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Ruling

Subject: Payment received by Trustee of Superannuation Fund

Issue 1

Question 1

Will the residual amount resulting from the winding up / termination of the Employee Share Plan (ESP) be subject to tax as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answer

No

Question 2

Will the residual amount resulting from the winding up / termination of the ESP be included in the assessable income of the superannuation fund under section 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Advice/Answer

No

Question 3

Will the amount paid by the trustee of the ESP to the trustee of the superannuation fund give rise to a capital gain determined under Parts 3-1 and 3-3 of the ITAA 1997?

Advice/Answer

Yes

This ruling applies for the following period

Year ended 30 June 2008

Year ended 30 June 2011

The scheme commenced on

21 July 2003

Relevant facts

An Employee Share Plan (ESP) was established by an employer. As part of the ESP, the employer also established a trust deed to administer the ESP.

The ESP was wound up several years after it was established.

Under the terms of the trust deed for the Employee Share Plan, a payment of a residual amount was made to a superannuation fund after the winding up of the ESP.

The ESP was wound up in one financial year and payment of the residual amount, as well as the termination of the trust deed for the ESP was made in another financial year.

Assumptions

None

Relevant legislative provisions

Income Tax Assessment Act 1997 - section 6-5

Income Tax Assessment Act 1997 - section 104-25

Income Tax Assessment Act 1997 - section 104-70

Income Tax Assessment Act 1997 - section 104-75

Income Tax Assessment Act 1997 - section 104-85

Income Tax Assessment Act 1997 - section 295-85

Income Tax Assessment Act 1936 - section 99B

Reasons for decision

Issue 1

Question 1

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident of Australia includes ordinary income (also defined as income according to ordinary concepts) derived directly or indirectly from all sources in or out of Australia.

There is no definition of income according to ordinary concepts in the income tax legislation. The characteristics of ordinary income have been developed by case law and generally fall into three categories:

§ income from providing personal services;

§ income from property; or

§ income from carrying on a business

Amounts which are not income according to ordinary concepts (and therefore not assessable under section 6-5 of the ITAA 1997) may be assessable as statutory income under another provision of the ITAA 1997 including the capital gains provisions.

The payment received by the trustee company from the termination of the Plan is not ordinary income as it does not fall within any of the categories of payments that give rise to this character.

The Trustee Company is the residual capital beneficiary of the trust constituting the ESP. The amount paid is clearly a distribution of capital to the residual beneficiary on termination of the trust, and therefore not assessable as income according to ordinary concepts to the superannuation fund.

Question 2

Section 295-85 of the ITAA 1997 provides that if a CGT event happens to a CGT asset owned by a Superannuation fund, then certain provisions do not apply to the CGT event.

Those provisions that do not apply to the CGT event are listed in subsection 295-85(2) and include:

(a) section 6-5 (about ordinary income0, section 8-1 (about amounts you can deduct), and 15-15 and 25-40 (about profit making undertakings or plans);

(b) section 230-15 (about financial arrangements);

(c) Sections 25A and 52 of the ITAA 1936 (about profit making undertakings or schemes).

Section 295-85 of the ITAA 1997 does not negate the operation of section 99B(1) of the ITAA 1936.

Section 99B ITAA 1936

Subsection 99B(1) of the ITAA 1936 provides:

[Amounts paid to, or applied for the benefit of, beneficiary] Where at any time during a year of income, an amount being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income, the assessable income of the beneficiary of the year of income, shall, subject to subsection (2) include that amount.

Essentially, section 99B of the ITAA 1936 provides that a beneficiary who was a resident at any time during the income year and who receives any amounts from a trust estate, either by way of payment or application for her or his benefit, is subject to tax on that amount except where certain exclusions contained in subsection 99B(2) of the ITAA 1936 apply.

In this case, Trustee Company is a beneficiary of the Plan Trust. During the 2011 income year, the Trustee Company was paid an amount from the Plan Trust in accordance with the Trust Deed. The Trustee Company is a resident during the 2011 income year. However, it was not intended that section 99B would apply to include the amount paid to the Trustee Company in the assessable income of the superannuation fund.

In view of this, the amount paid to the Trustee Company will not be assessable under section 99B of the ITAA 1936.

Question 3

Division 104 of the ITAA 1997 sets out all the CGT events for which you can make a capital gain or capital loss. The table in section 104-5 of the ITAA 1997 provides a summary of the different CGT events.

There are four possible CGT events that could apply to the payment received by the trustee of the Super Fund (Harwood Nominees Pty Ltd) from the termination of the Plan. They are CGT event E4, CGT event E5, CGT event E7, and CGT event C2.

Subsection 102-25(1) of the ITAA 1997 states that where more than one event can happen, the one you use is the one that is the most specific to your situation.

CGT event E4 (section 104-70 of the ITAA 1997)

Subsection 104-70(1) of the ITAA 1997 provides:

CGT event E4 happens if:

(a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for CGT event A1, C2, E1, E2, E6, or E7 happening in relation to it; and

(b) some or all of the payment (the non assessable part) is not included in your assessable income

CGT event E4 does not apply because CGT event C2 happens in relation to the interest in the trust and CGT event E4 is thus expressly excluded by paragraph 104-70(1)(a) of the ITAA 1997.

CGT event E5 (section 104-75 of the ITAA 1997) and CGT event E7 (section 104-85 of the ITAA 1997)

Subsection 104-75(1) of the ITAA 1997 provides:

CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

Subsection 104-85(1) of the ITAA 1997 provides:

CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital.

Taxation Determination TD 2002/25 deals with the issue of whether Australian currency is a CGT asset under section 108-5 of the ITAA 1997 if it is used as legal tender to facilitate a transaction.

TD 2002/25 provides that:

…Australian currency being Australian notes issued by the Reserve Bank of Australia or Australian coins issued on the authority of the Federal Treasurer is not a CGT asset under section108-5 of the ITAA 1997 when it is used as legal tender. In this circumstance, Australian currency serves as a medium of exchange to facilitate a transaction.

Accordingly, no capital gain or capital loss arises from Australian currency when it is used as legal tender.

Essentially, TD 2002/25 applies to any scenario where any type of Australian designated currency is used as the medium of exchange.

Normally the 'E" events are those that are more specific to a trust estate, however, in this case, TD 2002/25 means that neither CGT event E5 and E7 happen when the amount was paid to the Trustee Company by the Plan Trustee in accordance with rule 14.4 of the Plan.

Consequently, in accordance with subsection 102-25(1), CGT event C2 is the most specific to this situation.

CGT Event C2 (section 104-25 of the ITAA 19997

Subsection 104-25(1) of the ITAA 1997 provides:

CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered, or forfeited; or

(e) if the asset is an option - being exercised; or

(f) if the asset is a convertible interest - being converted.

Subsection 104-25(2) provides in relation to the timing of CGT event C2:

104-25(2) The time of the event is:

(a) when you enter into the contract

(b) if there is no contract, when the asset ends

In this case, the ownership of an intangible asset (being an interest in the Plan) arises when the trustee declares the superannuation fund the beneficiary of the residual amount resulting from the winding up / termination of the Plan. However, it is the ending of the interest in the Plan (i.e. payment of the residual amount) which causes CGT event C2 to happen.

The applicant has advised that the Plan was terminated in one financial year and payment of the remaining amount held by the trustee of the Plan (less authorised deductions) was made in a later financial year. There was no termination deed which relates to the Plan. However, the applicant has advised that the payment by the trustee of the Plan to the Trustee Company was made to facilitate the winding up of the Plan Trust.

As there was no contract in the form of a termination deed, and the payment of the taxpayers interest in the Plan was made in order to facilitate the winding up of the Plan Trust, it is considered that the payment has in fact given effect to the ending of the Trustee Company's interest in the Plan and this is when the asset ends. Consequently, the CGT event happens when the payment was made.

Subsection 104-25(3) of the ITAA 1997 provides in relation to CGT event C2

104-25(3) You make a capital gain if the capital proceeds from the ending are more than the assets cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base.

The payment received by the Trustee Company from the trustee of the Plan is the capital proceeds received in connection with the discharge and satisfaction of its interest in the Plan. As there is no cost base for this interest, the capital gain is equal to the payment made.

Subsection 104-25(5) provides a number of exceptions to CGT event C2 happening:

104-25(5) A capital gain or capital loss you make is disregarded if:

(a) you acquired the asset before 20 September 1985

(b) for a lease that you granted:

(i) it was granted before that day

(ii) If it has been renewed or extended - the start of the renewal or extension was before that day

Notes 1 to 7 of subsection 104-25(5) provides a number of other exceptions to CGT event C2 happening.

None of the exceptions listed in subsection 104-25(5) apply in this case.

Entitlement to CGT discount

A discount capital gain is a capital gain that satisfies the requirements of Subdivision 115-A of the ITAA 1997. Essentially, to be a discount capital gain, a capital gain must:

§ Be made by an individual, a complying superannuation entity, a trust, or by a life insurance company in relation to a discount capital gain from a CGT asset in respect of a CGT asset that is a complying superannuation / FHSA asset. (section 115-10 of the ITAA 1997).

§ Result from a CGT event happening after 11.45am EST on 21 September 1999 (section 115-15 of the ITAA 1997)

§ Be worked out without the cost base being indexed (section 115-20)

§ Result from a CGT event happening to a CGT asset owned by the taxpayer for at least 12 months (section115-25 of the ITAA 1997).

Section 115-100 of the ITAA 1997 sets out what is the discount percentage for a discount capital gain. Section 115-100 provides that the discount percentage is:

§ 50% if the gain is made by an individual or a trust

§ 33 1/3% if the gain is made by a complying superannuation entity, an FHSA trust, or by a life insurance company from a CGT asset that is a complying superannuation / FHSA asset.

In this case, a CGT asset (Trustee Company's interest in the Plan) was acquired by the Trustee Company in an earlier financial year, and CGT event C2 happened to the asset in a later financial year financial year. Furthermore, at the time the Trustee Company's interest in the Plan Trust ended, the Plan Trust held no assets that were acquired in the previous 12 months.

A discount percentage of 331/3% on the capital gain made as a result of CGT event C2 happening, is available to the superannuation fund where it is a 'complying superannuation entity'.