selected employees. Shares will be funded through contributions made by the subsidiaries to the Trustee which in turn will make loans to employees for this purpose. Shares acquired through such loans will be held by the Trustee absolutely on behalf of the employees. This arrangement is referred to as the Loan Share Plan (Plan).

The subsidiaries will irretrievably contribute money to the Trust as the need to fund the acquisition of shares by employees participating in the Plan arises. The potential beneficiaries of the Trust will be the employees of the company group.

The Board will determine which employees will be eligible to participate in the Plan. None of those employees will be current shareholders of the company nor related to any of the shareholders.

Offers will be made to eligible employees.

Once offers are accepted, the Trustee will lend funds on an interest-free basis to those employees who have accepted. The loans will generally be full recourse loans although the Trustee will have the ability to make loans on a partial or limited recourse basis. The Trustee will have security over the shares beneficially held by the employees.

Employees must use the loan funds received to acquire an interest in the Trust at fair market value, with the interest corresponding to underlying shares.

The Trust will then subscribe for new shares at the fair market value and designate particular shares as allocated to particular employees corresponding to the employee's share interest in the Trust. The employees will be absolutely entitled to the shares from the time of allocation.

Dividends may be paid of the shares held by the Trust and flow through to the employees, although part or all of the dividend payment may be used to repay the loans.

The shares will be held in the Trust for the employees with each employee having a beneficial interest in a number of shares and absolute entitlement to those shares. The trustee will be the registered legal owner of the shares.

Upon meeting the relevant vesting conditions, the directors would then use their best efforts to provide liquidity so that the employees' interests in the shares could be cashed out and the remaining balance of the related loan repaid to the Trustee.

Employee's who leave the employ of the group of companies prior to the vesting, will be classified as either good or bad leavers which will determine how many of the shares vest and the payout value.

Employees are liable for the full loan balance outstanding at vesting, unless the Board exercises its discretion to waive any shortfall between the payout value of the shares and the remaining balance of the related loan at vesting.

Once the employee has repaid the loan they become the owner of the shares unless the employees are "other leavers", who are required to hand back their shares in satisfaction of their loans.

Taxation of the employees will depend on how the liquidity is provided e.g. sale to other employees or share buy-back.

The Trust will be established in the current financial year (2011). Its purpose will be to make loans to employees to enable them to acquire shares via the Trust and hold those shares on their behalf.

The amount of the cash contribution made by the company to the Trust is equal to the fair market value of shares that are to be offered to employees by the Trust through the Loan Plan.

Further facts relating to the scheme will not be provided due to there commercial in-confidence nature.

Assumptions

The plan and the Trust are administered in accordance with their terms.

All entities referred to are residents of Australia for income tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-75(1)

Income Tax Assessment Act 1997 Section 107-75(5)

Income Tax Assessment Act 1997 Section 15-2

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 6-5(1)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Subsection 102-5(1)

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

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

Income Tax Assessment Act 1997 Subsection 960-100(4)

Income Tax Assessment Act 1997 Section 207-45

Income Tax Assessment Act 1997 Section 995-1(1)

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1936 Section 109C(1)

Income Tax Assessment Act 1936 Section 109Z

Income Tax Assessment Act 1936 Section 318(1)

Income Tax Assessment Act 1936 Section 318(2)

Income Tax Assessment Act 1936 Section 318(3)

Income Tax Assessment Act 1936 Section 109ZB(1)

Income Tax Assessment Act 1936 Section 109ZB(3)

Income Tax Assessment Act 1936 Section 109ZE

Income Tax Assessment Act 1936 Section 109T

Income Tax Assessment Act 1936 Subdivision E in Division 7A

Income Tax Assessment Act 1936 Section 160APHP

Income Tax Assessment Act 1997 Section 207-45

Income Tax Assessment Act 1997 Section 83A-20

Income Tax Assessment Act 1997 Section 83A-25

Income Tax Assessment Act 1997 Section 83A-10(2)

Question 1

Summary

Part A. No

Part B. No

Detailed reasoning

Division 7A of the ITAA 1936 was introduced to ensure that all advances, loans, and other credits (unless they come within specified exclusions) by private companies to shareholders (and their associates), are treated as assessable dividends to the extent that there are realised or unrealised profits in the company. In addition, debts owed by shareholders (or associates) which are forgiven by private companies are treated as dividends.

Subsection 44(1) of the ITAA 1936 requires that the assessable income of a resident shareholder in a company include dividends that are paid to the shareholder by the company out of profits derived by it from any source.

SECTION 109C OF THE ITAA  1936 PAYMENTS TREATED AS DIVIDENDS

109C(1)  When private company is taken to pay a dividend.

A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either:

(a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or

(b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time.

Where sub-section 109C(1) applies, then section 109Z of the ITAA 1936 will apply as follows:

If a private company is taken under this Division to have paid a dividend to an entity, the dividend is taken for the purposes of this Act to be paid:

(a) to the entity as a shareholder in the private company; and

(b) out of the private company's profits.

In this case when we consider sub-section 109C(1) it does not apply for the following reasons.

(i) Payment not received by a Shareholder.

The Trustee is currently owned by the company however it is intended that prior to implementation of the arrangements that its ownership will be changed. Therefore the Trustee is not the shareholder of the company or its subsidiaries.

(ii) Payment not received by an associate of a shareholder.

We need to examine subsection 318(2) of the ITAA 1936, associates of a company, to determine if the Trustee is an associate of the company shareholder. This subsection states the following:

318(2)  Associates of a company

For the purposes of this Part, the following are associates of a company (in this subsection called the "primary entity"):

(a) a partner of the primary entity or a partnership in which the primary entity is a partner;

(b) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;

(c) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;

(d) another entity (in this paragraph called the "controlling entity") where:

(i) the primary entity is sufficiently influenced by:

(A) the controlling entity; or

(B) the controlling entity and another entity or entities; or

(ii) a majority voting interest in the primary entity is held by:

(A) the controlling entity; or

(B) the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3);

(e) another company (in this paragraph called the "controlled company") where:

(i) the controlled company is sufficiently influenced by:

(A) the primary entity; or

(B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or

(C) a company that is an associate of the primary entity because of another application of this paragraph; or

(D) 2 or more entities covered by the preceding sub-subparagraphs; or

(ii) a majority voting interest in the controlled company is held by:

(A) the primary entity; or

(B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; or

(C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection;

(f) any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3).

Paragraphs 318(2)(a) and (b) do not apply in this case as the entities involved are not partners or a partnership.

Paragraph 318(2)(c) will apply if the company or any of its associates under paragraphs 318(2)(a), (b), (d), (e) or (f) benefit under the trust. You have stated that only eligible employees can benefit under the Trust and none of those employees will be shareholders of the company or associates of the company. None of the Participants in the Plan will be shareholders of the company or associates of the company.

With respect to paragraph 318(2)(d). Presently the company has four Directors and an alternate director, of which two are said to own shares in the trustee company under the structure when it is approved. One of the Directors does not directly own any shares in the Company, however he does have an indirect interest in 24.4% of the shares in the company via various entities. The other Director does not own any shares in the company. The two Directors who will be shareholders of the Trustee will have no influence over the arrangement. The Trustee is bound to act in accordance with the Plan rules and the Trust Deed. The Trustee will only act in accordance with is fiduciary duties which are stipulated in the Plan rules and the Trust Deed and cannot perform actions or duties unless authorised under the Plan rules and the Deed.

You have advised that the company has a controlling shareholder who has control over the company, and that the Trustee is not an associate of the controlling shareholder. Where this is the case paragraph 318(2)(d) will not have any application, to payments made to the trust, or subsequent amounts that the eligible employees are made presently entitled.

You have advised that it is intended that the maximum amount of equity available under the Plan will be 10%, given that the equity being issued is non-voting class b shares, Division 7A will not have any application to shares issued to employees, excluding the two directors of the trust, under the plan.

Section 109ZE of the ITAA 1936 and subsection 960-100(4) of the ITAA 1997 clarify that paragraph 318(2)(e) does not apply as the entity referred to in this paragraph is a company and not the trustee of a trust.

For paragraph 318(2)(f) to apply, the Trustee would have to be an associate of a third entity under subsection 318(1) or subsection 318(3) or another paragraph of subsection 318(2), where the third entity was an associate of the company because of paragraph 318(2)(d). You have advised that the company has a controlling shareholder who has control over the company, and that the Trustee is not an associate of the controlling shareholder. Therefore, paragraph 318(2)(f) does not apply.

We need to explore further subsection 318(3) of the ITAA 1936 as we are talking about a Trust. This subsection states the following:

For the purposes of this Part, the following are associates of a trustee (in this subsection called the "primary entity"):

(a) any entity that benefits under the trust;

(b) if a natural person benefits under the trust - any entity that, if the natural person were the primary entity, would be an associate of that natural person because of subsection (1) or because of this subsection;

(c) if a company is an associate of the primary entity because of paragraph (a) or (b) of this subsection - any entity that, if the company were the primary entity, would be an associate of the company because of subsection (2) or because of this subsection.

This subsection applies to determine if someone is associated with the Trustee of a trust and the controlling shareholder is the Trustee of a Trust. In this case the Trustee and the beneficiaries being the employees are unrelated to the controlling shareholder and cannot benefit from the Trust of which the controlling shareholder is a Trustee.

If the above two subsections do not determine that the payment were not made to a shareholder or associate, section 109ZB(3) of the ITAA 1936 applies to exempt the payments from the impact of Division 7A.

Section 109ZB(1) of the ITAA 1936 makes it abundantly plain that a loan caught under Div 7A is not to be treated as a fringe benefit, even where lent to an employee or employee's associate in respect of the employee's employment. As specified in the note to section 109ZB(1), this helps ensure that a loan is not a fringe benefit for the purposes of the FBTAA.

Section 109ZB(3) of the ITAA 1936 provides that Div 7A does not apply to a payment made to a shareholder, or shareholder's associate, in their capacity as an employee or an associate of an employee.

Subdivision E in Division 7A of the ITAA 1936 deals with payments and loans made by a private company through interposed entities to connected entities.

Section 109T of the ITAA 1936 provides that Division 7A of the ITAA 1936 operates as if a private company makes a loan to a target entity where:

· a private company makes a payment to an interposed entity, and

· a reasonable person would conclude that the payment was made mainly as part of an arrangement involving a loan to the target entity, and

· the interposed entity makes a loan to the target entity.

It is obvious that contributions to the Trust are made to enable the Trustee to make loans to eligible employees and therefore this section will not apply.

Question 2

Summary

Yes

Detailed reasoning

Section 104-75(1) of the ITAA 1997 states that a CGT Event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee.

As per clause 3.1(b) of the Trust Deed, the employee becomes absolutely entitled to the shares at the time they acquire a fixed interest in the Trust and the shares are acquired and allocated to the employee concerned by the Trustee.

The Trust Deed at clause 3.1(b) states the following:

The Trustee declares and agrees that:

(i) each participant is, subject to the relevant Plan Rules and relevant Terms of Participation:

(a) the beneficial owner of the Trust shares held by the Trustee on their behalf;

(b) absolutely entitled to the Trust shares held by the Trustee on their behalf; and

(c) absolutely entitled to all other benefits and privileges attached to, or resulting from the Trustee holding, those shares on their behalf;

In your client's case, it is necessary to determine when absolute entitlement occurs for the purpose of ascertaining whether the capital gains or losses are accepted.

The term "absolutely entitled" is not defined in the CGT legislation. However, there have been a number of UK decisions. In Saunders v Vautier(1841) 49 ER 282 absolute entitlement was described as the situation where the beneficiary is entitled to call for the transfer of the asset, or to require it to be dealt with in accordance with his/her directions.

In Hoare Trustees v Gardner (1978) STC 89, Brightman J, in considering a comparable provision in the United Kingdom legislation, said (at p 108) that the description of a person as being "absolutely entitled to an asset as against the trustee'' carries the implication that the expression is being used in the sense that that person is not necessarily absolutely entitled as against everyone else. Earlier, his Lordship had said that the concept of a person being absolutely entitled to an asset as against the trustee of the asset would not seem to pose great difficulties in most cases and went on to say:

"If property is held by T, the trustee, in trust for L for life with remainder to R, R, if living at L's death, would then be absolutely entitled to that property as against T. If R were dead, one would think that R's executor would similarly be absolutely entitled to that property as against T, even if the executor is not beneficially entitled. If R's estate is fully administered and there has been an assent in favour of the trustees of R's will, one would think that the trustees of R's will had become absolutely entitled to the property as against T or as against R's executor, as the case might be. If R, in the lifetime of L, assigned his remainder interest to X, on L's death X would become absolutely entitled to the property as against T. The answer should be the same whether X is a person who became beneficially entitled by virtue of the assignment or whether he is the trustee of some new settlement. The absolute entitlement of the propositus as against T, the trustee, would appear to be reasonably clear in those cases as a matter of simple language. There is no particular reason to equate absolute entitlement with beneficial ownership in such cases, but rather with the ability to give a good discharge."

The above passage indicates that a person is absolutely entitled to property only if a good discharge can be given by the person on disposal of the interest in the property. In the above passage, L is never absolutely entitled to the property because any disposal of the life interest will be subject to the remainder passing to R on the death of L. On the other hand, R will only be absolutely entitled to the property once L dies because, before then, any disposal of the property by R can only be made subject to L's life interest.

Core principle of absolute entitlement

The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v. Vautier (1841) 4 BEAV 115 (Saunders v. Vautier) applied in the context of the CGT provisions.

Rule in Saunders v. Vautier

Under the rule in Saunders v. Vautier, the courts do not regard as effective a direction from the settlor of the trust that purports to delay the beneficiary's full enjoyment of an asset. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it.  

Core principle: applying it in practice

The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset. Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it.

One beneficiary with all the interests in a trust asset

A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction.

As stated above, Clause 3.1(b) proves that the Trustee will hold the shares on behalf of the participants and that the participants are absolutely entitled to the shares, however this is subject to the Plan Rules and relevant Terms of Participation.

The Plan Rules at Clause 1.1 define the vesting conditions which provide for when the shares become vested to the participant.

Clause 1.1 of the Plan rules states that the "vesting conditions means any time based and/or performance based criteria, requirements or conditions (as specified in the invitation letter and determined by the Board in its sole and absolute discretion) which must be met in order for the class B shares to become vested to a Participant".

In the example letter sent in by applicant, the vesting conditions state that the employee must remain employed for three years from the acquisition date before the Class B shares will be transferred from the Trustee to the employee.

Furthermore clause 6.3 (a) and (b) provide that the vesting conditions as outlined in the invitation letter to the employee need to be satisfied or waived before the shares vest to a participant.

Clause 11.3(a) provides that the Trustee will be the registered, legal owner of all of the Class B shares held by it under clause 11.1(b) unless and until those Class B shares are vested in a Participant and withdrawn from the Plan or become Forfeited shares and are sold, disposed of otherwise dealt with in accordance with these Rules.

In addition clause 15.1 supports that the vesting conditions must be satisfied prior to the Class B shares being allocated to the participant.

Clause 19 of the Plan Rules states that the beneficiary will not be absolutely entitled to the shares due to forfeiture.

As outlined in the Plan Rules and in particular the vesting conditions and forfeiture conditions it is evident that the employee is not absolutely entitled to the shares at the time they acquire a fixed interest in the trust. As the shares are held by the Trustee and there are vesting and forfeiture conditions, the employee or participant does not have the requisite vested and indefeasible interest in the asset of the Trust at that time.

Absolutely entitled beneficiary is the relevant taxpayer

Broadly, the provisions dealing with capital gains and losses treat an absolutely entitled beneficiary as the relevant taxpayer in respect of the asset. This means that if a CGT event happens in relation to the asset, the beneficiary (and not the trustee) is responsible for any resulting capital gain or loss.

Where a beneficiary is absolutely entitled to an asset of a trust as against the trustee, section 106-50 of the ITAA 1997 treats an act done by the trustee as if the beneficiary had done it. Therefore, if section 106-50 applies, the disposal by the trustee is regarded as a disposal by the beneficiary.

CGT event E5

CGT event E5 happens, if a beneficiary becomes absolutely entitled to a CGT asset of a trust (subsection 104-75(1) of the ITAA 1997). In this case, the employee will be absolutely entitled to the CGT asset being the shares, from the time the shares become vested.

When a beneficiary becomes absolutely entitled to a CGT asset of the trust (in this case, the shares) as against the trustee, the beneficiary makes a capital gain if the market value of the interest in the shares at that time is more than the cost base of the beneficiary's interest in the trust capital to the extent it relates to the shares. A capital loss will arise if that market value is less than the reduced cost base of that beneficiary's interest in the trust capital to the extent it relates to the interest in the shares.

The employee becomes absolutely entitled to the shares at the time the shares become vested. The market value of the shares at this time could be greater or less than their cost base as the employee will not become absolutely entitled to them until the shares have been vested. Therefore a CGT event will arise for the employee.

Question 3

Summary

No

Detailed reasoning

Subject to the exceptions in section 83A-20, a taxpayer who acquires an Employee Share Scheme (ESS) interest at a discount must include the discount in assessable income, in the income year that the taxpayer acquires the ESS interest as defined in section 83A-25 of the ITAA 1997.

As the payment for the shares are made by the Trustee to pay full market value for the shares, then any interest that the employee acquires in the shares is not acquired at a discount, thus section 83A-25 of the ITAA 1997 will not apply.

Under section 83A-10(1) of the ITAA 1997,

An employee share scheme is a scheme under which ESS interests in a company are provided to employees or associates of employees (including past or prospective employees) of;

a. the company; or

b. subsidiaries of the company;

in relation to the employees' employment.

While the shares acquired by the employees of the company and subsidiaries are ESS as defined in the legislation, as the shares are acquired for the market value consideration, no discount is provided on acquisition of the shares. Therefore section 83A-25 of the ITAA 1997 will not apply.

Question 4

Part A.

Summary

No

Detailed Reasoning

Where the employee pays market value consideration for the fixed interest in the trust, the receipt of the fixed interest in the trust by the employee does not constitute income received or taken to have been received by the employee for the purposes of section 6-5 of the ITAA 1997.

Part B

Summary

No

Detailed Reasoning

Section 15-2 of the ITAA 1997 provides for the inclusion in a taxpayer's assessable income of all allowances, gratuities, compensations, benefits, bonuses and premiums provided to the taxpayer which relate directly or indirectly to the taxpayer's employment or to services rendered by the taxpayer.

Where the employee pays market value consideration for the shares, the shares provided to the employee do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums provided to the employee or applied or dealt with in anyway on the employee's behalf or as the employee directs for the purposes of section 15-2 of the ITAA 1997.

Question 5

Summary

Yes

Detailed Reasoning

Assessable income consists of ordinary income or statutory income under section 6-1(1) of the ITAA 1997. However an amount of ordinary income or statutory income will not be assessable income if the amount is made exempt or is otherwise excluded from assessable income. Under section 6-5(1) ordinary income is defined to mean income according to ordinary concepts.

The proceeds received by the employee is a realisation of a capital asset and the disposal proceeds do not constitute income according to ordinary concepts under section 6-5 of the ITAA 1997.

Question 6

Summary

Yes

Detailed Reasoning

Each employee is absolutely entitled to the shares that are held on their behalf by the Trustee when the shares are vested. Any disposal of the shares will be treated as a disposal of the shares by the employees and not the Trust.

The cost base of a CGT asset is relevant in finding out if a capital gain has been made from a CGT event. The cost base of a CGT asset has five elements as set out in section 110-25 of the ITAA 1997.

The first element is the total of the money paid or required to be paid, in respect of acquiring the CGT asset and the market value of any other property given, or required to be given, in respect of acquiring the CGT asset as stated in section 110-25(2) of the ITAA 1997.

In this case the total amount of money paid or required to be paid is the amount of money that has been loaned to each employee to acquire the fixed interest in the trust. This amount will equal the amount paid for the fixed interest.

Question 7

Summary

No

Detailed Reasoning

The disposal of shares by an employee is a realisation of a capital asset and the disposal proceeds do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums assessable under section 15-2 of the ITAA 1997.

Question 8

Part A

Summary

Yes

Detailed Reasoning

The CGT rules affect a taxpayer's income tax liability because assessable income includes a net capital gain for the income year. A taxpayer can only make a capital gain or loss if a CGT event happens. Where a CGT happens in relation to the exchange of shares, the net capital gain is included in their assessable income in accordance with subsection 102-5(1) of the ITAA 1997.

Part B

Summary

Yes

Detailed Reasoning

Division 115 of the ITAA 1997 discusses discount capital gains. A discount capital gain remaining after the application of any capital losses and net capital losses from previous income years is reduced by the discount percentage when working out a net capital gain. A capital gain from a CGT asset is a discount capital gain only if the entity making the gain acquired the asset at least a year before the CGT event causing the gain and no choice has been made to include indexation in the cost base of the asset.

Where the employee has a CGT event happen in respect of shares held for at least twelve month the capital gain will be a discount capital gain under Division 115 of the ITAA 1997.

Question 9

Summary

Yes

Detailed Reasoning

Section 207-40 was repealed on 25 June 2004. The explanatory memorandum identifies that Subsection 207-35(1) replaced section 207-40 for events arising on or after 1 July 2002.

Section 207-45 of the ITAA 1997 provides that an individual to whom a franked distribution flows indirectly in an income year is entitled to a tax offset for that income year that is equal to its share of the franking credit on the distribution.

Where a franked distribution is made to the Trustee and the beneficiary includes in his assessable income a share of the trust net income for that income year, a franked distribution is taken to flow indirectly to the employee(subsection 207-50(3) of the ITAA 1997).

Where a franked distribution flows indirectly to a taxpayer, paragraph 207-150(1)(a) 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 widely held trust must satisfy the holding period rule under former section 160APHP of the ITAA 1936.

If the employees satisfy the holding period rule they will be considered a qualified person for the purposes of Division 1A of former Part IIIAA of the ITAA 1936 in relation to any franked distribution.

The holding period requires the taxpayer to hold an interest in the shares contained in the trust holding as a beneficiary of the trust for a continuous period (not counting the day on which the taxpayer acquired the interest or, if the taxpayer has disposed of the interest, the day on which the disposal occurred) of not less than 45 days.

If the employees have not held the interest for 45 days or more, as such, they will not be eligible to a tax offset relating to any franking credit attached to franked distributions pursuant to the operation of subsection 207-150(1) of the ITAA 1997.