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Ruling

Subject: Employee share plan

Question 1

Will the irretrievable cash contributions to the Trustee of the Trust by the Company be assessable income of the Trust pursuant to section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the irretrievable cash contributions to the Trustee by the Company be assessable income of the Trustee pursuant to section 44, via the application of section 109C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 3

Part A. Will capital gains tax (CGT) event E5 arise for the Trustee of the Trust at the time when the employees become absolutely entitled to the Holding Company shares under section 104-75 of the ITAA 1997?

Part B. If the answer to Part A is yes, does CGT event E5 happen when the shares are allocated to the employees?

Answer

Part A Yes.

Part B. Yes.

Question 4

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

Answer

No.

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 July 2010.

Relevant facts and circumstances

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 Offer documents

o The Loan Agreement

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-10 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 104-75 of the Income Tax Assessment Act 1997

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

Division 7A of the Income Tax Assessment Act 1936

Subsection 44(1) of the Income Tax Assessment Act 1936

Subsection 109C(1) of the Income Tax Assessment Act 1936

Section 109Z of the Income Tax Assessment Act 1936

Section 318 of the Income Tax Assessment Act 1936

Reasons for decision

Question 1

Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) defines net income in relation to a trust as follows insofar as it is relevant:

Net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and was a resident, less all allowable deductions

 Subsection 6-5(1) of the ITAA 1997 states:

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

 And subsection 6-10(1) states:

Your assessable income also includes some amounts that are not ordinary income.

None of the provisions listed in section 10-5 of the ITAA 1997 are relevant in this situation and therefore irretrievable contributions will be net income of the trust only if they are income according to ordinary concepts.

The Trust Deed obliges the Trustee to hold the trust fund on trust for the beneficiaries in the manner required by the Plan Rules. It must, subscribe for or acquire and hold shares for the benefit of Participants under the terms of the Plan.

Consistent with ATO ID 2002/965, as contributions to the Trustee are used in accordance with the Trust Deed and Plan Rules for the sole purpose of providing shares under the employee share scheme, contributions will constitute capital receipts of the Trustee, and will not be assessable under sections 6-5 or 6-10 of the ITAA 1997.

Question 2

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.

Subsection 109C(1) of the ITAA 1936 provides the following in respect to when a 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.

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

The Trustee is not as associate of of a shareholder. Furthermore, as the Trustee is not a shareholder of the Company, subsection 109C(1) of the ITAA 1936 does not apply. Consequently section 109Z of the ITAA 1936 does not apply to make the payment a dividend to the Trustee.

Question 3

Section 104-75 of the ITAA 1997 contains the rules dealing with CGT event E5. Subsection 104-75(1) of the ITAA 1997 states that CGT event E5 happens if a beneficiary of a trust becomes absolutely entitled to an asset of the trust as against the trustee of the trust. Subsection 104-75(2) of the ITAA 1997 provides that the timing of the event is when the beneficiary becomes absolutely entitled to the asset, and under subsection 104-75(3) of the ITAA 1997 the trustee makes a capital gain if the market value of the asset (at the time of the event ) is more than its cost base.

It is necessary to determine if and when the employee becomes absolutely entitled to the shares to ascertain if and when CGT event E5 happens.

Draft Taxation Ruling TR 2004/D25 Income Tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 provides that the core principle underlying the concept of absolute entitlement in the CGT rules is the ability of a beneficiary who has a vested and indefeasible interest in a trust asset to call for the asset to be transferred to them as they so direct.

Paragraph 74 of TR 2004/D25 provides:

74. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they the right to immediate possession or enjoyment of it.

Applying the above to the terms of the Trust Deed in this case, it is considered that the employee becomes absolutely entitled to the Shares as against the Trustee of the Trust, and CGT event E5 happens, when the shares are allocated to the employee.

Question 4

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 Trustee is to pay full market value for the shares, then any interest that the Trustee 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 of the Company 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.