Edited version of your private ruling

Authorisation Number: 1012492340833

Ruling

Subject: Employee share scheme - Performance rights - Taxing point

Question 1: Does the Commissioner agree that subsection 83A-105(3) of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the ESS interest constituted by the Taxpayer's Performance Rights?

Answer:

Yes.

Question 2: Does the Commissioner agree that the requirements of paragraph 83A-105(1)(b) of the ITAA 1997 are not met in respect of the ESS interest constituted by the Taxpayer's Performance Rights?

Answer:

No.

Question 3: Does the Commissioner agree that as a result of the answers given in respect of Questions 1 and 2 above, Subdivision 83A-C of the ITAA 1997 does not apply, and subsection 83A-B does apply, to the ESS interest constituted by the Taxpayer's Performance Rights?

Answer:

No.

This ruling applies for the following period<s>:

2009-10 income year

2010-11 income year

2011-12 income year

2012-13 income year

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company A

Company A is a listed Australian company.

At all relevant times, Company A's issued share capital consisted solely of ordinary shares, each entitled to a single vote at a general meeting of Company A.

The Taxpayer is an Executive of Company A, and has held that role continuously for some years. At the time of the Taxpayer's appointment, the Taxpayer took a stake in Company A in excess of 10% of the then issued share capital, and has continued since that time to hold a significant stake in the company.

Performance Rights Plan

The Performance Rights Plan proposed by Company A was set out in the Notice of General Meeting, which included the Performance Rights Plan Rules.

At the 20XX General Meeting, Company A approved the Performance Rights Plan. The relevant resolution of Company A ("Resolution 1") provided as follows:

"That, pursuant to and in accordance with Listing Rule 7.2, Exception 9 and for all other purposes, the Company approves the grant of performance rights and the issue of Shares under the performance rights plan for Eligible Employees and Consultants known as the 'Company A' Performance Rights Plan' (the terms and conditions of which are set out in Annexure A in the Explanatory Statement accompanying this Notice of Meeting) as an exception to Listing Rule 7.1"

The 20XX General Meeting also approved the issue of Performance Rights to the Taxpayer (the Taxpayer's Performance Rights) in the form of the following resolution ("Resolution 2"- refer to Tab 1):

"That, conditional upon Resolution 1 being approved, pursuant to and in accordance with Listing Rule 10.14, and section 208 of the Corporations Act 2001 (Cth) and for all other purposes, the Directors be and are hereby authorised to grant up to [text deleted] performance rights under the Company A Limited Performance Rights Plan, for no consideration, to the Taxpayer, an executive of the Company on the terms described in the Explanatory Statement (including Annexure A to the Explanatory Statement) which forms part of this Notice of Meeting."

The Minutes record that these resolutions were duly passed by Company A at the 20XX General Meeting.

Performance Rights Plan Rules

The Performance Rights Plan is governed by the Performance Rights Plan Rules, which relevantly provide as follows:

(a) The board of directors of Company A is empowered to issue invitations to employees to acquire Performance Rights, which can be accepted by the employee on completion of an application form (clause 3);

(b) Unless otherwise determined by the Board, Performance Rights are granted by the Company on receiving the completed application form from the employee (clauses 3.ii(2) and 4.i);

(c) No amount is required to be paid to acquire the Performance Rights (clause 4.i(b));

(d) No amount is payable to exercise the Performance Rights (clause 4.i(c));

(e) Any Performance Rights issued are not able to be transferred (clause 4.ii);

(f) The Performance Rights will be subject to "performance hurdles" to be satisfied in a specific period of time, determined by the board of directors of Company A and set out in the invitation (clauses 3.1 a and 5.i);

(g) Performance Rights do not vest until the Board determined that the applicable performance hurdles for a set of Performance Rights has been satisfied for the relevant period (clause 5.ii);

(h) The Performance Rights can be exercised only once they became vested (clause 5.iii);

(i) The Performance Rights, once vested, could be exercised to receive ordinary shares in Company A (clause 5.iii);

(j) Once vested, the Performance Rights were required to be exercised within one year of the vesting date, otherwise they lapsed and could not be exercised (clauses 5.iii and 6).

Acquisition of Performance Rights by Taxpayer

The Taxpayer was immediately issued with an invitation to participate in the Performance Rights Plan by way of a letter from Company A to the Taxpayer.

The invitation to participate in the issue of Performance Rights was accepted by the Taxpayer on the same day.

As a result, Company A issued the Performance Rights to the Taxpayer on that date.

The Performance Rights issued to the Taxpayer can be broken into four "tranches", with each tranche having a different vesting date and different performance hurdles required to be met for that tranche of Performance Rights to vest as at the vesting date. The conditions in respect of each tranche were provided.

Shareholders in company A related to the Taxpayer

The Taxpayer and spouse are beneficiaries of a trust and the sole members and trustees of a superannuation fund. The sole trustee of the trust is the spouse. By way of deed shortly before the Performance Rights were granted, the spouse also became the appointor for the trust.

Some years earlier, the superannuation fund acquired some ordinary shares in Company A with most acquired by exercising Executive Performance Options granted to the superannuation fund as nominee of the Taxpayer.

Also some years earlier, the trust acquired some ordinary shares in Company A in an off-market transaction. The trust also acquired some options in Company A in the same transaction.

From these purchases and until after the 20XX General Meeting, shares in Company A continued to be held by both the superannuation fund and the trust

(a) the superannuation fund: Y% of the total issued share capital of Company A as at the date of the 20XX General Meeting; and

(b) the trust: Z% of the total issued share capital of Company A as at the date of the 20XX General Meeting.

The Taxpayer did not personally own any ordinary shares in Company A at any time up to and including the 20XX General Meeting.

Shortly after the 20XX General Meeting, the trust exercised the options and acquired more ordinary shares in Company A. As a result, the Taxpayer, the superannuation fund and the trust held the following shares in Company A (including as at the Second 20XX General Meeting):

(a) the superannuation fund: X% of the then issued share capital;

(b) the trust: Y% of the then issued share capital;

(c) Taxpayer: Z% of the then issued share capital.

A few days later, Company A advised the Taxpayer that 100% of Tranche 1 of the Taxpayer's Performance Rights vested. The Taxpayer exercised those Performance Rights almost immediately and acquired some ordinary shares in Company A.

As at the next annual general meeting of Company A (being the 20XX AGM):

(a) the superannuation fund held X% of the then issued share capital;

(b) the trust held Y% of the then issued share capital; and

(c) the Taxpayer held Z% of the then issued share capital.

A year later, 100% of Tranche 2 of the Taxpayer's Performance Rights vested, and the Taxpayer exercised those Performance Rights and acquired more ordinary shares in Company A.

Proxies held by the Taxpayer

The Taxpayer was the Chairman for the 20XX General Meeting. In that capacity, the Taxpayer was appointed as proxy for the meeting by shareholders as follows:

(a) appointed as proxy in respect of XY% of the then issued share capital where the proxy nomination contained directions binding on the Taxpayer as to how to exercise those votes in respect of each resolution; and

(b) appointed as proxy in respect of Z% of the then issued share capital where the proxy nomination allowed the Taxpayer to exercise a discretion as to how to exercise the votes subject to those proxies.

For the purpose of this ruling and for the absence of doubt in relation to this ruling, the Taxpayer is an employee of Company A or in a relationship similar to employment for the purpose of section 83A-325 of the ITAA 1997 for the Relevant Income Year.

Certain documents were provided with the ruling application and are to be read with and form part of the description of the scheme for the purpose of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Section 83A-20

Income Tax Assessment Act 1997 Section 83A-35

Income Tax Assessment Act 1997 Section 83A-105

Income Tax Assessment Act 1997 Section 83A-305

Income Tax Assessment Act 1997 Section 83A-325

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax (Transitional Provisions) Act 1997 Section 83A-5

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 318

Taxation Administration Act 1953 Subdivision 12-B of Schedule 1

Reasons for decision

Question 1

Summary

The Commissioner agrees that subsection 83A-105(3) of the ITAA 1997 applies to the ESS interest constituted by the Taxpayer's Performance Rights.

Detailed reasoning

Subsection 83A-105(3) of the ITAA 1997 applies to an ESS interest a taxpayer acquires under an employee share scheme if, when they acquire the interest:

(a) if the ESS interest is a beneficial interest in a share - there is a real risk that, under the conditions of the scheme, they will forfeit or lose the ESS interest (other than by disposing of it), or

(b) if the ESS interest is a beneficial interest in a right to acquire a beneficial interest in a share:

(i) there is a real risk that, under the conditions of the scheme, they will forfeit or lose the ESS interest (other than by disposing of it, exercising the right or letting the right lapse), or

(ii) there is a real risk that, under the conditions of the scheme, if they exercise the right, they will forfeit or lose the beneficial interest in the share (other than by disposing of it).

Meaning of ESS interest and employee share scheme

Subsection 83A-10(1) of the ITAA 1997 defines an 'ESS interest' in a company as a beneficial interest in:

(a) a share in a company, or

(b) a right to acquire a beneficial interest in a share in a company.

Subsection 83A-10(2) of the ITAA 1997 defines 'employee share scheme' as a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of:

(a) the company, or

(b) subsidiaries of the company,

in relation to the employees' employment.

Relationships similar to employment

Section 83A-325 of the ITAA 1997 applies Division 83A of the ITAA 1997 to relationships similar to employment. Specifically, Item 1 of the Table in section 83A-325 of the ITAA 1997 provides that Division 83A of the ITAA 1997 also applies to:

· an individual who receives, or is entitled to receive, work and income support withholding payments (otherwise than as an employee)

· as if he or she were employed by the entity that pays or provides the work and income support withholding payments (or is liable to do so), and

· the relationship because of which the entity pays or provides the work and income support withholding payments to you (or is liable to do so) constitutes that employment.

Subsection 995-1(1) of the ITAA 1997 applies the definition of 'work and income support withholding payments and benefits' from the Income Tax Assessment Act 1936 (ITAA 1936) as the definition of 'work and income support withholding payment' for the purposes of the ITAA 1997.

The definition of 'work and income support withholding payment and benefits' in subsection 6(1) of the ITAA 1936 includes payments from which an amount must be withheld under a provision of Subdivision 12-B in Schedule 1 to the Taxation Administration Act 1953 (TAA).

Section 12-40 in Subdivision 12-B in Schedule 1 to the TAA requires an incorporated company to withhold an amount from a payment of remuneration it makes to an individual as a director of the company, or as a person who performs the duties of a director of the company.

Real risk of forfeiture

There is no legal definition of the 'real risk of forfeiture' contemplated by subsection 83A-105(3) of the ITAA 1997. Therefore, the term is to be interpreted considering the ordinary meaning of the words having regard to the legislative context and the object or purpose of Division 83A of the ITAA 1997.

The Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009, which inserted Division 83A into the ITAA 1997, explains the purpose of having a real risk of forfeiture test to qualify for treatment under Subdivision 83A-C of the ITAA 1997 as follows:

1.152 In situations where there is a real risk that the benefits of shares or rights are never realised because the ESS interests may be forfeited, deferral of taxation is considered the appropriate treatment.

1.153 Providing for the deferral of tax in these situations recognises that the employee may never have a chance to recognise the economic value of the ESS interest, and that having employee remuneration 'at risk' in this manner is consistent with the purpose of concessionally taxing employee share schemes, namely to align the interests of employees and employers.

The EM makes the following comments about the real risk of forfeiture test:

1.42 An ESS interest is at real risk of forfeiture if a reasonable person would consider that there is a real risk that the employee would lose or forfeit the interest or never receive it, other than by selling or exercising it, by intentionally taking no action to realise the benefit, or through the market value of the ESS interest falling to nil.

1.156 The 'real risk of forfeiture' test does not require employers to provide schemes in which their employee share scheme benefits are at a significant or substantial risk of being lost. However, 'real' is regarded as something more than a mere possibility. Something is not a real risk if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility.

1.158 The 'real risk of forfeiture' test is intended to provide for deferral of tax when there is a real alignment of interests between the employee and employer, through the employee's benefits being at risk. The test is a principle based test, intended to deny deferral of tax where schemes contrive to present a nominal risk of forfeiture, without complying with the intent of the proposed law.

1.159 Real risk includes situations in which a share or right is subject to meaningful performance hurdles or the securities will be forfeited if a minimum term of employment is not completed.

Application of subsection 83A-105(3) of the ITAA 1997

Applying the above mentioned legislation to the Taxpayer's situation, subsection 83A-105(3) of the ITAA 1997 applies to the Performance Rights because:

· The Performance Rights provide the Taxpayer with a beneficial interest in rights to acquire beneficial interests in shares in Company A. Therefore, they are ESS interests

· The Performance Rights were provided to the Taxpayer in relation to their duties as a director of Company A. This is a relationship similar to employment as tax must be withheld from the directors fees paid to the Taxpayer. Therefore, the provision of the Performance Rights to the Taxpayer constitutes an employee share scheme.

· The performance hurdles imposed under the employee share scheme represented a real risk that the Taxpayer might forfeit some or all of the Performance Rights.

Question 2

Summary

The Commissioner does not agree that the requirements of paragraph 83A-105(1)(b) of the ITAA 1997 are not met in respect of the ESS interest constituted by the Taxpayer's Performance Rights.

Detailed reasoning

Subsection 83A-105(1) of the ITAA 1997 provides that Subdivision 83A-C of the ITAA 1997 applies to an ESS interest in a company and that Subdivision 83A-B doesn't apply to it if certain conditions are met including:

(b) subsections 83A-35(3), (4), (5) and (9) apply to the interest.

Employment requirement

Subsection 83A-35(3) of the ITAA 1997 applies to an ESS interest in a company if, when the Taxpayer acquires the interest, they are employed by:

(a) the company, or

(b) a subsidiary of the company.

Relationships similar to employment

Section 83A-325 of the ITAA 1997 applies Division 83A of the ITAA 1997 to relationships similar to employment. Specifically, Item 1 of the Table in section 83A-325 of the ITAA 1997 provides that Division 83A of the ITAA 1997 also applies to:

· an individual who receives, or is entitled to receive, work and income support withholding payments (otherwise than as an employee)

· as if he or she were employed by the entity that pays or provides the work and income support withholding payments (or is liable to do so), and

· the relationship because of which the entity pays or provides the work and income support withholding payments to you (or is liable to do so) constitutes that employment.

Subsection 995-1(1) of the ITAA 1997 applies the definition of 'work and income support withholding payments and benefits' from the ITAA 1936 as the definition of 'work and income support withholding payment' for the purposes of the ITAA 1997.

The definition of 'work and income support withholding payment and benefits' in subsection 6(1) of the ITAA 1936 includes payments from which an amount must be withheld under a provision of Subdivision 12-B in Schedule 1 to the TAA.

Section 12-40 in Subdivision 12-B in Schedule 1 to the TAA requires an incorporated company to withhold an amount from a payment of remuneration it makes to an individual as a director of the company, or as a person who performs the duties of a director of the company.

Ordinary shares requirement

Subsection 83A-35(4) of the ITAA 1997 applies to an ESS interest the Taxpayer acquires under an employee share scheme if, when he acquires the interest, all of the ESS interests available for acquisition under the scheme relate to ordinary shares.

Integrity rules

Subsection 83A-35(5) of the ITAA 1997 applies to an ESS interest in a company unless, when a taxpayer acquires the interest:

(a) the predominant business of the company (whether or not stated in its constituent documents) is the acquisition, sale or holding of *shares, securities or other investments (whether directly or indirectly through one or more companies, partnerships or trusts); and

(b) they are employed by the company; and

(c) they are also employed by any other company that is:

(i) a subsidiary of the first company; or

(ii) a holding company (within the meaning of the Corporations Act 2001) of the first company; or

(iii) a subsidiary of a holding company (within the meaning of the Corporations Act 2001) of the first company.

Shareholding limits

Subsection 83A-35(9) of the ITAA 1997 applies to an ESS interest in a company if, immediately after a taxpayer acquires the interest:

(a) they do not hold a beneficial interest in more than 5% of the shares in the company; and

(b) they are not in a position to cast, or to control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the company.

Associates

Section 83A-305 of the ITAA 1997 provides that if an associate (other than an employee share trust) of an individual acquires an ESS interest in relation to the individual's employment (including past or prospective employment), then, for the purposes of this Division:

(a) treat the interest as having being acquired by the individual (instead of the associate); and

(b) treat any circumstance, right or obligation existing or not existing in relation to the interest in relation to the associate as existing or not existing in relation to the individual; and

(c) treat anything done or not done by or in relation to the associate in relation to the interest as being done or not done by or in relation to the individual.

Subsection 995-1(1) of the ITAA 1997 states that the term 'associate' has the meaning given by section 318 of the ITAA 1936.

Subsection 318(1) of the ITAA 1936 includes the following as associates of an entity (in this subsection called the primary entity) that is a natural person (otherwise than in the capacity as trustee):

(a) a relative of the primary entity, and

(d) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection benefits under the trust.

Application of Division 83A of the ITAA 1997

Subsection 83A-5(1) of the Income Tax (Transitional Provisions) Act 1997 (ITTPA) states that Division 83A of the ITAA 1997 applies in relation to an ESS interest if certain conditions are met, including:

(a) the interest was acquired on or after 1 July 2009.

Subsection 83A-5(2) of the ITTPA states that Subdivision 83A-C of the ITAA 1997 (and the rest of Division 83A of that Act, to the extent it relates to that Subdivision) applies in relation to an ESS interest if certain conditions were met including:

(a)(i) at the pre-Division 83A time, subsection 139B(3) of the ITAA 1936 applied in relation to the interest.

Application of paragraph 83A-105(1)(b) of the ITAA 1997

Applying the above mentioned legislation to the Taxpayer's situation, the first three tests in paragraph 83A-105(1)(b) of the ITAA 1997 are met in relation to the Performance Rights because:

· the Performance Rights were provided to the Taxpayer in relation to his duties as a director of Company A. This is a relationship similar to employment as tax must be withheld from the directors fees paid to him. Therefore, the provision of the Performance Rights to the Taxpayer constitutes an employee share scheme.

· the Performance Rights provided the Taxpayer with the opportunity to acquire ordinary shares in Company A.

· company A is not a 'share trading and investment company' of the type contemplated by subsection 83A-35(5) of the ITAA 1997.

However, the following holdings of shares have been nominated as being those that the Taxpayer could cast, or control the casting of at the time that the Performance Rights were granted to the Taxpayer thereby failing the fourth test in paragraph 83A-105(1)(b) of the ITAA 1997:

the trust: X% of the total issued share capital of Company A as at the date of the 20XX General Meeting

the superannuation fund: Y% of the total issued share capital of Company A as at the date of the 20XX General Meeting with most of these shares relating to the Executive Performance Options approved at the General Meeting held some years earlier, and

the Taxpayer being appointed as proxy in respect of Z% of the then issued share capital where the proxy nomination allowed the Taxpayer to exercise a discretion as to how to exercise the votes subject to those proxies.

Application of paragraph 83A-35(9)(b) of the ITAA 1997

In determining whether paragraph 83A-35(9)(b) applied to the rights granted to the Taxpayer at the 20XX General Meeting it is necessary to determine:

· the relevant time to apply the test - 'immediately after you acquire the interest'

· whether the Taxpayer was in a position to cast or control the casting of votes in respect of shares held by the spouse as trustee of the trust, at that test time

· whether the Taxpayer was in a position to cast or control the casting of votes in respect of shares held as joint trustee of the superannuation fund, at that test time

· whether the proxy votes for the 20XX General Meeting were still active at the relevant test time.

When did the Taxpayer acquire the ESS interest?

According to the information provided, all relevant events occurred on the day of the 20XX General Meeting. These events were:

· the Plan was approved by share holders at a general meeting;

· the grant of the rights to the Taxpayer was also approved by shareholders at this meeting, necessary according to the ASX listing rules as he was a director of the company;

· an invitation was made to the Taxpayer to participate in the Plan;

· the invitation was accepted by the Taxpayer in writing on the application form provided;

· the necessary notification was made to the ASX with Appendix 3B.

Based on the information provided, the Performance Rights were acquired by the Taxpayer on the date of the 20XX General Meeting. This is supported by the decisions in both Fowler v. FCT [2012] FCA 1040 (Fowler) and FCT v. McWilliam [2012] FCAFC 105 (McWilliam), as the granting of the rights was dependent upon shareholder approval. The decision in Fowler is the subject of an appeal to the Full Federal Court with the decision currently pending. At the time the rights were granted, evidenced by written invitation to the Taxpayer, shareholders had already provided approval at a general meeting of the company. Fowler and McWilliam both concerned the question of when a right was acquired for the purposes of Division 13A of Part III of the ITAA 1936 but these decisions will equally apply to determine the date an ESS interest is acquired under Division 83A of the ITAA 1997 unless the ESS interest arises from an indeterminate right under section 83A-340 of the ITAA 1997. No information has been provided to suggest that the Taxpayer was promised an alternative in the event that shareholders did not approve the granting of the Performance Rights so section 83A-340 of the ITAA 1997 has no application.

For the purposes of paragraph 83A-35(9)(b) of the ITAA 1997, when is immediately after?

It is important to determine when is the time 'immediately after' the ESS interest was acquired. On the date of the 20XX General Meeting, the shareholders of Company A voted to give their approval to the Plan and the grant of rights to the Taxpayer. Company A then invited the Taxpayer to participate in the Plan, and the Taxpayer accepted. Company A notified the ASX as required by the listing rules. It is likely that these actions occurred in sequence, however it seems reasonable to assume they occurred contemporaneously, for the purposes of the test at paragraph 83A-35(9)(b) of the ITAA 1997. In any event, determining a particular point in time may only be necessary if the question of control is dependent upon the Taxpayer authority in respect of the proxy votes.

Was the Taxpayer in a position to cast or control the casting of votes in respect of shares held by the spouse as trustee of the trust at the test time?

The Taxpayer and the spouse are both beneficiaries of the trust and the spouse is the sole trustee and the appointor.

At the date of the 20XX General Meeting, the trustee of the trust held X% of the shares in Company A that were purchased on-market and were not acquired in relation to the Taxpayer's employment. The trustee of the trust also held options in Company A and shortly after the 20XX General Meeting exercised the options and acquired additional shares in Company A. These latter shares are not relevant as they were not held at the test time.

It has been suggested that the trust 'can be considered to be the "alter ego" of the Taxpayer for the purposes of determining whether the Taxpayer has control of the trust, and therefore control of the voting rights attached to the Company A shares held by the trust'. It is also suggested that 'where there is de-facto control of the trust by the Taxpayer, this is sufficient for the voting rights in Company A that are held by the trust to be included in determining whether the Taxpayer satisfies subsection 83A-35(9)' of the ITAA 1997.

It is suggested that the decision in Australian Securities and Investments Commission v. Carey (No 6) [2006] FCA 814 (Carey) to supports the position outlined above. In that case ASIC was seeking, amongst other things, to have orders made for the appointment of receivers to the property of company officers where that property was held by a third party as trustee for any trust where the company officer was a beneficiary.

In considering the notion of a 'contingent interest' for the purposes of section 9 of the Corporations Act 2001, French J held at paragraph 36 of the judgment that a beneficiary of a discretionary trust, 'at arms length from the trustee, does not have a "contingent interest" but rather an expectancy or mere possibility of a distribution'. He went on to say:

On the other hand, where a discretionary trust is controlled by a trustee who is in truth the alter ego of a beneficiary, then at the very least a contingent interest may be identified because, to use the words of Nourse J, "it is as good as certain" that the beneficiary will receive the benefits of distributions either of income or capital or both.

In Carey, French J looked at several trusts and found that the company officers in question had a contingent interest in the property of the trust and a degree of ownership dependent upon the terms of the trusts. In all the trusts mentioned, the officer was the trustee or appointor.

In the case of the trust, the Taxpayer's spouse is both the trustee and the appointor. This falls between the categories described by French J above as the Taxpayer is not the trustee, but the Taxpayer is not at arms length from the trustee. However, in Carey the decision was about the concept of contingent interest in property which is a wider concept that that needed when looking at 'control' for the purposes of paragraph 83A-35(9)(b) of the ITAA 1997.

Property is defined at section 9 of the Corporations Act 2001 as follows:

property means any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action

Even if it was concluded that the Taxpayer had a contingent interest in potential distributions from the trust, which is unlikely, something more than that is needed before he could be considered to have control in respect of assets of the trust such as the shares in Company A. When discussing one of the company officers in Carey at paragraph 41 of the judgment, French J says 'Mr Beck would appear through his trustee company, to have effective control of the assets of the trust. At the very least he has a contingent interest in the sense used earlier. His interest would appear to amount to effective ownership of the trust property'.

The concept of 'alter ego' trusts has also been looked at in various cases in the Family Court of Australia. A common theme is that each decision must be determined on its own facts. In a recent decision, Fletcher & Maloney [2008] FamCA 864, Strickland J looked in detail at this concept at paragraphs 153 to 163 of the judgment, referring to several other decisions including Carey.

The decisions support the view put by French J in Carey, that 'a beneficiary who effectively controls the trustee of a discretionary trust may have what approaches a general power and thus a proprietary interest in the income and corpus of the trust'.

It has also been held that control of a trust in the absence of beneficial entitlement is not enough for the assets of a trust to be treated as the assets of the person with control.

In Fletcher & Maloney, Strickland J found that the trust was not the alter ego of the husband even though the husband controlled the trustee company. The trust operated for the benefit of several family members who provided varying degrees of input to the trust. The husband's control of the trustee did not equate to control of the trust.

The Taxpayer is a beneficiary of the trust, and is the spouse of the trustee and appointor. It cannot be concluded that the Taxpayer should be treated as the alter ego of the trust, or that the Taxpayer in any way has control of the assets of the trust.

It is claimed that the decision in Bluebird Investments Pty Ltd & Ors v. Graf & Ors (1994) ACLC 724 (Bluebird) supports his position that the Taxpayer was in a position to control the shares in Company A that were owned by the trust on the date of the 2010 General Meeting.

In that case, Santow J considered words about voting control used in legislation governing corporate structures in the ACT. The words considered were nearly identical to those used in paragraph 83A-35(9)(b) of the ITAA 1997. The difference between being in a position to cast a vote and controlling the casting of a vote was discussed as a present ability versus control test. It was concluded that the former might be satisfied by 'some arrangement falling short of control'. The example given for the purpose of the decision under consideration was that of proxy votes.

This decision does not support the Taxpayer's assertion that the Taxpayer was in a position to control the votes applicable to the shares in Company A held by the trust. The Taxpayer's spouse, as trustee, has control of the assets of the trust and the Taxpayer does not inherit that control because of being the trustee's spouse. In Bluebird, at 282 to 283 Santow J held:

In short, an actual power, revocable or not, legally enforceable or not, to cast more than 50% of the votes does suffice to satisfy the "present ability" alternative, so long as it does not depend on further action of support and is not under the control of another person.

The control of the trust rests with the Taxpayer's spouse, as trustee. As a result, the Taxpayer was not in a position on the date of the 20 General Meeting to cast or to control the casting of the votes of Company A shares held by the spouse as trustee of the trust and therefore not in a position to cast or to control the casting of more than 5% of the maximum number of votes that might be cast at a general meeting of Company A.

This means that paragraph 83A-35(9)(b) of the ITAA 1997 and therefore Subdivision 83A-C of the ITAA 1997 will apply to the rights the Taxpayer acquired under the Plan, and as a result the market value of the rights will be included in assessable income at the deferred taxing point in accordance with section 83A-110 of the ITAA 1997.

Was the Taxpayer in a position to cast or control the casting of votes in respect of shares held as joint trustee of the superannuation fund at the test time?

Having decided that the Taxpayer could not have been in a position to exceed the 5% limit in paragraph 83A-35(9)(b) of the ITAA 1997, there is no need to consider in detail the interests through the superannuation fund and proxy votes. However, the following brief analysis is provided.

The Taxpayer and the spouse are the sole members and trustees of the superannuation fund. The deed or any further detail has not been provided.

As joint trustee, the Taxpayer is not in a position to cast votes in respect of the superannuation fund's interest in Company A as the Taxpayer does not control more than 50% of the votes. A unanimous decision of the two trustees is needed, and it cannot be assumed that the spouse would vote in the same manner as the Taxpayer. Therefore, the Taxpayer is not in a position to control the casting of any of the votes in respect of shares held by the superannuation fund.

It is argued that the superannuation fund is an associate of the Taxpayer so the voting rights attached to Company A shares held by the superannuation fund are deemed to be held by the Taxpayer. This is because the shares in Company A owned by the superannuation fund were acquired as a result of exercising options issued to the superannuation fund by Company A in connection with the Taxpayer's employment.

The options were acquired by the superannuation fund some years ago and were exercised by the superannuation fund to acquire Company A shares before 1 July 2009.

The discount in relation to these options should have been included in the Taxpayer's assessable income under Division 13A of Part III of the ITAA 1936. In accordance with subsection 139C(4) of the ITAA 1936, although the options were granted under an employee share scheme, the shares acquired as a result of exercising the options are not themselves considered to be acquired under an employee share scheme.

Division 83A of the ITAA 1997 applies in relation to ESS interests acquired from 1 July 2009 and to interests acquired prior to 1 July 2009 in certain circumstances specified at section 83A-5 of the Income Tax (Transitional Provisions) Act 1997. Division 83A of the ITAA 1997 does not apply to the Company A shares held by the superannuation fund.

Note 2 to subsection 83A-20(1) of the ITAA 1997 ensures that Division 83A of the ITAA 1997 applies to an individual rather than their associate if the associate acquires an ESS interest in relation to the individual's employment. The use of the present tense in this provision, and in section 83A-305 of the ITAA 1997 about the treatment of ESS interests acquired by associates, indicates that the provisions are intended to apply at the time the ESS interests are acquired.

Nothing in Division 83A of the ITAA 1997 or the supporting explanatory memorandum suggests that the provisions are intended to be used to include the interests of associates acquired in prior years for the purposes of the test at subsection 83A-35(9) of the ITAA 1997.

Consequently, the Taxpayer was not in a position to cast, or control the casting of, any of the votes in respect of Company A shares held by the superannuation fund that might be cast at the 20XX General Meeting.

Were the proxy votes allocated to the Taxpayer for the company A 20XX General Meeting still active at the relevant test time?

In accordance with the voting exclusion statements shown on the agenda for the notice of general meeting of Company A for the 20XX General Meeting, the proxies allocated to the Taxpayer were valid for Resolution 1 and 3. They were not valid for Resolution 2 which was the approval by shareholders of the grant of rights to the Taxpayer, under the Plan.

As the test time is immediately after the rights were acquired by the Taxpayer, and that is likely to be at the time of approval in Resolution 2, the status of the Taxpayer proxy votes at the time of Resolution 3 may determine whether the proxy votes are included for the purposes of paragraph 83A-35(9)(b) of the ITAA 1997.

While this question has not been considered in detail, it is likely that the Taxpayer would be considered to have been in a position, for the purposes of paragraph 83A-35(9)(b) of the ITAA 1997, to control the casting of the proxy votes allocated to him for Resolution 3 of the 20XX General Meeting of Company A.

This view is supported by the decision in Bluebird which was about similar wording to that used in paragraph 83A-35(9)(b) of the ITAA 1997, in the area of corporations law.

It is also interesting to note that proxy votes are specifically dealt with at subsection 609(5) of the Corporations Act 2001 in listing situations that do not give rise to a 'relevant interest' in a security:

A person does not have a relevant interest in securities merely because the person has been appointed to vote as a proxy or representative at a meeting of members, or a class of members, of the company, body or managed investment scheme if:

(a) the appointment is for one meeting only; and

(b) neither the person nor any associate gives valuable consideration for the appointment.

While this provision has no authority when interpreting tax legislation, it is arguable that a proxy vote would be considered to be a 'relevant interest' without this provision, and that this supports the position that the non-binding proxies given to the Taxpayer gave them voting control for the purposes of paragraph 83A-35(9)(b) of the ITAA 1997.

Question 3

Summary

The Commissioner does not agree that as a result of the answers given in respect of Questions 1 and 2 above, Subdivision 83A-C of the ITAA 1997 does not apply, and subsection 83A-B does apply, to the ESS interest constituted by the Taxpayer's Performance Rights.

Detailed reasoning

Subsection 83A-105(1) of the ITAA 1997 states that Subdivision 83A-C applies, and Subdivision 83A-B does not apply, to an ESS interest in a company if:

(a) Subdivision 83A-B would, apart from this section, apply to the interest, and

(b) subsections 83A-35(3), (4), (5) and (9) apply to the interest, and

(c) if the interest is a beneficial interest in a share:

(i) subsection (2) of this section applies to the interest, and

(ii) subsection (3) or (4) applies to the interest, and

(d) if the interest is a beneficial interest in a right to acquire a beneficial interest in a share - subsection (3) applies to the interest.

For the reasons provided above, the condition mentioned in paragraph 83A-105(1)(b) of the ITAA 1997 is met. Therefore, Subdivision 83A-C applies, and Subdivision 83A-B does not apply to the ESS interest constituted by the Taxpayer's Performance Rights.