Edited version of your private ruling

Authorisation Number: 1012498974924

Ruling

Subject: Employee Share Unit Trust

Question 1

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

Answer:

No

Question 2

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

Answer:

No

Question 3

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

Answer:

Yes

Question 4

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

Answer:

Yes

Question 5

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

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

Answer:

Yes.

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

Answer:

Yes.

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

Answer:

Yes.

Question 6

Will the transfer of an allocated share to the unallocated share account by the trustee constitute a CGT event under Division 102 of the ITAA 1997?

Answer:

No

Question 7

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

Answer:

No

Question 8

Will the general anti-avoidance provisions under section 67 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) apply to the scheme described?

Answer:

Decline to rule - the trustee's liability to fringe benefits tax is not affected by the outcome of the ruling.

Question 9

Will the general anti-avoidance provisions under Part IVA of the ITAA 1936 apply to the scheme described?

Answer:

No

This ruling applies for the following periods:

Income Tax Year ended 30 June 2013

Income Tax Year ended 30 June 2014

Income Tax Year ended 30 June 2015

Fringe Benefits Tax year ended 31 March 2013

Fringe Benefits Tax year ended 31 March 2014

Fringe Benefits Tax year ended 31 March 2015

Relevant facts and circumstances

The employer entity intends to implement a long-term equity plan for the purpose of providing a long-term equity incentive structure to deliver equity based benefits to employees selected by the board of the employer entity.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 67

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Subsection 99A(4A)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Division 102

Income Tax Assessment Act 1997 Subsection 102-5(1)

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(1)

Income Tax Assessment Act 1997 Subsection 104-10(2)

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

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Subsection 109-5(2)

Income Tax Assessment Act 1997 Subsection 114-5(2)

Income Tax Assessment Act 1997 Division 115

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 Paragraph 115-215(3)(b)

Income Tax Assessment Act 1997 Paragraph 115-215(4)(a)

Income Tax Assessment Act 1997 Paragraph 115-222(4)(b)

Income Tax Assessment Act 1997 Subsection 115-225(1)

ATO view documents

CGT Determination Number 40

Reasons for decision

Question 1

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

Answer:

Section 95 of the ITAA 1936 defines the 'net income of the trust estate' as the total assessable income of the trust, calculated as if the trust were a taxpayer in respect of that income, less all allowable deductions.

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

Contributions of money from the employer to the trustee pursuant to the trust deed constitute capital receipts to the trustee, and are therefore not considered to be income according to ordinary concepts. These contributions are thus not included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936.

Question 2

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

Answer:

As stated above, section 95 of the ITAA 1936 defines the 'net income of the trust estate' as the total assessable income of the trust, calculated as if the trust were a taxpayer in respect of that income, less all allowable deductions.

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

Loans made by the employer to the trustee pursuant to the trust deed constitute capital receipts to the trustee, and are therefore not considered to be income according to ordinary concepts. As such, the contributions are not included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936.

Question 3

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

Answer:

As stated above, section 95 of the ITAA 1936 defines the 'net income of the trust estate' as the total assessable income of the trust, calculated as if the trust were a taxpayer in respect of that income, less all allowable deductions.

Section 44 of the ITAA 1936 includes in the assessable income of a shareholder in a company dividends that are paid to the shareholder by the company out of profits derived by it from any source.

If dividends and other income are received by the trustee, those amounts are included the trustee's calculation of the net income for a year of income under section 95 of the ITAA 1936.

Question 4

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

Answer:

Subsection 99A(4A) of the ITAA 1936 states that, where there is part of the net income of the trust estate of a trust that:

(a) is not included in the assessable income of a beneficiary under section 97 of the ITAA 1936;

(b) is not assessed to the trustee under section 98 of the ITAA 1936; and

(c) does not represent income attributable to sources out of Australia and a period in which the relevant beneficiary was not a resident of Australia;

the trustee of the trust estate is liable to pay tax on that part of the net income.

As such, in circumstances where there is a part of the net income of the trust to which no beneficiary is presently entitled, the trustee will be assessed and liable to pay tax on that part of the net income of the trust.

Question 5

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

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

Answer:

Under section 104-10 of the ITAA 1997, CGT event A1 occurs if you dispose of a CGT asset.

You have advised that, in circumstances where the shares in the Employer are to be sold to a third party entity or to the Employer, then under Subclause 16.5(b) of the Trust Deed you are entitled to sell the shares to the third party entity insofar as you are acting in accordance with the direction of the Employee.

In these circumstances, the relevant assets being sold to the third party are the shares in the Employer, as allocated to the Units of the Employee. The Units themselves are not being sold to the third party, but rather the underlying assets which are legally held by you.

Upon selling the shares to the third party, you will be disposing of a CGT asset of the trust. As such, CGT event A1 will apply to the sale of the shares.

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

Answer:

Subsection 102-5(1) of the ITAA 1997 provides that your assessable income includes your net capital gain, if any, for an income year.

Under section 102-20 of the ITAA 1997, you can make a capital gain or a capital loss a CGT event happens.

As stated above, under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. You make a capital gain if the capital proceeds from the disposal of that asset exceed its cost base, and you make a capital loss of the capital proceeds are less than the reduced cost base of the asset.

As further stated above, we consider that CGT event A1 has occurred where you sell the shares legally owned by the trust to a third party or to the Employer.

As the legal owner of the shares, the CGT event has happened to you, and as such subsection 102-5(1) of the ITAA 1997 will apply to include any capital gain arising from the sale of the shares in your net capital gain.

We note, however, that Subdivision 115-C of the ITAA 1997 provides rules for the allocation and assessment of trust capital gains to beneficiaries. Subdivision 115-C will need to be taken into account when determining the tax implications of capital gains for both you and the Employee, who is the Unit Holder

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

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.

Paragraph 115-215(3)(b) states:

If you are a beneficiary of a trust estate, for each capital gain of the trust estate, Division 102 applies to you as if you had:

…

(b) if the capital gain was reduced under either step 3 of the method statement or Subdivision 152-C but not both… - a capital gain equal to twice the amount mentioned in subsection 115-215(1)…

However, paragraph 115-215(4)(a) states:

For each capital gain of yours mentioned in paragraph (3)(b) or (c):

(a) if the relevant trust gain was reduced under step 3 of the method statement in subsection 102-5(1) - Division 102 also applies to you as if your capital gain were a discount capital gain, if you are the kind of entity that can have a discount capital gain

Step 3 of the method statement in subsection 102-5(1) of the ITAA 1997 states that an entity should reduce any discount capital gains by the discount percentage. These terms are defined in Division 115 of the ITAA 1997.

To be a discount capital gain, a capital gain must have been made by a certain type of entity (including an individual or trust), on a CGT event which occurs after 21 September 1999, in relation to a CGT asset that was acquired 12 months prior to the CGT event and that does not have an indexed cost base.

Under subsection 114-5(2), indexation is not relevant to a capital gain which occurred after 21 September 1999 unless the trustee have chosen that the cost base include indexation.

In the trustee's case, the capital gain will be made by a trust, after 21 September 1999, with respect of a CGT asset that the trustee holds for at least 12 months. Unless the trustee elects to index the cost base of the shares, then any capital gain the trustee makes will be a discount capital gain.

When the capital gain is applied to the employee as beneficiary of the trust, paragraph 115-215(3)(b) of the ITAA 1997 will apply to double the amount of the discount capital gain to which the employee is presently entitled as a share unit holder. The employee is then entitled to apply their own discount percentage as per paragraph 115-215(4)(a) of the ITAA 1997.

In effect, the capital gain is assessed to the employee as presently entitled beneficiary at the rate as if it were not a discount capital gain. The capital gain is then treated as a discount capital gain in the hands of the employee.

Tax treatment of Capital Gains which are assessed to the trustee

Paragraph 115-222(4)(b) of the ITAA 1997 states:

For each capital gain of the trust estate, increase the amount (the assessable amount) in respect of which you are liable to be assessed (and pay tax) under section 99A of the Income Tax Assessment Act 1936 in relation to the trust estate by:

…

(b) if the capital gain was reduced under either step 3 of the method statement or Subdivision 152-C but not both (even if it was further reduced by the other small business concessions) - twice the amount mentioned in subsection 115-225(1).

Subsection 115-225(1) of the ITAA 1997 states that the amount of a trust's attributable gain is the amount of capital gain remaining under the first four steps in subsection 102-5(1) multiplied by the trustee's share of the capital gain. As the third step of the method statement in subsection 102-5(1) states that a discount capital gain is to be applied, then the trustee's attributable gain includes the discount percentage.

As such, paragraph 115-222(4)(b) applies to remove the benefit of the CGT discount where a capital gain is assessed to the trustee of the trust where no beneficiary is presently entitled to that gain.

In the trustee's case, presuming that the trustee does not choose to index the cost base of the shares, then the capital gain on the sale of the shares will be a discount capital gain. However, under paragraph 115-222(4)(b) of the ITAA 1997, the benefit of the discount will be removed and the trustee will be assessed on the entire capital gain amount.

Question 6

Will the transfer of an allocated share to the unallocated share account by the trustee constitute a CGT event under Division 102 of the ITAA 1997?

Answer:

Subsection 102-5(1) of the ITAA 1997 provides that your assessable income includes your net capital gain, if any, for an income year.

Under section 102-20 of the ITAA 1997, you can make a capital gain or a capital loss if and only if a CGT event happens.

Under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. You make a capital gain if the capital proceeds from the disposal of that asset exceed its cost base, and you make a capital loss of the capital proceeds are less than the reduced cost base of the asset.

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

A CGT asset is defined in section 108-5 of the ITAA 1997 as any kind or property, or a legal or equitable right that is not property (paragraphs 108-5(1)(a) and (b) of the ITAA 1997). Note 1 in section 108-5 lists examples of CGT assets and shares in a company and units in a unit trust are specifically listed.

Taxation Determination TD 2000/32 sets out the Commissioner of Taxation's view as to the relevant asset for CGT purposes under a unit trust. TD 2000/32 states:

1. Yes. The unit in the unit trust is the relevant CGT asset irrespective of any interest the unit holder has in the property of the unit trust.

2. The scheme of the Income Tax Assessment Act 1997 is to treat units in a unit trust as the relevant asset for capital gains purposes rather than any interest a unit holder might have in the underlying property of the unit trust. Note 1 to section 108-5 specifically identifies units in a unit trust as examples of CGT assets.

In your case, you have advised that you would receive proceeds from the 'sale' of the shares that you acquired in the Employer in circumstances where the Employee instructs you to cancel his/her Units. In this case, it could be said that the Employee has instructed you to transfer his/her beneficial ownership in the underlying shares to you. As such, it could be said that you, on behalf of the Employee, has sold the Employee's interest in the shares to you in your capacity as trustee.

However, in the Commissioner's view, the relevant asset for the purposes of the CGT legislation is the Units themselves and not the underlying shares attached to those Units.

Under the Trust Deed, you are required to cancel some or all of the Units held by the Employee if their employment ends, or if they request such a cancellation in writing.

We consider that the redemption of Units by you will represent a cancellation of those Units, and each cancellation will constitute CGT event C2 under section 104-25 of the ITAA 1997. The ensuing capital gain or capital loss will be assessed to the Unit Holder as beneficial owner of the Units.

It is the Commissioner's view that there will be no corresponding CGT event that occurs to the underlying shares.

As such, any proceeds from the 'sale' of the shares will not be taken into account in determining your net capital gain under Division 102 of the ITAA 1997.

Question 7

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

Answer:

Under section 109-5 of the ITAA 1997, the trustee acquires an asset when the trustee becomes its owner. Subsection 109-5(2) of the ITAA 1997 sets out specific rules relating to the time at which the trustee acquires something under relevant CGT events. We note that there is no specific acquisition rule for CGT event C2.

The Commissioner of Taxation has issued CGT Determination Number 40, which sets out the Commissioner's view of the capital gains treatment of units in a unit trust upon redemption. CGT Determination Number 40 states that there is no acquisition of share units in the trust by the trustee at the time of redemption of the share units as the share units are extinguished when redeemed.

As such, the cancellation of the employee's share units will not constitute an acquisition of the cancelled share units by the trustee under section 109-5 of the ITAA 1997.

Question 8

Will the general anti-avoidance provisions under section 67 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) apply to the scheme described?

Answer:

Decline to rule - the trustee's liability to fringe benefits tax is not affected by the outcome of the ruling.

Question 9

Will the general anti-avoidance provisions under Part IVA of the ITAA 1936 apply to the scheme described?

Answer:

No

Provided that the scheme as implemented is materially identical to the scheme described in this ruling, it is considered that Part IVA of the ITAA 1936 would not apply in respect of the trustee.