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Ruling

Subject: Employee - employee share plan

Question 1

Will the irretrievable cash contributions to the Trustee of the Trust by one or more Subsidiary Members be assessable income of the Employee pursuant to section 44 of the Income Tax Assessment Act 1936 (ITAA 1936), via the application of Division 7A of the ITAA 1936?

Answer

No.

Question 2

Will Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the Employee in relation to the acquisition of a Share (via the acquisition by the Employee of the interest in the Trust) for the payment of market value consideration?

Answer

No.

Question 3

Will the acquisition of an interest in the Trust by the Employee in return for a payment of market value consideration, give rise to any assessable income

a. under section 6-5 of the ITAA 1997 for the Employee?

b. under section 15-2 of the ITAA 1997 for the Employee?>

Answer

a. No

b. No

Question 4

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 5

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 6

Will the Employee be entitled to a tax offset for the credits under section 207-40 of the ITAA 1997 if the Employee receives distributions from the Trustee that represent franked dividends paid by the employer to the Trustee?

Answer

This ruling applies for the following period:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

Year ending 30 June 2012

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 scheme the subject of this Ruling has been ascertained from the following documents:

o Application for Private Ruling

o Plan Rules

o The Trust Deed of the Trust

o Shareholders Agreement

o Offer documents

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 15-2 of the Income Tax Assessment Act 1997

Division 83A of the Income Tax Assessment Act 1997

Section 83A-10 of the Income Tax Assessment Act 1997

Section 83A-20 of the Income Tax Assessment Act 1997

Section 83A-25 of the Income Tax Assessment Act 1997

Section 207-40 of the Income Tax Assessment Act 1997

Section 207-45 of the Income Tax Assessment Act 1997

Section 207-50 of the Income Tax Assessment Act 1997

Section 207-55 of the Income Tax Assessment Act 1997

Section 207-145 of the Income Tax Assessment Act 1997

Section 207-150 of the Income Tax Assessment Act 1997

Section 44 of the Income Tax Assessment Act 1936

Division 7A of the Income Tax Assessment Act 1936

Division 13A of the Income Tax Assessment Act 1936

Subsection 109ZB(3) of the Income Tax Assessment Act 1936

Subsection 139C(3) of the Income Tax Assessment Act 1936

Section 160APHD of the Income Tax Assessment Act 1936

Section 160APHE of the Income Tax Assessment Act 1936

Section 160APHL of the Income Tax Assessment Act 1936

Section 160APHM of the Income Tax Assessment Act 1936

Section 160APHO of the Income Tax Assessment Act 1936

Section 160APHU of the Income Tax Assessment Act 1936

Reasons for decision

Question 1

Generally, Division 7A of the ITAA 1936 has the effect that certain payments or loans made by private companies to shareholders or their associates will be treated as dividends and assessable to the recipient under section 44 of the ITAA 1936.

The payments made by Subsidiary Members to the Trustee are being made as part of an employee incentive plan in respect to the employment of the Employee.

Subsection 109ZB(3) of the ITAA 1936 states:

109ZB(3) [Employees] However, this Division does not apply to a payment made to a shareholder, or an associate of a shareholder, in their capacity as an employee (as defined in the Fringe Benefits Tax Assessment Act 1986) or an associate of such an employee.

Therefore, pursuant to subsection 109ZB(3) of the ITAA 1936, Division 7A of the ITAA 1936 has no application to the contributions to the Trustee.

Question 2

Subject to the exceptions in section 83A-20 of the ITAA 1997, 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 shares in question are acquired by the Employee at market value, 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(2) 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 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 3

Subsection 6-5(1) provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). However, as there is no definition of 'ordinary income' in income tax legislation it is necessary to apply principles developed by the courts to the facts of a particular case.

Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (GP International Pipecoaters), the Full High Court stated:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

In this case, the Employee participant must use the funds they loan from the Trust to acquire an interest in the Trust corresponding to his interest in the underlying shares.

Where the interest in the Trust is acquired by the Employee at market value, the actual interest in the Trust will not in itself give rise to profit or gain and so does not result in income according to ordinary concepts for the Employee.

Section 15-2 of the ITAA 1997 provides:

15-2(1) Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you ….

Where the interest in the Trust is acquired by the Employee at market value, the actual interest in the Trust will not in itself give rise to profit or gain and so does not result in anything of the type that is covered by section 15-2 of the ITAA 1997 for the Employee.

Question 4

Subsection 6-5(1) provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). However, as there is no definition of 'ordinary income' in income tax legislation it is necessary to apply principles developed by the courts to the facts of a particular case.

Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (GP International Pipecoaters), the Full High Court stated:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

ATO Interpretative Decision ATO ID 2001/746 Income Tax Share and Securities Trading, provides the ATO View on the application of section 6-5 of the ITAA 1997 to the disposal of shares.

ATO ID 2001/746 provides that, unless the trading activities conducted by the taxpayer amounts to the carrying on of a business, any income from the disposal of shares is not assessable under 6-5 of the ITAA 1997 but any gain or loss may be subject to capital gains.

The Employee is not considered to be carrying on a business in respect to the shares acquired under this arrangement; as such the income derived is not assessable under section 6-5 of the ITAA 1997.

Question 5

Section 15-2 of the ITAA 1997 provides:

15-2(1) Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you ….

The disposal of shares acquired by the Employee is the realisation of capital assets and the disposal proceeds do not constitute allowances, gratuities, benefits, bonuses or premiums etc assessable under section 15-2 of the ITAA 1997.

Question 6

The Employee will be entitled to a tax offset for the credits under subsection 207-40 of the ITAA 1997 provided the Trustee has held the shares at risk for more than 45 days and neither the Trustee nor the Employee nor any associate of the Trustee or of the Employee has made, is under any obligation to make, or is likely to make, a related payment in respect of the dividend.