1012458301116 | Legal database

Back to browse

Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012458301116

Ruling

Subject: Option Share Trust

Question 1

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

Answer:

Question 2

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

Answer:

Question 3

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

Answer:

Question 4

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

Answer:

Question 5

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

Answer:

Question 6

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

Answer:

Question 7

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

Answer:

Question 8

Will the first element of the CGT cost base of the share units acquired by the employee, 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 the employee, to which the employee is presently entitled, be included in the employee's assessable income under section 97 of the ITAA 1936?

Answer:

Yes

Question 10

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

Answer:

Question 11

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

Answer:

Question 12

To the extent that any proceeds received on the redemption of the share units constitute the employee's 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

Where the trustee disposes of the allocated investments/shares allocated to the employee's share units and make a capital gain from that disposal, will that capital gain be treated as the employee's capital gain pursuant to Subdivision 115-C of the ITAA 1997?

Answer:

Yes

Question 14

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 the employee 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

(d) To the extent the proceeds are distributed by the trustee and paid to the employee in respect of Subdivision 115-C of the ITAA 1997 (whether due to present entitlement or specific entitlement), as part of the consideration for redemption of the employee's share units will the CGT Event arising from the redemption of the employee's share units as per question 14(b) above be the sole taxing event in respect of that distribution?

Answer:

Yes

Question 15

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:

To the extent that proceeds given from the cancellation of share units give rise to assessable income and a capital gain, the amount of the income is included as 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 16

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

Answer:

Question 17

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

Answer:

Yes

Question 18

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

Answer:

Yes

Relevant facts and circumstances

The employer entity intends to implement a long term equity plan for the purpose of providing a long term incentive structure to deliver equity based benefits to employees and/or contractors selected by the board of the employer/contracting 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 82-130(1)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subsection 83A-10

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

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Section 83A-20

Income Tax Assessment Act 1997 Section 83A-25

Income Tax Assessment Act 1997 Division 102

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Paragraph 104-25(1)(a)

Income Tax Assessment Act 1997 Section 110-25

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

Income Tax Assessment Act 1997 Division 114

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-215

Income Tax Assessment Act 1997 Subsection 115-215(1)

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)

Taxation Administration Act 1953 Section 12-5 of Schedule 1

ATO view documents

Taxation Ruling 2003/13

Reasons for decision

Question 1

Answer:

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

The employee is taken to have derived an amount when the employee has received it, or when it is applied or dealt with in any way on the employee's behalf or as the employee directs.

In the employee's case, the contributions of monies by the employer to the trustee are not applied on the employee's behalf or as the employee directs because, at the time of the contribution, they are applied for the benefit of the eligible employees as a whole.

As such, the employee cannot be said to derive income according to ordinary concepts, and as such the contributions of monies by the employer to the trustee under clause 4.1 of the trust deed will not be included in the employee's assessable income.

Question 2

Will the contributions of monies by the employer to the trustee pursuant to the trust deed be included in the employee's 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 the employee's case, the contributions of monies are to be made for the purpose of providing a benefit or bonus to eligible employees generally, and not provided specifically to the employee in respect of the employee's employment.

As such, the employee 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 monies by the employer to the trustee pursuant to the trust deed be included in the employee's assessable income under section 6-5 of the ITAA 1997?

Answer:

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

In the employee's case loans of monies by the employer to the trustee pursuant to the trust deed are not income according to ordinary concepts.

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

Question 4

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

Answer:

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

Question 5

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

Answer:

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

As the payment for the share units are made by the employee and the application moneys are used by the trustee to pay full market value for the shares, then any interest the employee 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 by the employee 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 assessable income any income according to ordinary concepts that is 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 the employee 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 the employee 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 the employee's case, the employee 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 the employee 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 the employee, 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 the employee 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 the employee.

Given that the employee is 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

Answer:

Where the employee is 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, the employee's 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 the employee is presently entitled in the relevant income year.

Question 10

Will the proceeds received by the employee 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 assessable income any income according to ordinary concepts that is derived directly or indirectly from all sources.

The disposal of share units acquired by the employee 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 the employee upon redemption of the share units constitute assessable income under section 15-2 of the ITAA 1997?

Answer:

The disposal of share units acquired by the employee is a realisation of a capital asset, which was not provided to the employee but rather acquired by the employee 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

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

Answer

Subdivision 115-C of the ITAA 1997 applies where a trust has a net capital gain for an income year, which is taken into account in calculating the trust's net income for an income year.

Tax Treatment of Capital Gains which are Assessed to Presently Entitled Beneficiaries

Section 115-215 of the ITAA 1997 applies to capital gains which are assessed through a trust to presently entitled beneficiaries. Subsection 115-215(1) of the ITAA 1997 states:

The purpose of this section is to ensure that appropriate amounts of the trust estate's net income attributable to the trust estate's capital gains are treated as a beneficiary's capital gains when assessing the beneficiary, so:

(a) the beneficiary can apply capital losses against gains; and

(b) the beneficiary can apply the appropriate discount percentage (if any) to gains.

However if the circumstance outlined in Subsection 115-230(3) of the ITAA 1997 apply and the trustee makes a choice under section 115-230 of the ITAA1997 to be specifically entitled to the capital gain then the trustee will be assessed on that capital gain.

In the employee's case, provided the provisions in Section 115-230 of the ITAA1997 are not applicable then any capital gain will be treated as your capital gain pursuant to Subdivision 115-C of the ITAA.

Question 14

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 relevantly states that CGT Event C2 occurs if the ownership of an intangible asset ends by that asset being redeemed or cancelled.

Pursuant to the trust deed, the trustee is required to cancel some or all of the share units held by the employee if their employment ends, or if the employee requests such a cancellation in writing.

We consider that the redemption of share units by the employee 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 the employee upon the redemption of the share units be taken into account in calculating the employee's net capital gain under Division 102 of the ITAA 1997?

Answer:

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

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

In the employee's case, the redemption of the share units will constitute a cancellation of those share units. Where the employee receives the cancellation entitlement upon cancellation of the share units, this will be included in the employee's capital proceeds.

As such, the proceeds received by the employee upon redemption of the share units will be taken into account in calculating the employee's capital gain or capital loss under section 104-25 of the ITAA 1997, and thus will be taken into account in calculating the employee's 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 the employee is 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 the employee 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.

Answer:

Section 102-25 of the ITAA 1997 states that in working out if a CGT even happens to your situation and more than one event can happen, the one that you use is the one that is the most specific to your situation.

As stated above, paragraph 104-25(1)(a) of the ITAA 1997 relevantly 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 the employee if the employee's employment ends, or if the employee requests such a cancellation in writing.

Question 15

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 the employee's 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 16

Answer:

Subsection 82-130(1) of the ITAA 1997 relevantly 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

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

Question 17

Answer:

Section 6-5 of the ITAA 1997 includes in assessable income any income according to ordinary concepts that is derived directly or indirectly from all sources. Payments of salary and wages generally constitute ordinary income, and the employee 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 to the employee 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, the employee may receive a credit for the PAYG withheld.

Question 18

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.

Under section 83A-10 of the ITAA 1997, an ESS interest is defined as including a beneficial interest in a share in a company, and an employee share scheme is relevantly defined as a scheme in which ESS interests are provided by a company to their employee, in relation to the employment of that employee.

Any discount that an employee receives by acquiring an ESS interest below the market price is a benefit relating to employment, similar to salary or wages, and so would usually be considered income of the employee. The value of that discount is taxed under the provisions of Division 83A of the ITAA 1997. The discount is the market value of the ESS interests less any consideration paid or to be paid by the employee.

The discounted rights to shares in the employer provided to the employee by the trustee on behalf of the employer will constitute ESS interests, as defined under subsection 83A-10(1) of the ITAA 1997.

Therefore the value of the discount must be included in the employee's assessable income for that income year pursuant to section 83A-25 of the ITAA 1997.

Individuals online services

Business online services

Agents online services

Non-residents online services

Foreign Investor

Tools

Tax information for

Help and support