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Ruling

Subject: Employee Share Trust Plan

Question 1

Will the contributions of monies by employer to the trustee pursuant to the trust deed be included in the calculation of the net income of the trust estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Will the loans of monies by employer to the trustee pursuant to the trust deed be included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936?

Answer

No

Question 3

Will dividends and other income received by the trustee be included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936?

Answer

Yes

Question 4

Will any part of the net income of the trust estate to which no beneficiary is presently entitled be assessed to the trustee pursuant to section 99A of the ITAA 1936?

Answer

Yes

Question 5

To the extent that the net income of the trustee does not include proceeds received on the disposal of investments as ordinary income of the trust estate:

will the proceeds received by the trustee from the sale of investments be taken into account in calculating the net capital gain of the trust estate under Division 102 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Will the sale of investments by the trustee which had been allocated to share units of the employee constitute a CGT event of the trust estate under Division 104 of the ITAA 1997?

Answer

Yes

Will the proceeds received by the trustee from the sale of investments allocated to share units of the employee be taken into account in calculating the net capital gain of the trust estate under Division 102 of the ITAA 1997?

Answer

Unnecessary to answer; see section (i) of this question, above.

where the proceeds received by the trustee from the sale of investments held by the Trustee for at least 12 months are taken into account in calculating a capital gain of the trust estate under Division 102 of the ITAA 1997, will the capital gain be a discount capital gain under Division 115 of the ITAA 1997?

Answer

Yes

Question 6

Will the cancellation of the employee's share units constitute an acquisition of the cancelled share units by the trustee under section 109-5 of the ITAA 1997?

Answer

No

Question 7

Will the general anti-avoidance provisions under section 67 of the FBTAA apply to the scheme described?

Answer

No

Relevant facts and circumstances

The employer entity 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 employees selected by the board of the employer entity.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Subsection 99A(4)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Division 102

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(4)

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 114-1

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 116-20

Fringe Benefits Tax Assessment Act 1986 Section 67

ATO view documents

CGT Determination Number 40

Reasons for decision

Question 1

Will the contributions of monies by employer to the trustee pursuant to the trust deed be included in the calculation of the net income of the trust estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)?

No

Detailed reasoning

Net income is defined by section 95 of the ITAA 1936 and means the total assessable income of the trust estate calculated under the ITAA 1936 as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions.

Contributions of monies by employer to the trustee pursuant to the trust deed represent corpus of the trust. The contributions constitute capital receipts to the trustee and would not be included in the assessable income of a resident taxpayer because they are not income according to ordinary concepts and are not included in the assessable income under another provision. They are therefore not included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936.

Question 2

Will the loans of monies by employer to the trustee pursuant to the trust deed be included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936?

No

Detailed reasoning

Net income is defined by section 95 of the ITAA 1936 and means the total assessable income of the trust estate calculated under the ITAA 1936 as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions.

Loans made by employer to the trustee pursuant to the trust deed constitute capital receipts to the trustee and would not be included in the assessable income of a resident taxpayer because they are not income according to ordinary concepts and are not included in the assessable income under another provision. They are therefore not included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936.

Question 3

Will dividends and other income received by the trustee be included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936?

Yes

Detailed reasoning

Net income is defined by section 95 of the ITAA 1936 and means the total assessable income of the trust estate calculated under the ITAA 1936 as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions.

Subsection 44(1) of the ITAA 1936 includes in the assessable income of a shareholder in a company dividends that are paid to the shareholder by the company out of profits derived by it from any source. Section 6-5 of the ITAA 1997 includes ordinary income in the assessable income of the taxpayer.

It follows that dividends and other income received by the trustee are included in the calculation of the net income of the trust estate for a year of income under section 95 of the ITAA 1936.

Question 4

Will any part of the net income of the trust estate to which no beneficiary is presently entitled be assessed to the trustee pursuant to section 99A of the ITAA 1936?

Yes

Detailed reasoning

Where there is any part of the net income of a resident trust estate to which no beneficiary of the trust estate is presently entitled, the trustee shall be assessed and is liable to pay tax on the net income of the trust estate (subsection 99A(4) of the ITAA 1936).

Question 5

To the extent that the net income of the trust estate does not include proceeds received on the disposal of investments as ordinary income of the trust estate:

(i) will the proceeds received by the trustee from the sale of investments be taken into account in calculating the net capital gain of the trust estate under Division 102 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Detailed reasoning

The sale of investments by the trustee is a disposal of CGT assets. Subsection 104-10(4) provides that you work out your capital gain (loss) on disposal of a CGT asset by comparing cost base (reduced cost base) and capital proceeds. The method statement in section 102-5 of the ITAA 1997 requires you to add up the capital gains you make in a year of income in working out your net capital gain for the year.

As the proceeds received by the trustee from the sale of investments are capital proceeds under section 116-20 of the ITAA 1997, they are taken into account in working out the capital gain or loss of the trustee on the sale of the investments and in turn in calculating the net capital gain of the trust estate under Division 102 of the ITAA 1997

(ii) will the sale of investments by the trust estate which had been allocated to share units of the employee constitute a CGT event of the trust estate under Division 104 of the ITAA 1997?

Yes

Detailed reasoning

The sale of investments by the trust estate will represent a disposal of CGT assets and each disposal will give rise to CGT event A1 in section 104-10 of the ITAA 1997.

(iii) will the proceeds received by the trustee from the sale of investments allocated to share units of the employee be taken into account in calculating the net capital gain of the trust estate under Division 102 of the ITAA 1997?

Unnecessary to answer; see section (i) of this question, above.

Detailed reasoning

All investments held by the trustee, including those that are allocated to share units, are CGT assets. The tax consequences of the disposal of CGT assets held by the trustee are described in section (i) of this question above.

(iv) where the proceeds received by the trustee from the sale of investments held by the trustee for at least 12 months are taken into account in calculating a capital gain of the trust estate under Division 102 of the ITAA 1997, will the capital gain be a discount capital gain under Division 115 of the ITAA 1997?

Yes

Detailed reasoning

A capital gain will be a discount capital gain under Division 115 of the ITAA 1997 if it is made (relevantly):

· by a trust (section 115-10 of the ITAA 1997)

· after 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999 (section 115-15 of the ITAA 1997)

· on a CGT asset that does not have an indexed cost base (section 115-20 of the ITAA 1997)

· on a CGT asset acquired at least 12 months before the CGT event (section 115-25 of the ITAA 1997).

In this case:

· the taxpayer is a trust

· the CGT events will be after 21 September 1999

· the Share Units cannot have an indexed cost base as they will be acquired after 21 September 1999 (section 114-1 of the ITAA 1997).

As the first three requirements for a discount capital gain are met, it follows that any capital gain made by the trustee from CGT event A1 happening to investments that were held by the trustee for at least 12 months will be a discount capital gain.

Question 6

Will the cancellation of the employee's share units constitute an acquisition of the cancelled share units by the trustee under section 109-5 of the ITAA 1997?

No

Detailed reasoning

There is no acquisition of share units in the trust by the trustee at the time of redemption of the share units as the share units are extinguished when redeemed (refer to CGT Determination Number 40).

Question 7

Will the general anti-avoidance provisions under section 67 of the FBTAA apply to the scheme described?

No