Edited version of your private ruling

Authorisation Number: 1012448181697

Ruling

Subject: Employee Share Plan

Question 1

Will the contributions of money by the employer to the trustee pursuant to the trust deed be included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

Question 2

Will the contributions of money by the employer to the trustee pursuant to the trust deed be included in your assessable income under section 15-2 of the ITAA 1997?

Answer:

No

Question 3

Will the loans of money by the employer to the trustee pursuant to the trust deed be included in your assessable income under section 6-5 of the ITAA 1997?

Answer:

No

Question 4

Will the loans of money by the employer to the trustee pursuant to the trust deed be included in your assessable income under section 15-2 of the ITAA 1997?

Answer:

No

Question 5

Will the acquisition of share units by you in return for payment of market value consideration be included in your assessable income under section 83A-25 of the ITAA 1997?

Answer:

No

Question 6

Will the issue of the share units to you in return for payment of market value consideration give rise to any assessable income under section 6-5 of the ITAA 1997?

Answer:

No

Question 7

Will the issue of the share units to you in return for payment of market value consideration give rise to any assessable income under section 15-2 of the ITAA 1997?

Answer:

No

Question 8

Will the first element of the CGT cost base of the share units acquired by you, in accordance with section 110-25 of the ITAA 1997, equal the amount paid for those Share Units?

Answer:

Yes

Question 9

Will the distribution of dividends included in the calculation of the net income of the trust estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) by the trustee to you, to which you are presently entitled, be included in your assessable income under section 97 of the ITAA 1936?

Answer:

Yes

Question 10

Will the proceeds received by you upon redemption of the share units constitute assessable income under section 6-5 of the ITAA 1997?

Answer:

No

Question 11

Will the proceeds received by you upon redemption of the share units constitute assessable income under section 15-2 of the ITAA 1997?

Answer:

No

Question 12

To the extent that any proceeds received on the redemption of the share units constitute your assessable income under the provisions of section 6-5 or section 15-2 of the ITAA 1997, will the net proceeds (i.e. gross proceeds less the cost of the Share Units) be assessable, rather than the gross proceeds?

Answer:

The proceeds received by you upon redemption of the share units do not constitute your assessable income under either sections 6-5 or 15-2 of the ITAA 1997. As such, it is unnecessary to consider this question further.

Question 13

To the extent that the proceeds received on the redemption of the share units do not constitute assessable income under section 6-5 or section 15-2 of the ITAA 1997:

(a) Will the redemption of the share units constitute a CGT event as set out in Division 104 of the ITAA 1997?

Answer:

Yes

(b) Will the proceeds received by you upon the redemption of the share units be taken into account in calculating your net capital gain under Division 102 of the ITAA 1997?

Answer:

Yes

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

Answer:

Yes

Question 14

To the extent that the proceeds from any given cancellation of share units are included in assessable income under section 6-5 or section 15-2 of the ITAA 1997 and are taken into account in calculating a net capital gain, will the anti-overlap provisions of section 118-20 of the ITAA 1997 operate to reduce the capital gain by the amount included in assessable income or to zero in accordance with subsections 118-20(2) and 118-20(3) of the ITAA 1997?

Answer:

The proceeds received by you upon redemption of the share units do not constitute your assessable income under either sections 6-5 or 15-2 of the ITAA 1997.

However, to the extent that the proceeds from any given cancellation of share units are included in assessable income under section 82-130 of the ITAA, then the anti-overlap provisions of section 118-20 of the ITAA 1997 will operate to reduce the capital gain by the amount otherwise included in assessable income.

Question 15

If the share units are redeemed at a time that coincides with the cessation of your employment, will the proceeds on redemption be an employment termination payment under section 82-130 of the ITAA 1997?

Answer:

No

Question 16

If the Trustee, pursuant to the trust deed, decides to pay salary to you on behalf of the employer, will the amounts paid to you (including any amounts of Pay As You Go withheld) be included as your assessable income under section 6-5 of the ITAA 1997?

Answer:

Yes

Question 17

If the Trustee, pursuant to the trust deed, decides to provide discounted rights to shares to you on behalf of the employer, will the discount to the market value of the rights provided to you be included as your assessable income under section 83A-25 of the ITAA 1997?

Answer:

Decline to rule - speculative or not seriously in contemplation

This ruling applies for the following period

Income Tax Year ended 30 June 2013

Income Tax Year ended 30 June 2014

Income Tax Year ended 30 June 2015

Fringe Benefits Tax year ended 31 March 2013

Fringe Benefits Tax year ended 31 March 2014

Fringe Benefits Tax year ended 31 March 2015

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 Division 6

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-2

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 83A-10(1)

Income Tax Assessment Act 1997 Section 83A-15

Income Tax Assessment Act 1997 Section 83A-25

Income Tax Assessment Act 1997 Subsection 83A-25(1)

Income Tax Assessment Act 1997 Division 102

Income Tax Assessment Act 1997Section 102-5

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Subsection 118-20(2)

Income Tax Assessment Act 1997 Subsection 118-20(3)

Reasons for decision

Question 1

Will the contributions of money by the employer to the trustee pursuant to the trust deed be included in your assessable income under section 6-5 of the ITAA 1997?

Answer:

Section 6-5 of the ITAA 1997 includes in your assessable income any income according to ordinary concepts that you derived directly or indirectly from all sources.

You are taken to have derived an amount when you have received it, or when it is applied or dealt with in any way on your behalf or as you direct.

In this case, the contributions of money by the employer to the trustee are not applied on your behalf or as you direct because, at the time of the contribution, they are applied for the benefit of the eligible employees as a whole.

As such, you cannot be said to derive income according to ordinary concepts, and as such the contributions of money by the employer to the trustee under the trust deed will not be included in your assessable income.

Question 2

Will the contributions of money by the employer to the trustee pursuant to the trust deed be included in your assessable income under section 15-2 of the ITAA 1997?

Answer:

Subsection 15-2(1) of the ITAA 1997 states that '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.'

In your case, the contributions of money are to be made for the purpose of providing a benefit or bonus to eligible employees generally, and not provided specifically to you in respect of your employment.

As such, you will not be provided with any allowances, gratuities, compensation, benefits, bonuses or premiums as a result of the contributions made from the employer to the Trustee.

Question 3

Will the loans of money by the employer to the trustee pursuant to the trust deed be included in your assessable income under section 6-5 of the ITAA 1997?

Answer:

Section 6-5 of the ITAA 1997 includes in your assessable income any income according to ordinary concepts that you derived directly or indirectly from all sources.

In this case loans of money by the employer to the trustee pursuant to the trust deed are not income according to ordinary concepts.

As such, you cannot be said to derive income according to ordinary concepts, and as such the loans of money by the employer to the trustee under the trust deed will not be included in your assessable income.

Question 4

Will the loans of money by the employer to the trustee pursuant to the trust deed be included in your assessable income under section 15-2 of the ITAA 1997?

Answer:

Subsection 15-2(1) of the ITAA 1997 states that '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.'

Loans of money by the employer to the trustee pursuant to the trust deed do not constitute statutory income of you under section 15-2 of the ITAA 1997 as the loans do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums provided to you or applied or dealt with in any way on your behalf or as you direct.

Question 5

Will the acquisition of share units by you in return for payment of market value consideration be included as your assessable income under section 83A-25 of the ITAA 1997?

Answer:

Section 83A-25 of the ITAA 1997 states that your assessable income includes the discount given in the income year in which you acquire the ESS interest.

As the payment for the share units are made by you and the application moneys are used by the trustee to pay full market value for the shares, then any interest you acquire in the shares is not acquired at a discount, thus section 83A-25 of the ITAA 1997 will not apply.

Question 6

Will the issue of the share units to you in return for payment of market value consideration, give rise to any assessable income under section 6-5 of the ITAA 1997?

Answer:

As stated above, section 6-5 of the ITAA 1997 includes in your assessable income any income according to ordinary concepts that you derived directly or indirectly from all sources.

It is settled law that the acquisition of capital assets does not constitute income according to ordinary concepts. The acquisition of units in a unit trust for consideration is considered to be the acquisition of a capital asset, and not the provision of income.

As such, the issue of share units to you in return for payment of market value consideration does not give rise to any assessable income under section 6-5 of the ITAA 1997.

Question 7

Will the issue of the share units to you in return for payment of market value consideration, give rise to any assessable income under section 15-2 of the ITAA 1997?

Answer:

As stated above, subsection 15-2(1) of the ITAA 1997 states that '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 term 'provide' is defined in section 995-1 of the ITAA 1997 as including to 'allow, confer, give, grant or perform the benefit.' While not exhaustive, all of these terms indicate a unilateral or one-sided provision of a benefit, rather than an acquisition of a benefit for market value and on equal terms.

In your case, you will not be provided with the share units, but rather will acquire them at market value. As such, the issue of the share units to you does not meet the definition of section 15-2 of the ITAA 1997.

Question 8

Will the first element of the CGT cost base of the share units acquired by you, in accordance with section 110-25 of the ITAA 1997, equal the amount paid for those share units?

Answer:

Under subsection 110-25(2) of the ITAA 1997, the first element of the cost base of a CGT asset includes the costs of acquisition of the CGT asset. This is defined as including the total of the money paid or required to be paid in respect of the CGT asset, as well as the value of any property you gave or were required to give to acquire the CGT asset.

Under the plan, the share units will be transferred to you for the market value of the shares acquired in the employer and allocated to those share units. This will be funded by an interest-free loan from the Trustee to you.

Given that you are only required to pay the market value of the share units and not pay any other amounts or contribute any property to acquire them, then the amount paid for the share units will equal the first element of the CGT cost base.

Question 9

Will the distribution of dividends included in the calculation of the net income of the trust estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) by the trustee to you, to which you are presently entitled, be included as your assessable income under section 97 of the ITAA 1936?

Answer:

Where you are a beneficiary presently entitled to a share of the income of the trust estate, that share of the net income of the trust estate for the purposes of section 95 of the ITAA 1936 is included in your assessable income under section 97 of the ITAA 1936.

The Trustee will include in its calculation of net income, as defined in section 95 of the ITAA 1936, the total assessable income of the trust estate calculated under Division 6 of the ITAA 1936 as if the Trustee were a taxpayer in respect of that income less all allowable deductions.

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

Therefore, to the extent that a dividend is received by the trustee as a shareholder and included by the Trustee in its calculation of net income for the purposes of Division 6 of the ITAA 1936, your proportionate share of the section 95 net income of the trust estate for the purposes of section 97 of the ITAA 1936 will be the proportionate share of the income of the trust estate to which you are presently entitled in the relevant income year.

Question 10

Will the proceeds received by you upon redemption of the share units constitute assessable income under section 6-5 of the ITAA 1997?

Answer:

As stated above, section 6-5 of the ITAA 1997 includes in your assessable income any income according to ordinary concepts that you derived directly or indirectly from all sources.

The disposal of share units acquired by you is a realisation of a capital asset and the disposal proceeds thus do not constitute income according to ordinary concepts assessable under section 6-5 of the ITAA 1997.

Question 11

Will the proceeds received by you upon redemption of the share units constitute assessable income under section 15-2 of the ITAA 1997?

Answer:

As stated above, subsection 15-2(1) of the ITAA 1997 states that '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 share units acquired by you is a realisation of a capital asset, which was not provided to you but rather acquired by you for market value. As such, the disposal proceeds do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums are not assessable under section 15-2 of the ITAA 1997.

Question 12

To the extent that any proceeds received on the redemption of the share units constitute your assessable income under the provisions of section 6-5 or section 15-2 of the ITAA 1997, will the net proceeds (i.e. gross proceeds less the cost of the share units) be assessable, rather than the gross proceeds?

Answer:

As stated at questions 10 and 11 above, it is our position that the proceeds received on the redemption of the share units are not included in your assessable income under sections 6-5 and 15-2 of the ITAA 1997. Rather, the proceeds received constitute the redemption of a capital asset and as such are more properly considered under the CGT provisions.

As such, it is unnecessary to consider this question further.

Question 13

To the extent that the proceeds received on the redemption of the share units do not constitute assessable income under section 6-5 or section 15-2 of the ITAA 1997:

(a) Will the redemption of the share units constitute a CGT event as set out in Division 104 of the ITAA 1997?

Answer:

Paragraph 104-25(1)(a) of the ITAA 1997 states that CGT Event C2 occurs if your ownership of an intangible asset ends by that asset being redeemed or cancelled.

Under the trust deed, the trustee is required to cancel some or all of the share units held by you if your employment ends, or if you request such a cancellation in writing.

We consider that the redemption of share units by you will represent a cancellation of those share units, and each cancellation will constitute a CGT event C2 under section 104-25 of the ITAA 1997.

(b) Will the proceeds received by you upon the redemption of the share units be taken into account in calculating your net capital gain under Division 102 of the ITAA 1997?

Answer:

Under section 102-5 of the ITAA 1997, your assessable income for an income year includes any net capital gain upon the share units redeemed during that income year. You make a capital gain or loss if a CGT event happens to your CGT asset.

As stated above, paragraph 104-25(1)(a) of the ITAA 1997 provides that CGT Event C2 occurs if your ownership of an intangible asset ends by that asset being redeemed or cancelled. Subsection 104-25(3) states that you make a capital gain if the capital proceeds received on cancellation of the intangible asset exceed the cost base of the asset.

In your case, the redemption of the share units will constitute a cancellation of those share units. Where you receive the cancellation entitlement upon cancellation of the share units, this will be included in your capital proceeds.

As such, the proceeds received by you upon redemption of the share units will be taken into account in calculating your capital gain or capital loss under section 104-24 of the ITAA 1997, and thus will be taken into account in calculating your net capital gain under Division 102 of the ITAA 1997.

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

Answer:

Sections 115-10 to 115-25 of the ITAA 1997 set out the conditions under which an entity will make a discount capital gain. The conditions are as follows:

· The capital gain must be made by an individual, complying superannuation fund, trust or life insurance company (section 115-10 of the ITAA 1997);

· The discount capital gain must be made after 21 September 1999 (section 115-15 of the ITAA 1997);

· The discount capital gain must not have an indexed cost base - which is only relevant to assets acquired prior to 21 September 1999 under Division 114 of the ITAA 1997 (section 115-20 of the ITAA 1997); and

· The discount capital gain must result from a CGT event occurring to a CGT asset acquired at least 12 months before the CGT event (section 115-25 of the ITAA 1997).

As you are an individual, and will be both acquiring and cancelling the share units after 21 September 1999, then as long as the share units were held by you for at least 12 months prior to their cancellation, the capital gain will meet all of the criteria in sections 115-10 to 115-25 of the ITAA 1997 and thus be a discount capital gain.

Question 14

To the extent that the proceeds from any given redemption of share units are included in assessable income under section 6-5 or section 15-2 of the ITAA 1997 and are taken into account in calculating a net capital gain, will the anti-overlap provisions of section 118-20 of the ITAA 1997 operate to reduce the capital gain by the amount included in assessable income or to zero in accordance with subsections 118-20(2) and 118-20(3) of the ITAA 1997?

Answer:

Under subsections 118-20(2) and 118-20(3) of the ITAA 1997, where the disposal of an asset gives rise to assessable income and a capital gain, the amount of the income is included in assessable income and the capital gain is reduced by that amount or to zero.

As stated at questions 10 and 11 above, it is our view that proceeds from any cancellation of share units will not be included in your assessable income under sections 6-5 and 15-2 of the ITAA 1997.

However to the extent the disposal of an asset gives rise to assessable income and a capital gain, the amount of the income is included in assessable income and the capital gain is reduced by that amount or to zero in accordance with subsections 118-20(2) and 118-20(3) of the ITAA 1997.

Question 15

If the share units are redeemed at a time that coincides with the cessation of your employment, will the proceeds on redemption be an employment termination payment under section 82-130 of the ITAA 1997?

Answer:

Subsection 82-130(1) of the ITAA 1997 provides that:

A payment is an employment termination payment if:

(a) It is received by you:

(i) In consequence of the termination of your employment…

(b) It is received no later than 12 months after that termination… and

(c) It is not a payment mentioned in section 82-135.

Taxation Ruling TR 2003/13 provides the Commissioner of Taxation's view of the meaning of the term 'in consequence of'. Paragraphs 4-5 of TR 2003/13 state:

5. The phrase 'in consequence of' is not defined in the ITAA 1936. However, the words have been interpreted by the courts in several cases. Whilst there are divergent views as to the correct interpretation of the phrase, the Commissioner considers that a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

The redemption of share units held by you at a time that coincides with the cessation of your employment is considered to be a realisation of a capital asset. The proceeds are not received by you as a consequence of the termination of your employment and are therefore not an employment termination payment under section 82-130 of Part 2-40 of the ITAA 1997.

Question 16

If the trustee, pursuant to the trust deed, decides to pay salary to you on behalf of the employer, will the amounts paid to you (including any amounts of Pay As You Go (PAYG) withheld) be included as your assessable income under section 6-5 of the ITAA 1997?

Answer:

Section 6-5 of the ITAA 1997 includes in your assessable income any income according to ordinary concepts that you derived directly or indirectly from all sources. Payments of salary and wages generally constitute ordinary income, and you will have received them indirectly from the employer through the trustee.

Section 12-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) requires an entity to withhold an amount, being the PAYG withholding amount, from the salary and wages that it pays to an individual as an employee.

As such, where the trustee, pursuant to the trust deed, pays amounts on behalf of the employer from repayments of a loan pursuant to the trust deed as salary or wages, such amounts, including the amounts of PAYG withheld, will constitute income according to ordinary concepts assessable under section 6-5 of the ITAA 1997. However, you may receive a credit for the PAYG withheld.

Question 17

If the trustee, pursuant to the trust deed, decides to provide discounted rights to shares to you on behalf of the employer, will the discount to the market value of the rights provided to you be included as your assessable income under section 83A-25 of the ITAA 1997?

Answer:

Section 83A-20 of the ITAA 1997 states that the provisions of Subdivision 83A-B, including section 83A-25, apply to an ESS interest if you acquire that interest under an employee share scheme at a discount.

You have advised that the share units will be issued at market value of the share price. You have further advised that the trustee will not pay any amounts from repayments of loans as discounted rights to shares. This is the case irrespective of the fact that the trust deed allows the trustee, when instructed by the employer, to pay amounts to you from repayments of loan as discounted rights to shares.

As such, we are of the view that this question is speculative, and is not in serious contemplation by the employer, the trustee or yourself. We therefore decline to rule on this question, in accordance with paragraph 101 of Law Administration Practice Statement PS LA 2008/3: Provision of advice and guidance by the Australian Taxation Office.