Edited version of your private ruling

Authorisation Number: 1012500243807

Ruling

Subject: Employee Share Trust

Question 1

Will the contributions 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 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 proceeds received by the trustee from the sale of investments be taken into account in calculating the trustee's net capital gain under Division 102 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

(ii) 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

(iii) 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

(iv) 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 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 7

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 not affected by the outcome of the ruling

Question 8

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

Answer:

No

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 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 your assessable income any income according to ordinary concepts that you 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. As such, these contributions are 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 in 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 proceeds received by the trustee from the sale of investments be taken into account in calculating the trustee's net capital gain under Division 102 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

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

Under section 102-20 of the ITAA 1997, the trustee can make a capital gain or capital loss if and only if a CGT event happens. The capital gain or loss is made at the time of the event.

Under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if the trustee disposes of a CGT asset. Subsection 104-10(2) provides that the trustee disposes of a CGT asset if a change of ownership occurs from the trustee to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if the trustee stops being the legal owner of the asset but continues to be its beneficial owner. .

Under subsection 108-5(1) of the ITAA 1997 a CGT asset is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

The trustee makes a capital gain if the capital proceeds from the disposal of that asset exceed its cost base, and the trustee make a capital loss if the capital proceeds are less than the reduced cost base of the asset (subsection 104-10(4) of the ITAA 1997).

Where the trustee disposes of those investments that are a CGT asset, the proceeds received by the trustee from the disposal will be taken into account in calculating the trustee's net capital gain under Division 102 of the ITAA 1997.

(ii) 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:

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 because a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

Under subsection 108-5(1) of the ITAA 1997 a CGT asset is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

Where the trustee disposes investments, which have been allocated to share units of the employee, that disposal results in the happening of a CGT event A1 under Division 104 of the ITAA 1997.

(iii) 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 if a CGT event happens to you.

As stated above, under section 104-10 of the ITAA 1997, CGT event A1 occurs 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 the legal owner of the shares, the CGT event has happened to the trustee, 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 the trustee's net capital gain.

(iv) 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 you have chosen that the cost base include indexation.

In your case, the capital gain will be made by a trust, after 21 September 1999, with respect of a CGT asset that you hold for at least 12 months. Unless you elect to index the cost base of the Shares, then any capital gain you make 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 your 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 your 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 your case, presuming that you do 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 you will be assessed on the entire capital gain amount.

Question 6

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 became 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 7

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 not affected by the outcome of the ruling

Question 8

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

Answer:

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 you.