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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This edited version has been archived due to the length of time since original publication.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: 1012458391961

Ruling

Subject: Option Share Trust

Question 1

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

Answer:

Question 3

Will the contributions of monies by the contracting entity to the trustee pursuant to the trust deed be included in the contractor's assessable income under section 21A of the ITAA 1936?

Answer:

Question 4

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

Answer:

Question 5

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

Answer:

Question 6

Will the loans of monies by the contracting entity to the trustee pursuant to the trust deed be included in the contractor's assessable income under section 21A of the ITAA 1936?

Answer:

Question 7

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

Answer:

Question 8

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

Answer:

Question 9

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

Answer:

Question 10

Will the issue of the share units to the contractor in return for payment of market value consideration give rise to any assessable income under section 21A of the ITAA 1936?

Answer:

Question 11

Will the interest free loan provided by the trustee to the contractor for the purpose of acquiring the share units constitute assessable income under section 6-5 of the ITAA 1997?

Answer:

Question 12

Will the interest free loan provided by the trustee to the contractor for the purpose of acquiring the share units constitute assessable income under section 15-2 of the ITAA 1997?

Answer:

Question 13

Will the interest free loan provided by the trustee to the contractor for the purpose of acquiring the share units constitute assessable income under section 21A of the ITAA 1936?

Answer:

Yes

Question 14

Will the taxable value of a non-cash business benefit constituted by the interest free loan be reduced to nil due to the application of the otherwise deductible rule under subsection 21A(3) of the ITAA 1936?

Answer:

Yes

Question 15

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

Answer:

Yes

Question 16

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 contractor, to which you are presently entitled, be included in the contractor's assessable income under section 97 of the ITAA 1936?

Answer:

Yes

Question 17

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

Answer:

Question 18

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

Answer:

Question 19

Will the proceeds received by the contractor upon redemption of the share units constitute assessable income under section 21A of the ITAA 1997?

Answer:

Question 20

To the extent that any proceeds received on the redemption of the share units constitute the contractor's assessable income under the provisions of section 6-5 or section 15-2 of the ITAA 1997, or section 21A of the ITAA 1936 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 the contractor upon redemption of the share units do not constitute the contractor's 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 21

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

Answer:

Yes

Question 22

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 or section 21A of the ITAA 1936:

(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 contractor 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:

(d) To the extent the proceeds are distributed by the trustee and paid to the contractor 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 their share units will the CGT Event arising from the redemption of the contractor's share units as per question 22(b) above be the sole taxing event in respect of that distribution?

Answer:

Yes

Question 23

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 or section 21A of the ITAA 1936 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 24

If the trustee, pursuant to the trust deed, decides to make a cash payment to the contractor on behalf of the contracting entity, will the amounts paid to the contractor be included as the contractor's assessable income under section 6-5 of the ITAA 1997?

Answer:

Yes

Question 25

If the trustee, pursuant to the trust deed, decides to provide discounted rights to shares to the contractor on behalf of the contracting entity, will the discount to the market value of the rights provided to the contractor be included as the contractors assessable income under section 6-5 and section 15-2 of the ITAA 1997 and/or section 21A of the ITAA 1936?

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 Section 21A

Income Tax Assessment Act 1936 Subsection 21A(2)

Income Tax Assessment Act 1936 Subsection 21A(3)

Income Tax Assessment Act 1936 Subsection 21A(5)

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 Subsection 15-2(1)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-25

Income Tax Assessment Act 1997 Division 102

Income Tax Assessment Act 1997Section 102-5

Income Tax Assessment Act 1997Section 102-25

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 104-24

Income Tax Assessment Act 1997 Section 104-25

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

Income Tax Assessment Act 1997 Subsection 104-25(3)

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-A

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 Subdivision 115-C

Income Tax Assessment Act 1997 Section 115-215

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

Income Tax Assessment Act 1997 Section 115-230

Income Tax Assessment Act 1997 Subsection 115-230(3)

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

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 contractor is taken to have derived an amount when the contractor received it, or when it is applied or dealt with in any way on your behalf or as the contractor directs.

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

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

Question 2

Will the contributions of monies by the contracting entity to the trustee pursuant to the trust deed be included in the contractor'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 contractor's case, the contributions of monies are to be made for the purpose of providing a benefit or bonus to eligible contractors generally, and are not provided specifically to the contractor in respect of services rendered by the contractor.

As such, the contractor will not be provided with any allowances, gratuities, compensation, benefits, bonuses or premiums as a result of the contributions made from the contracting entity to the trustee.

Question 3

Will the contributions of monies by the contracting entity to the trustee pursuant to the trust deed be included in the contractor's assessable income under section 21A of the ITAA 1936?

Answer:

Section 21A of the ITAA 1936 provides that any non-cash business benefit is to be treated as convertible to cash for the purpose of determining the income of a taxpayer from the carrying on of a business. Non-cash business benefit is defined in subsection 21A(5) to include property and services provided in respect of a business relationship.

Section 21A of the ITAA 1936 does not actually deem any benefit in the form of property or services to be income. Its effect is that in the event that the non-cash benefit is already considered to be income derived in carrying on a business, subsection 21A(2) specifies that the amount to be brought to account is the amount that the taxpayer would have paid the provider for the property or services under an arm's length transaction.

Contributions of monies by the contracting entity to the trustee pursuant to the trust deed are not non-cash business benefits. Therefore, they are not assessable to the contractor under section 21A of the ITAA 1936.

Question 4

Will the loans of monies by the contracting entity to the trustee pursuant to the trust deed be included in the contractor'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 contractor's case loans of monies by the contracting entity 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 monies by the contracting entity to the trustee under the trust deed will not be included in the contractor's assessable income.

Question 5

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

Answer:

Loans of monies by the contracting entity 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 the contractor or applied or dealt with in any way on the contractor's behalf or as the contractor directs.

Question 6

Will the loans of monies by the contracting entity to the trustee pursuant to the trust deed be included in the contractor's assessable income under section 21A of the ITAA 1936?

Answer:

As stated above section 21A defines non-cash business benefit to include property and services provided in respect of a business relationship and brings to account all non-cash business benefits, whether or not convertible to cash, that are income derived by a taxpayer in carrying on a business for the purpose of gaining or producing assessable income.

Loans of monies by the contracting entity to the trustee pursuant to the trust deed are not non-cash business benefits. They are therefore not assessable to the contractor under section 21A of the ITAA 1936.

Question 7

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

Answer:

Division 83A of the ITAA 1997 does not apply to contractors that are corporate entities. In this case, as the contractor is a corporate entity, section 83A-25 of the ITAA 1997 will not apply to the contractor.

Question 8

Will the issue of the share units to the contractor 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 the contractor's 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 the contractor 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 9

Will the issue of the share units to the contractor 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 contractor's case, the contractor 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 contractor does not meet the definition of section 15-2 of the ITAA 1997.

Question 10

Will the issue of the share units to the contractor in return for payment of market value consideration give rise to any assessable income under section 21A of the ITAA 1936?

Answer:

Share units issued to you may be non-cash business benefits for the purposes of section 21A of the ITAA 1936, i.e. property provided in relation to a business relationship between the contractor and the contracting entity.

Where such benefits are income derived in carrying on a business for the purpose of gaining or producing assessable income, the amount assessable under subsection 21A(2) of the ITAA 1936 is the arm's length value of the benefit, reduced by any amount of consideration paid to the provider by the recipient in respect of the provision of the benefit (the recipient's contribution).

Where the recipient's contribution is equal to or greater than the arm's length value of the non-cash business benefit, no amount is assessed under subsection 21A of the ITAA 1936. Therefore, where the contractor pays market value consideration for the share units, the receipt of the share units by the contractor is not assessable to the contractor under section 21A.

Question 11

Will the interest free loan provided by the trustee to the contractor for the purpose of acquiring 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.

In this case loans of monies provided to the contractor by the trustee pursuant are not income according to ordinary concepts.

As such, you cannot be said to derive income according to ordinary concepts, and as such the interest free loan by the Trustee will not be included in the contractor's assessable income.

Question 12

Will the interest free loan provided by the trustee to the contractor for the purpose of acquiring the share units constitute assessable income under section 15-2 of the ITAA 1997?

Answer:

The interest free loan provided by the Trustee to the contractor does not constitute a benefit for the purposes of section 15-2 of the ITAA 1997.

Question 13

Will the interest free loan provided by the trustee to the contractor for the purpose of acquiring the share units constitute assessable income under section 21A of the ITAA 1936?

Answer:

An interest free loan provided to the contractor is a non-cash business benefit for the purposes of section 21A of the ITAA 1936, i.e. property and/or services provided in relation to a business relationship between the contractor and the contracting entity.

The value of the non-cash business benefit constituted by the interest free loan will be brought to account as the contractor's assessable income. The amount to be brought into account is the difference between the amount of interest the contractor could reasonably be expected to pay on the loan if the arrangement was at arm's length, and the amount of interest which has actually been paid.

Question 14

Answer:

As stated above section 21A of the ITAA 1936 defines non-cash business benefit to include property and services provided in respect of a business relationship and brings to account all non-cash business benefits, whether or not convertible to cash, that are income derived by a taxpayer in carrying on a business for the purpose of gaining or producing assessable income.

Subsection 21A(3) of the ITAA 1936 states:

Where:

(a) a non-cash business benefit is income derived by a taxpayer in a year of income; and

(b) if the taxpayer had, at the time the benefit was provided, incurred and paid unreimbursed expenditure in respect of the provision of the benefit equal to the amount of the arm's length value of the benefit - a once-only deduction would, or would but for section 82A, and Subdivisions F, GA and G of Division 3 of this Part, of this Act, and Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the taxpayer in respect of a percentage (in this subsection called the deductible percentage) of the expenditure;

the amount that, apart from this subsection, would be applicable under subsection (2) of this section in respect of the benefit shall be reduced by the deductible percentage.

As stated above an interest free loan provided to the contractor is a non-cash business benefit for the purposes of section 21A of the ITAA 1936, i.e. property and/or services provided in relation to a business relationship between the contractor and the contracting entity and the amount assessable under subsection 21A(2) of the ITAA 1936 is the arm's length value of the benefit.

However the value of the non-cash business benefit constituted by the interest free loan brought to account as the contractor's assessable income under subsection 21A(2) of the ITAA 1936 will be reduced to nil by virtue of the otherwise deductible rule in subsection 21A(3) of the ITAA 1936 as all of the loan funds will be applied to an income producing purpose.

Question 15

Will the first element of the CGT cost base of the share units acquired by the contractor, 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 the contractor gave or were required to give to acquire the CGT asset.

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

Given that the contractor 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 16

Answer:

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

Question 17

Will the proceeds received by the contractor 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 contractor 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 18

Will the proceeds received by the contractor 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 contractor is a realisation of a capital asset, which was not provided to the contractor but rather acquired by the contractor 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 19

Will the proceeds received by the contractor upon redemption of the share units constitute assessable income under section 21A of the ITAA 1997?

Answer:

The proceeds from the disposal of share units are not non-cash business benefits. Therefore, they are not assessable to the contractor under section 21A of the ITAA 1936.

Question 20

To the extent that any proceeds received on the redemption of the share units constitute the contractor's assessable income under the provisions of section 6-5 or section 15-2 of the ITAA 1997, or section 21A of the ITAA 1936 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 17, 18 and 19 above, it is our position that the proceeds received on the redemption of the share units are not included in the contractor's 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 21

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

Question 22

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 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 contractor if the contractor's employment ends, or if the contractor requests such a cancellation in writing.

We consider that the redemption of share units by the contractor 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 contractor 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, assessable income for an income year includes any net capital gain upon the share units redeemed during that income year. The contractor makes a capital gain or loss if a CGT event happens to the contractor's CGT asset.

As stated above, paragraph 104-25(1)(a) of the ITAA 1997 relevantly 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 the contractor makes a capital gain if the capital proceeds received on cancellation of the intangible asset exceed the cost base of the asset.

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

As such, the proceeds received by the contractor upon redemption of the share units will be taken into account in calculating the contractor's capital gain or capital loss under section 104-24 of the ITAA 1997, and thus will be taken into account in calculating the contractor'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 contractor is a corporate entity the requirement under section 115-10 is not met, therefore the provisions under Subdivision 115-A will not apply to discount the capital gain..

Answer:

Section 102-25 of the ITAA 1997 states that in working out if a CGT even happens to the contractor's 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.

Question 23

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 17, 18 and 19 above, it is our view that proceeds from any cancellation of share units will not be included in the contractor's assessable income under sections 6-5 and 15-2 of the ITAA 1997 or section 21A of the ITAA 1936.

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 24

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 cash as a reward for services generally constitute ordinary income, and the contractor will have received them indirectly from the contracting entity through the trustee.

As such, where the trustee, pursuant to the trust deed, pays amounts to you on behalf of the contracting entity from repayments of a loan pursuant to the trust deed, such amounts, including the amounts of PAYG withheld, will constitute income according to ordinary concepts assessable under section 6-5 of the ITAA 1997.

Question 25

Answer:

Section 15-2 of the ITAA 1997 requires the contractor to include in the contractor assessable income "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… services rendered by you." For section 15-2 to apply the thing provided must be in money or in any other form and provided to the taxpayer.

The term 'provided' similarly refers to "to provide" and this is defined in section 995-1 of the ITAA 1997 as including to 'allow, confer, give, grant or perform the benefit.'

The value provided must be in respect of services rendered. The expression "services rendered" refers to situations not encompassed by the term "employment". Section 15-2 uses the same expression to former section 26(e) of the ITAA 1936. Relevantly in considering the situation where services are rendered outside of an employment relationship, the Full Federal Court in Federal Commissioner of Taxation v.Holmes (1995) 58 FCR 151 stated (at 154-155):

The words of [former] section [26(e) of the ITAA 1936] are broad indeed, although not without limit, cf Federal Commissioner of Taxation v. Dixon (1952) 10 ATD 82; (1952) 86 CLR 540. They exclude, for example, a payment which is received by the recipient as a mere gift: Scott v. F C of T (1966) 117 CLR 514. To fall within s 26(e) there must be 'a real relation between the receipt and... services': Hayes v. Federal Commissioner of Taxation (1956) 11 ATD 68 at 72; (1956) 96 CLR 47 at 54. Or, as Fullagar J put it in F C of T v. Dixon (supra at ATD 90; CLR 564) the payment must have the 'character of a reward for services rendered or to be rendered'.

In FCT v Cooke and Sherden (1980) 10 ATR 696; 80 ATC 4140, also considered former section 26(e) of the ITAA 1936, and the Full Federal Court took the view that the expression "services rendered" was wide enough to cover the situation of an employee, independent contractor or any other relationship under which services are rendered.

The contractor was invited to participate in the plan by the contracting entity as part of the contractors remuneration and performance. Where the trustee pursuant to the trust deed, decides to provide discounted rights to shares to the contractor on behalf of the contracting entity, these discounted rights to shares are considered to be benefits provided to the contractor in respect of the services rendered to the contracting entity. The contractor is to include the value of the discounted rights to shares as assessable income.

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