Edited version of your written advice

Authorisation Number: 1013077238711

Date of advice: 1 September 2016

Ruling

Subject: Company A Group Limited Performance Rights Plan

Question 1

Will the irretrievable contributions made pursuant to the Company A Performance Rights Plan (Plan) to Trust Co (Trustee), as trustee of the Company A Group Performance Share Plan Trust (Trust), to fund the acquisition of ordinary shares in Company A (Company A shares) by the Trustee in accordance with the Company A Group Performance Share Plan Trust Trust Deed, be assessable income of the Company A Trust under sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) thereby forming part of the net income of the Trust pursuant to Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Will a capital gain or capital loss that arises for the Trustee of the Trust at the time the Participants become absolutely entitled to Company A shares under the Plan be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Company A shares for the same or less than the cost base of the Company A shares in the hands of the Trustee?

Answer

Yes.

Question 3

Will dividend income received by the Trustee in respect of Performance Shares that have been allocated but not yet transferred to, a Trust Participant, be included in the calculation of the net income of the Trust pursuant to section 95 of the ITAA 1936?

Answer

Yes.

Question 4

Will dividend and other income received by the Trustee in respect of Unallocated Shares be included in the calculation of the net income of the Trust pursuant to section 95 of the ITAA 1936?

Answer

No.

Question 5

Will the net income of the Trust under section 95 of the ITAA 1936 be assessed to the Trustee pursuant to section 99A of the ITAA 1936 to the extent that the net income relates to income derived from the Unallocated Shares?

Answer

Yes.

Question 6

Will the Trustee be entitled to franking credits under Subdivision 207-B of the ITAA 1997 that are attached to franked distributions made to the Trustee in respect of Unallocated Shares?

Answer

Yes, provided that section 207-150 (which provides that no gross-up or tax offset is available where the imputation system has been manipulated) is not satisfied.

This ruling applies for the following periods:

Income tax year ending 30 June 2017

Income tax year ending 30 June 2018

Income tax year ending 30 June 2019

Income tax year ending 30 June 2020

Income tax year ending 30 June 2021

Relevant facts and circumstances

Company A is the parent company of an economic group of companies that carry on business in Australia and overseas (Company A Group). For Australian taxation purposes, Company A only acts as the head entity of a tax consolidated group (Company A Group tax consolidated group) and has no employees. Company B is a member of the Company A Group Group by virtue of being a wholly owned subsidiary of Company A and it is also a member of the Company A Group tax consolidated group.

Company A has settled and established an employee share trust, the Company A Group Group Performance Share Plan Trust (Trust), for the purposes of administering the Company A Group Group Performance Share Plan (Plan). The Plan is operated pursuant to the Company A Performance Rights Plan Rules.

The Trust was established pursuant to the Company A Group Group Performance Share Plan Trust Trust Deed) and entered into between Company A and Trustee Company. Trust Co, an independent company, is the current trustee of the Company A Group Trust (Trustee) and has replaced Trustee Company.

The Plan

The Company A Group Group established the Plan as part of its reward and retention policy for certain employees of Company B. The Plan has been implemented as part of Company A’s long-term strategy of creating shareholder wealth by:

● rewarding the hard work of senior executives and selected employees in a way that is competitive, market related and cost-effective;

● motivating senior executives and selected employees through direct alignment of the Company A Group Group’s success and personal financial interests;

● promoting the long-term retention, reflecting the importance of senior executives and selected employees to the future success of the Company A Group Group; and

● attracting new executive talent to achieve the Company A Group Group’s strategy.

Employees of Company B, who are Eligible Executives as defined in clause 1.1 of the Plan Rules and who choose to participate in the Plan by accepting an offer of Performance Rights, become and are referred to as Participants under the Plan. A Performance Right represents a right to acquire one Performance Share, which is defined in the Plan Rules as being a fully paid ordinary share in the capital of Company A (Company A Group share) that has been allocated to the Participant pursuant to the terms of the Plan.

An Unallocated Share is defined in the Trust Deed as a Company A Group share held by the Trustee pursuant to the Trust Deed which has not been allocated to a Participant.

Ultimately Participants, through the Company A Group Group’s business operation, directly generate assessable Australian income for the Company A Group tax consolidated group.

The Plan was funded by a notional initial settlement amount from Company A to the Trust, and has since been funded by periodic irretrievable contributions made to the Trust by Company A and Company B, as and when required.

It is proposed that contributions will be made to the Trust in the 2017 income year and subsequent income years as follows:

● funds transferred to the Trust by Company A or Company B must only be used to acquire Company A shares for the purposes of administering the Plan;

● the amount of funds transferred to the Trust will be determined based on an estimated forecast following a review of the quantum of outstanding unvested Performance Rights, together with consideration of the likelihood of rights vesting to determine if the Trust holds sufficient Company A shares to satisfy future potential vesting;

● management will review these forecasts and periodically provide recommendations to the Board (as defined in the Plan Rules) to ensure the Trust is properly funded;

● the Board will provide guidance to the Trustee on how the Trustee should acquire the Company A shares whether by way of on-market purchase or subscription; and

● The Trustee will then consider the Board’s instructions and having regard to its broader obligations under the Trust Deed and under trust law will then act accordingly.

The amount of the contributions made to the Trust will depend on:

● the estimated forecast of the Performance Rights vesting; and

● the number of Company A shares held at that time by the Trustee.

The Trust

The Trust was established for the purpose of obtaining and administering Performance Shares for the benefit of employees participating in the Plan.

It is also intended that the Trust will be available to facilitate the requirements of any future equity plans that the Company A Group may implement.

The Company A Group’s reasons for implementing the Plan via the Trust include:

● the Trust assures Participants that the Performance Shares and any incidental dividend income or associated rights are held independently of the Company A Group and the Trustee has a fiduciary obligation to act in the interest of its beneficiaries, that is, employees of the Company A Group;

● the Trust enables the acquisition of Performance Shares, either on-market or by subscribing in accordance with the Company A Group’s preferred timeline;

● The Company A Group can manage its costs and share capital position by having the Trust acquire Performance Shares before the vesting criteria has been tested and satisfied and the Participants become entitled to the shares. If the vesting criteria following testing is not met, the Trust can reallocate the Performance Shares to future grants;

● the Trust provides the opportunity to improve cash flow planning as either Company A or Company B can, if desired, make contributions to the Trust periodically throughout the vesting period. This provides the Company A Group with the flexibility to determine the most appropriate time to make contributions;

● the Trust is the most appropriate vehicle to acquire Performance Shares and accumulate dividend income during the vesting period, thus assisting the Company A Group to meet the costs of the Plan;

● the Trust enables easier administration of the Plan.

Contributions to the Trust will be made by either Company A or Company B depending on the commercial position of the Company A Group at the time.

The Trustee’s actions to purchase Company A shares on market, or subscribe for new Company A shares in Company A, will take into consideration the Corporations Act requirements and the Trustee Act 1925 (NSW) requirements (clause 4.1 of the Trust Deed) and at all times the Trustee will make decisions in accordance with the terms of the Trust Deed and the rules of the Plan (clauses 2.2 and 2.3 of the Trust Deed) and in fulfilment of the Trustee’s fiduciary duties to the beneficiaries.

The Plan Rules

The Plan Rules, together with the Trust Deed, set out the requirements and circumstances under which Company A can issue Performance Rights to Participants, as well as the Trustee’s rights and obligations in administering the Company A Trust in execution of the Plan. The key attributes of the Plan are as follows:

● no member of the Company A Group will have any legal or beneficial entitlement to any of the Company A shares forming part of the Company A Trust fund at any time, and may not acquire such an interest (clause 3.6 of the Trust Deed);

● the Trust funds ( both the initial settlement and any additional contributions made) cannot be refunded, repaid or returned to any Company A Group company, other than by way of the Trustee paying the issue price where it subscribes for Company A shares (clause 3.6 of the Trust Deed);

● Performance Rights are granted to Participants by the Board in its absolute discretion and upon such terms and Performance Conditions, as defined in the Plan Rules, as the Board determines (clause 2.1 of the Plan Rules);

● all Performance Rights are subject to the satisfaction of vesting conditions (i.e. the Performance Conditions as defined in the Plan Rules), which can include time-based and/or financials-based requirements. It is noted that the time-based conditions used by the Company A Group includes a vesting period that exceeds 12 months from the date the Performance Rights are granted;

● the Trustee has the authority to acquire Company A shares, as instructed by Company A, for the purpose of satisfying grants made pursuant to the Plan Rules by way of an on-market purchase or subscription, or through a combination of both (clause 5.2 of the Trust Deed);

● the Trustee can, if required, acquire and hold Company A shares as Unallocated Shares i.e. shares which are not allocated to a Participant and to which that Participant has no beneficial entitlement at the time of purchase;

● the Trustee has the discretion to use any capital receipts, dividends, distributions or other entitlements received in respect of any Unallocated Shares to acquire more Company A shares to allocate to Participants, or to distribute the entitlements to beneficiaries of the Company A Trust prior to final allocation of those shares (clause 4.6 of the Trusts Deed);

● to the extent that there is no one presently entitled to the income of the Company A Trust the Trustee will pay tax on this income;

● once the Performance Conditions have been met, Participants have 30 days to exercise their Performance Rights i.e. convert those rights into Performance Shares, otherwise the rights will automatically lapse unless determined otherwise by the Board (clause 5.2);

● the amount payable upon vesting and exercise of a Performance Right is nil;

● upon exercise of a Performance Right a Participant becomes absolutely entitled to the ownership of that Performance Share and all other benefits or privileges attaching to it, including dividends (clause 3.5 of the Trust Deed);

upon exercise of Performance Rights the Trustee transfers ownership of the requisite number of Performance Shares to the Participants ‘as soon as reasonably practicable’ (clause 6.1 of the Trust Deed);

Participants are prevented from disposing of Performance Shares in accordance with the disposal restrictions listed below, and this is achieved by way of ASX trading lock placed on the relevant shares;

Performance Shares held in the Trust on behalf of a Participant i.e. before transfer of those shares to the Participant following exercise, are registered in the name of the Trustee. This will continue until either transfer of legal title to the Participant in accordance with the Trust Deed (clause 6.1 and 6.2) or disposal on behalf of the Participant in accordance with clause 6.3;

Transfer of legal title to a Performance Share (i.e. to the Participant or his or her personal representative (as the case may be) – see clause 5.1 of the Plan Rules), can only occur upon the date when one of the following events occurs:

transfer of legal title is required or permitted under the Plan Rules

the Trust is terminated

the Board exercises its discretion to transfer legal title to the Participant

the Participant terminates employment or

the Participant instructs the Trustee to sell the Performance Shares as allowed under the Plan Rules; and

Pursuant to clause 5.5 of the Plan Rules a trading lock applies to the Performance Shares in that a Participant is not entitled to trade in Performance Shares without the prior written consent of the Board until the earlier of:

● 3 years after the date from which the Performance Share is issued or transferred to the Participant or held by the Trustee on behalf of the Participant;

● 12 months after the date the Participant ceases to be employed by a Company A Group company; or

● such another date as the Board determines.

The applicant states that other than in the event of cessation of employment referred to above, where the disposal restriction is 12 months after the date of cessation of employment, the Board will only provide written consent for the disposal of Performance Shares prior to completion of the 2 year (or 3 year, depending on the date of grant) period in exceptional circumstances, such as when a Participant has severe and unforseen medical or financial related issues, and not on a routine basis.

Lapsing of Performance Rights

Each unvested Performance Right will lapse on the earlier of:

● the expiry of the exercise period (unless otherwise determined by the Board);

● the date the Participant ceases employment with a Company A Group company (unless otherwise determined by the Board);

● the date specified by the Board that they will lapse;

● the date a Participant purports to transfer the Performance Right without the written consent of the Board;

● failure to meet the performance condition in the prescribed period;

● the 10th year anniversary of the date of grant of the Performance Right; and

● the Board determining that a participant acted fraudulently or dishonestly or in breach of their obligations to an Company A Group company.

Where the Board has discretion in relation to the lapsing of unvested Performance Rights it will only exercise that discretion in exceptional circumstances, and not on a routine basis.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 subsection 95(1)

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 former section 160APHO

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 6-10(1)

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 subsection 44(1)

Income Tax Assessment Act 1997subsection 67-25(1)

Income Tax Assessment Act 1997 subsection 67-25(1B)

Income Tax Assessment Act 1997 Division 83A

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

Income Tax Assessment Act 1997 subsection 83A-10(2)

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 subsection 130-85(4)

Income Tax Assessment Act 1997 paragraph 130-85(4)(a)

Income Tax Assessment Act 1997 paragraph 130-85(4)(b)

Income Tax Assessment Act 1997 paragraph 130-85(4)(c)

Income Tax Assessment Act 1997 section 130-90

Income Tax Assessment Act 1997 subsection 130-90(1)

Income Tax Assessment Act 1997 subsection 130-90(2)

Income Tax Assessment Act 1997 Division 207

Income Tax Assessment Act 1997 Subdivision 207-B

Income Tax Assessment Act 1997 subsection 207-5(1)

Income Tax Assessment Act 1997 subsection 207-5(2)

Income Tax Assessment Act 1997 subsection 207-5(4)

Income Tax Assessment Act 1997 section 207-25

Income Tax Assessment Act 1997 section 207-35

Income Tax Assessment Act 1997 subsection 207-35(5)

Income Tax Assessment Act 1997 subsection 207-35(6)

Income Tax Assessment Act 1997 section 207-50

Income Tax Assessment Act 1997 subparagraph 207-50(4)(b)(ii)

Income Tax Assessment Act 1997 section 207-55

Income Tax Assessment Act 1997 subsection 207-150(1)

Reasons for decision

Question 1

Section 95 in Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936), defines net income in relation to a trust as follows, insofar as it is relevant:

net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, …

Subsection 6-5(1) states:

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Further, subsection 6-10(1) states:

Your assessable income also includes some amounts that are not ordinary income.

Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5.

None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, irretrievable contributions made by Company A or Company B to the Trustee will not be assessable income under section 6-10. They will only be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936 if they are assessable as income according to ordinary concepts under section 6-5.

Section 6-5 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 gave the classic definition of “income” in Australian law. Chief Justice Jordan considered that:

The word “income” is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts.

The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). The decision states that:

The fundamental relation of “capital” to “income” has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being “derived” that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description.

In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient’s purpose in engaging in the transaction, venture or business.

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

The Trustee must acquire Company A shares to enable Company A to satisfy its obligations under the terms of the Plan. Company A must provide, or procure for the Trustee, all the funds required to enable it to subscribe for, or acquire those Company A shares (clause 5.1 of the Trust Deed).

The Trust funds (both the initial settlement and any additional contributions made) cannot be refunded, repaid or returned to any Company A Group company, other than by way of the Trustee paying the issue price where it subscribes for Company A shares. In addition, clause 3.6 of the Trust Deed provides that no company in the Company A Group can benefit from the Trust Fund (as defined in the Trust Deed). This means that no member of the Company A Group will have any legal or beneficial entitlement to any of the Company A shares forming part of the Company A Trust fund at any time and may not acquire such an interest, nor will they be entitled to any contributions received by the Trustee. The Trustee must apply the funds received to the acquisition or subscription of Company A shares under the Deed and the Plan. No Participant is entitled to receive such funds from the Trustee. The contributions will therefore not be assessable as ordinary income under section 6-5 as they constitute receipts of a capital nature to the Trustee.

Question 2

When a Participant in the Plan becomes absolutely entitled to the Company A shares (and more specifically the Performance Shares) as against the Trustee, CGT Event E5 will occur and under section 104-75 the Trustee will make a capital gain or loss. However, section 130-90 may operate to disregard that gain or loss where specified conditions are satisfied.

Section 130-90

Section 130-90 relevantly states:

Shares held to satisfy the future exercise of rights acquired under employee share schemes

130-90(1)

Disregard any capital gain or capital loss made by an employee share trust, or a beneficiary of the trust, to the extent that it results from a CGT event, if:

(a) the CGT event is CGT event E5 or E7; and

(b) the CGT event happens in relation to a share; and

(c) the beneficiary had acquired a beneficial interest in the share by exercising a right; and

(d) the beneficiary's beneficial interest in the right was an ESS interest to which Subdivision 83A-B or 83A-C (about employee share schemes) applied.

130-90(2)

Subsection (1A) or (1) does not apply if the beneficiary acquired the beneficial interest in the share for more than its cost base in the hands of the employee share trust at the time the CGT event happens.

Employee share trust

Subsection 130-85(4) states:

An employee share trust, for an employee share scheme, is a trust whose sole activities are:

(a) obtaining shares or rights in a company; and

(b) ensuring that ESS interests in the company that are beneficial interest in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of:

(i) the company; or

(ii) a subsidiary of the company; and

(a) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b).

Paragraphs 130-85(4)(a) and (b)

The beneficial interest in a Performance Share received by a Participant when an ordinary share in Company A is granted to them under the terms of the Deed is an ESS interest within the meaning of subsection 83A-10(1). Subsection 83A-10(2) defines an employee share scheme as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees’ employment.

The Plan is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme that provides rights (Performance Rights) to acquire beneficial interests in ordinary shares in Company A to Company B employees in relation to the employee’s employment.

Company A has established the Trust to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests (Performance Rights) acquired by those employees under the Plan. A beneficial interest in a Performance Share is itself provided under an employee share scheme because it is provided under the same scheme under which the Performance Rights and are provided to Participants in relation to their employment, being an employee share scheme as defined in subsection 83A-10(2).

Paragraphs 130-85(4)(a) and (b) are therefore satisfied because:

● the Trust acquires shares in a company, namely Company A; and

● the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust Deed and the Plan.

Paragraph 130-85(4)(c)

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the Plan.

ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c):

● the opening and operation of a bank account to facilitate the receipt and payment of money;

● the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee;

● the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme;

● dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme;

● the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares;

● the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and

● receiving and immediately distributing shares under a demerger.

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental.

Clause 3.3 of the Deed states that the ‘..Trustee acknowledges, declares and agrees with the Company that it will hold the Trust Fund on trust for Trust Participant’s in accordance with this Deed and the Rules of the Plan.’.

Clause 4.2(m) further states that Trustee has power to ‘…generally do all other acts and things which the Trustee considers necessary or expedient for the administration, maintenance and preservation of the Trust and in performance of the Trustee’s obligations under this Deed and the Rules of the Plan.’.

Paragraph 130-85(4)(c) is satisfied as any activities undertaken by the Trustee other than the acquisition of Company A shares and the allocation of those shares to the employees in accordance with the Deed and Plan Rules are merely incidental to operation of the Plan.

The Trust satisfies the definition of an employee share trust in subsection 130-85(4) as:

● the Trust acquires shares in a company (being Company A);

● the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trus Deed and Plan Rules; and

● the Trust Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to the function of administering the Trust.

Paragraph 130-90(1)(a)

CGT event E5 is the CGT event that will apply under the terms of the Plan at the time the Participant becomes absolutely entitled to the Performance Shares as against the Trustee. Therefore paragraph 130-90(1)(a) will be satisfied.

Paragraph 130-90(1)(b)

Subsection 995-1(1) defines a share in a company to mean a share in the capital of a company. An ordinary share in Company A held by the Trustee and to which a Participant is entitled upon vesting or exercise of a Performance Right is a share in the capital of a company (i.e. Company A). Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph.

Paragraph 130-90(1)(c)

Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a share (in Company A) by vesting or exercising of a Performance Right provided under the Plan.

Paragraph 130-90(1)(d)

Subsection 83A-20(1) of Subdivision 83A-B states:

This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

Subsection 83A-10(2) defines an employee share scheme as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees’ employment.

The Plan is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme that provides rights (Performance Rights) to acquire beneficial interests in ordinary shares in Company A to employees in relation to the employee’s employment. Each Performance Right is acquired for no cost.

Subdivision 83A-B will apply to the Performance Rights provided under the Plan as pursuant to subsection 83A-20(1) the ESS interests (i.e. Performance Rights issued under the Plan) will be acquired under an employee share scheme (for the reasons stated in the immediately preceding paragraph) at a discount. It should be noted however that whether a Participant is ultimately taxed upfront on some or all of any discount received (under Subdivision 83A-B) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C), will depend on which of the additional requirements in Subdivision 83A-B or Subdivision 83A-C have been satisfied. Under either circumstance paragraph 130-90(1)(d) will be satisfied.

Accordingly, all the conditions in subsection 130-90(1) have been satisfied.

Provided a Participant does not acquire the beneficial interest in the Company A share for more than its cost base in the hands of the Trustee at the time that CGT event E5 happens, subsection 130- 90(1) will apply.

Under these circumstances, section 130-90 operates to disregard any capital gain or loss made by the Trustee on any Company A share when a Participant becomes absolutely entitled to that share.

CGT Event E7 and A1

Subsection 104-85(1) provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary’s interest, or part of it, in the trust capital.

Similarly, CGT event A1 happens when you dispose of a CGT asset.

However, section 106-50 provides that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), Part 3-1 and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

A Participant, on allocation of the Company A shares by the Trustee, becomes absolutely entitled to those shares. In accordance with clauses 3.5(b) and 7 of the Deed each Participant is absolutely entitled to any Company A shares held by the Trustee on their behalf once allocated, and is entitled to the same rights in respect of those shares as if he or she was the legal owner of the shares (subject to the Plan).

Once a Participant is absolutely entitled to the Company A shares held on their behalf by the Trust (and a CGT event, namely CGT event E5, has already occurred) section 106-50 will deem the disposal of the Company A shares by the Trustee to be done by the Participant.

Therefore, section 106-50 will apply such that, if the Trustee disposes of the Company A shares under the Plan (by way of transfer to a Participant), the Trustee will not make a capital gain or capital loss under CGT Event E7 or CGT event A1.

Question 3

Subsection 95(1) of the ITAA 1936 states:

net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions,..

Subsection 44(1) states that the ‘...assessable income of a shareholder in a company…includes:… if the shareholder is a resident:…(i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source;…’.

Therefore, if dividends and other income are received by the Trustee in respect of Performance Shares it holds on behalf of a Participant, those amounts are to be included in the Trustee’s calculation of its net income for a year of income under section 95 of the ITAA 1936.

Section 97 of the ITAA 1936 then details how income is to be assessed where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate.

Accordingly, while the operation of section 97 of the ITAA 1936 will (given that pursuant to clause 3.5 of the Trust Deed upon exercise of a Performance Right a Participant becomes absolutely entitled to the ownership of that Performance Share and all other benefits or privileges attaching to it, including dividends) include that part of any Trust income to which a beneficiary (Participant) is presently entitled to be assessable to the beneficiary and not the Trustee, the present entitlement of the Participant to the Performance Shares does not remove, as a starting point, the dividend income from the net income of the Trust estate as defined in subsection 95(1) of the ITAA 1936.

As such, if dividends are received by the Trustee in relation to Performance Shares that are allocated in the Trust to a Participant but not yet transferred to them , those amounts will be included the calculation of the net income of the Trust pursuant to subsection 95(1) of the ITAA 1936.

Question 4

Where Unallocated Shares are held by the Trustee, no Participant will be presently entitled to any income (including dividend income) or any other right or privilege attaching to the Unallocated Share.

As such, consistent with the reasoning in question 3 immediately above, dividends and any other income received by the Trustee in relation to Unallocated Shares will be included the calculation of the net income of the Trust pursuant to subsection 95(1) of the ITAA 1936.

Question 5

Where no beneficiary is presently entitled to the net income of a trust estate, the net income of that trust estate will be taxed in the hands of the Trustee pursuant to either section 99 or 99A(2) of the ITAA 1936.

Section 99 of the ITAA 1936 only applies in relation to a trust estate in relation to a year of income if section 99A does not apply in relation to that trust estate in relation to that year of income.

Section 99A of the ITAA 1936 effectively provides that the Trustee will be assessed and is liable to pay tax on the net income of the Trust (as a resident trust estate) where there is no part of the net income of the Trust that is included in the assessable income of a beneficiary of the Trust under section 97 of the ITAA 1936 i.e. no Participant is presently entitled to the net income of the Trust.

Pursuant to clause 4.6 of the Trust Deed, in respect of Unallocated Shares, The Trustee may apply any capital receipts, dividends or other distributions received in respect of those Unallocated Shares to purchase further shares to be held on trust for the purposes of the Plan. That is, no Participant beneficiary is presently entitled to nor do they have any beneficial entitlement in the Unallocated Shares or any income (including dividend income) or other such rights attributable to them. If dividends and other income are received by the Trustee in respect of Unallocated Shares, those amounts will be included in the Trustee’s calculation of its net income for a year of income under section 95 of the ITAA 1936 and will be assessed to the Trustee pursuant to section 99A (As section 99A of the ITAA 1936 applies, section 99 of the ITAA 1936 will not apply).

Question 6

Division 207 deals with the effect of receiving franked distributions.

Overview

Subsection 207-5(1) provides that as a general rule, if a corporate tax entity makes a franked distribution to one of its members, then:

● an amount equal to the franking credit on the distribution is included in the member's assessable income; and

● the member is entitled to a tax offset equal to the same amount.

Subsection 207-5(3) then provides that if a franked distribution is made by a corporate tax entity to a member that is a trustee of a trust, an amount equal to the franking credit on the distribution is included in the trustee’s assessable income. However, subsection 207-5(4) provides that a tax offset in relation to that distribution is only available to an entity (who may be a trustee) if the distribution flows indirectly to it and does not flow indirectly through it to another entity. The tax offset is equal to the Trustee’s share of the franking credit on the distribution.

Franked distribution received by trustee

The meaning of ‘flows indirectly’ to a trustee is set out in subsection 207-50(4):

Trustees

207-50(4)

A *franked distribution flows indirectly to the trustee of a trust in an income year if, and only if:

(a) during that income year, the distribution is made to the trustee, or *flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or (3); and

(b) the trustee is liable or, but for another provision in this Act, would be liable, to be assessed in respect of an amount (the share amount) that is:

(i) a share of the trust's *net income for that income year under section 98 of the Income Tax Assessment Act 1936; or

(ii) all or a part of the trust's net income for that income year under section 99 or 99A of that Act;

(whether or not the share amount becomes assessable income in the hands of the trustee); and

(c) the trustee's *share of the distribution under section 207-55 is a positive amount (whether or not the trustee actually receives any of that share).

In this instance, pursuant to subsection 207-50(4), a franked distribution will be taken to flow indirectly to the Trustee of the Trust as:

● the distribution is made to the trustee (this will be the case in respect of dividends paid to and received by the Trustee in respect of Unallocated Shares), and

● the trustee is liable to be assessed on all or part of the trust’s net income for that year under section 99A of the ITAA 1936 (subparagraph 207-50(4)(b)(ii)) (as described above the Trustee will be assessed pursuant to section 99A on income received in respect of Unallocated Shares to which no Participant is absolutely or in any other way presently entitled); and

● the trustee’s share of the distribution under section 207-55 is a positive amount, whether or not the trustee actually receives any of that share (this will be the case where a dividend is paid to the Trustee in respect of an Unallocated Share) .

Gross-up of the franked distribution by the amount of the franking credit

Accordingly, having determined that a franked distribution in respect of Unallocated Shares flows indirectly to the Trustee pursuant to subsection 207-50(4), Subdivision 207-B needs to be considered.

Where a franked distribution is made directly to a trust, the assessable income of the trustee of the trust will be grossed-up by the amount of the franking credit under section 207-35. Subsection 207-35(5) lists the requirements that must be met before subsection 207-35(6) operates to increase the assessable amount on which it is assessed under section 99A of the ITAA 1936. The increased assessed amount is the sum of the trustee’s share of the franking credit on distribution and the attributable franked distribution under section 207-37. For the present case, the Trustee will need to gross-up any franked distribution by the amount of the franking credit it received in respect of Unallocated Shares and the attributable franked distribution calculated under section 207-37.

Tax offset

Section 207-45 provides an entity that is the ultimate recipient of a franked distribution to whom a distribution flows indirectly is entitled to a tax offset for that income year equal to its share of franking credit attached to the distribution. The ultimate recipients of a franked distribution are the recipients that can use the tax offset and includes trustees that are liable to be assessed under section 99A of the ITAA 1936.

The Trustee is therefore entitled to a tax offset in respect of any franking credit attached to franked distributions paid on the Unallocated Shares as the Trustee will be liable to be assessed under section 99A of the ITAA 1936 in relation to dividends on Unallocated Shares as explained at question 5 above.

However, , there are integrity measures in Division 207 to ensure that benefits of imputation are only available to the true economic owner of shares and to the extent that the person can use the franking credits.

Therefore, provided that section 207-150 (which provides that no gross-up or tax offset is available where the imputation system has been manipulated) is not satisfied, then pursuant to section 207-45, the Trustee will be entitled to a franking credit on any franked dividends it receives in respect of Unallocated Shares and to receive a tax offset equal to the amount of the franking credit.

Limit of tax offset

Finally, subsection 67-25(1) provides that where a tax offset is available under Division 207, that tax offset is subject to the refundable tax offset rules unless otherwise stated in the section. Subsection 67-25(1B) provides that the tax offset is only subject to the refundable tax offset rules if the trustee entitled to the tax offset is not liable to be assessed under section 98 or 99A of the ITAA 1936.

As franked distributions flow indirectly to the Trustee, the Trustee is entitled to a franking tax offset under section 207-45. However, the Trustee is assessed on the distributions under section 99A of the ITAA 1936. Therefore the tax offsets available to the Trustee is limited to the amount of tax payable and any excess franking tax offset is not refundable