Edited version of private advice

Authorisation Number: 1051897783099

Date of advice: 6 December 2021

Ruling

Subject: Employee share trust

Question 1

Will irretrievable cash contributions made by Company A to the Trustee of the Company A Employee Share Plan Trust to fund the subscription for, or acquisition on-market of, Shares in respect of the Employee Incentive Plan be assessable income of the Trust pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will a capital gain or capital loss that arises for the Trustee at the time when either capital gain tax (CGT) event E5 or E7 happens in relation to Shares held by the Trustee be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Shares for the same or less than the cost base of the Shares in the hands of the Trustee?

Answer

Yes.

Question 3

Will dividends and other income received by the Trustee on Unallocated Shares:

• be included in the calculation of the net income of the Trust under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)
• be assessed to the Trustee under section 99A of the ITAA 1936?

Answer

Yes.

Question 4

Will the Trustee be entitled to a tax offset for the franking credits attached to the franked dividend on the Unallocated Shares under Subdivision 207-B of the ITAA 1997?

Answer

Yes, provided the Trustee holds the Unallocated Shares at risk for a continuous period of not less than 4 days during the period beginning the day after the Trustee acquires the Unallocated Shares and ending on the 45^th day after the Unallocated Shares become ex-dividend.

Relevant facts and circumstances

Company A is a public company listed on the Australian Securities Exchange.

Company A is the head company of the Company A tax consolidated group (Company A TCG).

The Plan

Company A currently has the Plan in place which allows Company A to grant the following Awards to Participants:

• Options: a right to be issued a share in Company A (Share) upon payment of an Exercise Price and subject to the satisfaction of Vesting Conditions
• Performance Rights: a right to be issued with a Share subject to the satisfaction of Vesting Conditions

Offer

Company A may make an Offer to any Eligible Participant to participate in the Plan. Under the Plan, the Offer must be in writing and include the following terms of issue for the relevant award:

• the name and address of the Eligible Participant to whom the offer is made
• the type and total number of Awards for which the Eligible Participant may accept
• any payment required to be made for the grant of the Award
• the date of the Offer
• any Exercise Period (including the Vesting Date and Expiry Date)
• any Exercise Price
• any Vesting Date
• any Vesting Conditions
• any Disposal Restrictions
• any other terms of the Awards
• any matters required to be specified by the Corporations Act or Listing Rules.

An Eligible Participant must complete, sign and return the Acceptance Form in accordance with the Offer to accept an Offer.

The Board may permit an Eligible Participant to nominate a Permitted Nominee to be granted and hold Awards on behalf of the Eligible Participant.

Options

The Plan states that an Option entitles a Participant to be issued, transferred or allocated one Share by the Trust:

• provided any acquisition of Shares does not breach the Corporations Act or the Listing Rules
• provided any Vesting Conditions have been satisfied
• during the Exercise Period
• for payment of the Exercise Price
• otherwise in the manner required by the Board and specified in the Offer.

The Vesting Conditions and the Exercise Price will be specified in the Offer.

The Options are granted for no cost, subject to satisfaction of Vesting Conditions, and do not carry voting or dividend rights.

A Participant may exercise an Option at any time in the Exercise Period by delivering a Notice of Exercise and paying the Exercise Price to Company A.

Performance Rights

Each Performance Right entitles the Participant to be issued, transferred or allocated by the Trust, one Share after the Vesting Date:

• subject to the satisfaction of Vesting Conditions
• provided any acquisition of Shares does not breach the Corporations Act or the Listing Rules (if applicable)
• subject to any other requirement contained in the Offer.

The Board has absolute discretion to make a cash payment to the Participant to substitute the issue, transfer or allocation of Shares on the Vesting of Performance Rights.

To the extent Performance Rights are granted and the Board determines that the rights are to be satisfied by way of cash payment, the payment would be made by the Company to the Participant. The Trust will only be used for Awards satisfied by way of a Share issued to Participants.

Issue, transfer and allocation of Shares

Under the Plan, Company A will issue, or procure the Trust to transfer or allocate, Shares to a Participant at the earlier date of either the next Board meeting or within XX business days after:

• in the case of Options, receiving a valid Notice of Exercise and the Exercise Price
• in the case of Performance Rights, the Participant becomes entitled to Shares.

General conditions

Subject to any Disposal Restrictions, Shares acquired under the Plan carry all of the same rights and obligations of other Shares, except for any rights attaching to Shares by reference to a record date prior to the date of issue or transfer and subject to the terms of the Trust.

A Participant will have no interest in Shares, or have the right to participate on dividends on Shares, until Shares are issued, transferred or allocated by the Trust to that Participant, including on the exercise or Vesting of that Award.

A Participant does not have the right to vote in respect of an Option or Performance Right.

Under the Plan, a Participant cannot participate in a new issue of Shares without exercising their Options or being issued, transferred or allocated Shares for their Performance Rights.

If an Offer contains a Disposal Restriction, the Participant must comply with the Disposal Restriction in relation to all Shares issued, transferred or allocated under an Award, on exercise of the Options, or after Vesting of the Performance Rights, for the period specified in the Offer.

The Plan states that except as provided in the Plan or an Offer, or otherwise determined by the Board, a Participant may not Dispose of any interest in a Share issued, transferred or allocated until the earlier of the:

• end of the period of three years (or any longer period specified in an Offer) commencing on the date of issue or transfer of the Share
• date on which the Participant is no longer employed by a Group member
• end of any other period determined by the Board in accordance with relevant law.

Company A may implement any procedure, including a holding lock, it considers appropriate to ensure the Disposal Restriction is complied with for the period specified in the Offer.

Administration of the Plan

The Plan states the Board has the authority to make policy and to delegate its functions and powers under the Plan as it considers appropriate for the operation and efficient administration of the Plan.

Lapse of Awards

Unless the Board decides otherwise or as otherwise specified in an Offer, an Option that has not been exercised on or before the Expiry Date, lapses at 5.00pm Australian Eastern Standard Time on the day after the Expiry Date.

Trust

Company A has established the Trust pursuant to the Trust Deed. The Trust was implemented with a view to:

• providing Company A with greater flexibility to accommodate the long-term incentive arrangements whilst the business continues to expand in terms of operation and employee numbers in future years
• accommodating capital management flexibility for Company A in that the Trust would be able to use contributions from Company A to either acquire shares on-market or subscribe for new Shares
• facilitating a streamlined approach to the administration of the Plan.

The recitals of the Trust Deed state that Company A established the Trust to acquire, hold and transfer Shares and that Trustee has agreed to act as the Trustee and administer the Trust under the terms of the Trust Deed. In the Trust Deed, the activities of the Plan Trustee include:

• receiving funds and holding these funds on trust on the terms of the Trust Deed
• transferring and allocating Shares to Participants under any Plan
• acquiring Shares on the terms of the Trust Deed
• holding Shares on the terms of the Trust Deed
• receiving Income for use on the terms of the Trust Deed
• any ancillary activities related to the above.

Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of section 130-85(4). The Trustee's activities are not intended to be unrestricted and should be read in conjunction with the Trust Deed.

The Trustee is prohibited from being or becoming a Participant or otherwise benefiting under the Trust Deed. Company A and each entity Company A controls is prohibited from benefiting under the Trust Deed.

Acquisition of Shares

To satisfy Company A's obligations in respect of Rights or Shares that have been or are to be issued or granted to Participants under a Plan, Company A may give written notice to the Trustee of the number of Shares that must be acquired by the Trustee and/or allocated to a Participant from Allocated Shares or Unallocated Shares.

Prior to individual Participants becoming beneficially entitled to Shares, they will be held in an unallocated account.

As soon as practicable after notification by Company A and, if necessary, the provision of sufficient additional funds, the Trustee must:

• apply the Fund to acquire (by purchase or subscription) the number of Shares specified
• allocate the relevant number of Shares to each Participant and record the allocation in the books of the Trust.

Transfer of Shares

To satisfy Company A's obligations on exercise of an Option by a Participant under a Plan (without any Disposal Restrictions that apply to the Shares) or on the Disposal Restrictions applying to any Allocated Shares ceasing to exist, Company A may give written notice to the Trustee of the number of Shares that must be transferred to a Participant.

As soon as practicable after receiving notice from Company A and payment by Company A of any associated costs, the Trustee must transfer to the Participant the number of Shares specified.

Funding

The Trustee is not remunerated for administering the Trust. Under the Trust Deed, Company A must provide the Trustee with, or procure the provision to the Trustee, of all funds that are required by the Trustee to:

• acquire or transfer the Shares that the Trustee is directed to acquire to transfer under the Trust Deed
• pay any transfer taxes and brokerage fees associated with the acquisition or transfer of Shares
• pay all costs associated with the acquisition or delivery of Shares, and with the administration of the Fund.

Costs associated with the administration of the Fund include brokerage fees, bank charges and other ongoing administrative expenses.

The Trustee or any person who has been a Trustee must not be paid or transferred beneficially from the Fund, or be conferred any direct or indirect benefit out of the Trust.

Restrictions on disposal

The Trustee may only Dispose of Shares under the terms of the Trust Deed and the Plan applying to the Shares.

Unallocated Shares

A Participant has no entitlement to any Unallocated Shares, or any Income deriving from any Unallocated Shares, held by the Trustee.

Where the Trustee receives any Income deriving from Unallocated Shares held, the Trustee can hold or apply this Income for the purposes of meeting the operating costs of operating and administering the Plan, subject to the terms of the Trust Deed.

Rights in respect of Allocated Shares

The Trust Deed provides that subject to its own terms, the relevant Plan and any Disposal Restrictions, a Participant is:

• absolutely entitled to all of their Allocated Shares
• entitled to the same rights in respect of their Allocated Shares as if the Participant was the legal owner of the Allocated Shares, including the right to
  • direct the Trustee how the attached voting rights are to be exercised
  • receive the Income deriving from the Allocated Shares
  • participate in any dividend reinvestment plan operated by Company A in respect of the Allocated Shares.

Reasons for decision

All legislative references are to provisions of the ITAA 1936 or to provisions of the ITAA 1997.

Question 1

Detailed reasoning

The total assessable income of a trust estate is calculated as if the trustee were a resident taxpayer in respect of that income (subsection 95(1)).

The assessable income of a taxpayer includes income under ordinary concepts (section 6-5) or statutory income (section 6-10).

Section 10-5 contains a summary list of the provisions for statutory income. None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, irretrievable contributions made by Company A to the Trustee for the Trust 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 if they are assessable as income according to ordinary concepts under section 6-5.

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

In ATO Interpretative Decision ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme, the Commissioner expresses the view that funds provided to the trustee of an employee share scheme (ESS) for the sole purpose of providing Shares under an ESS will constitute capital receipts to the trustee and are not assessable under sections 6-5 or 6-10.

An ESS is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2)).

An ESS interest is a beneficial interest in a Share in a company or a right to acquire a beneficial interest in a Share in a company (subsection 83A-10(1)).

Under the Plan, each Participant will acquire an Option, or Performance Right (as the case may be), these rights each being a right to acquire a beneficial interest in a Share (i.e. an ESS interest).

The irretrievable cash contributions made by Company A to the Trustee under the terms of the Plan and the Trust Deed are to be used solely for the purpose of funding the subscription for, or acquisition on-market of Shares for the benefit of Participants in accordance with the terms of the Trust Deed. Accordingly, the irretrievable cash contributions constitute receipts of a capital nature to the Trustee and will not be assessable income of the Trustee pursuant to sections 6-5 or 6-10.

Question 2

Detailed reasoning

Pursuant to section 102-20, an entity can make a capital gain or loss if, and only if, a CGT event happens.

CGT event E5

Under subsection 104-75(1), CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee.

The time of the event is when a beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)).

If CGT event E5 happens, the trustee may make a capital gain or loss if the market value of the asset, at the time of the event, is more than its cost base or less than the asset's reduced cost base respectively (subsection 104-75(3)).

In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 applies.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 explains the principles set out in the leading English trust law case of Saunders v Vautier (1841) 49 ER 282 in relation to 'absolutely entitled' as follows:

... if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustees to transfer the trust property to them or at their direction, even though the trust deed contains a contrary intention. The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway.

A Participant will become absolutely entitled to the Options or Performance Rights (as the case may be) in accordance with the Plan when those rights have vested, been exercised and the restrictions in respect of the Shares have ceased or no longer apply. Upon the cessation of all the restrictions, the Participant has the right to request the Trustee to transfer the Shares into his or her name and deal with the Shares at his or her own will. At this point, the Participant will become absolutely entitled to the Shares as against the Trustee, and CGT event E5 happens pursuant to subsection 104-75(1).

However, any capital gain or loss that a Trustee makes from CGT event E5 in these circumstances is disregarded if section 130-90 applies.

Shares held to satisfy the future exercise of rights: subsection 130-90(1)

Subsection 130-90(1) applies to disregard any capital gain or loss made by an employee share trust if all the following apply:

•         the CGT event is CGT event E5 or E7 (paragraph 130-90(1)(a))

•         the CGT event happens in relation to a share (paragraph 130-90(1)(b))

•         the beneficiary had acquired a beneficial interest in the share by exercising a right (paragraph 130-90(1)(c))

•         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 (paragraph 130-90(1)(d)).

Employee share trust

In examining whether the requirements of an employee share trust in subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that are relevant. To qualify as an employee share trust, a trustee's activities must be limited to:

• obtaining shares or rights in a company (paragraph 130-85(4)(a))
• ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the ESS to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph 130-85(4)(b))
• other activities that are merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and (b) (paragraph 130-85(c)).

Clause 2.7(c) of the Trust Deed provides that Company A and the Trustee agree that:

'the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of section 130-85(4) of the [ITAA 1997].'

Paragraph 130-85(4)(a) is satisfied because the purpose of the Trust is to acquire, hold and transfer shares in a company, namely Company A.

Paragraph 130-85(4)(b) is satisfied because:

• the Trust has been established to acquire Shares and to allocate those Shares to Participants to satisfy

o   Options acquired by Participants under the Plan which subsequently vest and are exercised (with each Option constituting an ESS interest as defined in subsection 83A-10(1))

o   Performance Rights acquired by Participants under the Plan which subsequently vest (with each Performance Right constituting a 'right' to which paragraph 130-85(4)(b) applies)

• the Plan is an employee share scheme within the meaning of subsection 83A-10(2) as it is a scheme under which rights to acquire Shares are provided to employees in relation to the employees' employment.

In respect of paragraph 130-85(4)(c), the phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'? 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.

In the present case, paragraph 130-85(4)(c) is satisfied as any activities undertaken by the Trustee other than the acquisition of Shares and the allocation of those Shares to Participants in accordance with the Trust Deed and Plan are merely incidental to the operation of the Plan.

Paragraph 130-90(1)(a)

CGT event E5 will apply under the terms of the Plan when the Participant becomes absolutely entitled to the 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 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 the vesting of a Performance Right or upon the exercise of an Option is a share in the capital of a company. Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share.

Paragraph 130-90(1)(c)

Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a Share by:

• exercising an Option granted under Plan, or
• being taken to have exercised a Performance Right granted under the Plan once the right has vested in accordance with the Plan and Offer.

Paragraph 130-90(1)(d)

Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states:

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

The Right or Option in the Plan is an 'ESS interest' under paragraph 83A-10(1)(b) because it is a beneficial interest in a right to acquire a Share in Company A.

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 under which Rights or Options to acquire beneficial interests in ordinary Shares in Company A are provided to employees in relation to the employee's employment. Each Right or Option is acquired for no cost.

As the Participant acquires the Right or Option for no cost, the ESS interest is acquired by the Participant at a discount. Therefore, Subdivision 83A-B or 83A-C applies to the Right or Option under the Plans.

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

Subsection 130-90(2)

Subsection 130-90(1A) and 130-90(1) do not apply if the beneficiary acquired the beneficial interest in the shares for more than its cost base in the hands of the employee share trust at the time the CGT event happens (subsection 130-90(2)).

Provided a Participant does not acquire the beneficial interest in the Share for more than its cost base in the hands of the Trust at the time that CGT event E5 happens, subsection 130-90(1) will apply to disregard any capital gain or loss that arises for the Trustee as a result of CGT event E5 happening.

CGT event E7

It is noted that CGT event E7 is not relevant in these circumstances, as it only occurs where a CGT asset is transferred to a beneficiary where the beneficiary does not have absolute entitlement but does have an interest in the trust capital. However, to the extent CGT event E7 occurs, subsection 130-90(1) will apply to disregard any capital gain or loss that arises for the Trustee as a result of CGT event E7 happening.

Question 3

Detailed reasoning

Subsection 95(1) defines 'net income', in relation to a trust estate, to mean the total assessable income of the trust estate calculated under the ITAA 1936 as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions.

Pursuant to subsection 44(1), the assessable income of a resident shareholder includes dividends that are paid to the shareholder by the company out of profits derived by it from any source.

Subsection 6-5(1) states that your assessable income includes income according to ordinary concepts, which is called ordinary income.

Subsection 6-10(1) states that your assessable income also includes some amounts that are not ordinary income.

Section 10-5 provides that dividends assessable under subsection 44(1) and credits on franked dividends pursuant to subsections 207-20(1), 207-35(1) and 207-35(3) are to be included in assessable income. Therefore, dividends and other income received by the Trustee on Unallocated Shares are required to be included in calculating the net income of the Trust as defined under subsection 95(1).

Subsection 97(1) determines the assessable, exempt and non-assessable non-exempt income of a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of the trust estate. When no beneficiary is presently entitled to the income of a trust estate, the net income of the estate will be taxed in the hands of the trustee under either section 99 or 99A. Section 99A will apply unless excluded in accordance with subsection 99A(2).

Where no part of the net income of a resident trust estate is included in the assessable income of a beneficiary of the estate, the trustee is assessed and liable to pay tax on the net income (as defined in subsection 95(1) and pursuant to subsection 99A(4)).

Accordingly, the Trustee will be assessed under section 99A on that part of the net income of the trust estate which relates to Unallocated Shares to the extent the net income is not included in the assessable income of a Participant.

Question 4

Detailed reasoning

Division 207 deals with the effect of receiving franked distributions.

Subsection 207-5(3) provides that if a franked distribution is made to a member that is a trustee of a trust, an amount equal to the franking credit on the distribution is included in the member's assessable income.

Subsection 207-5(4) provides that a tax offset in relation to an above distribution is only available to an entity if the distribution flows indirectly to it and does not flow indirectly through it to another entity. The tax offset is equal to its share of the franking credit on the distribution.

Subdivision 207-B deals with the effect of receiving a franked distribution through certain partnerships and trusts.

Section 207-25 provides that Subdivision 207-B deals with an entity that receives a benefit of a franked distribution where the distribution is made to a partnership or the trustee of a trust, and the benefit is received either directly or through interposed partnerships or trusts.

The distribution is regarded as flowing indirectly to the entity under this Subdivision.

On the basis of a notional amount of the entity's share of the distributions, the entity may be entitled to have an amount included in its assessable income and/or a tax offset under this Subdivision.

Under subsection 207-35(1), the assessable income of the trust for an income year includes the amount of the franking credit on a distribution if the following conditions are met:

• a franked distribution is made in an income year to an entity that is a trustee of a trust (paragraph 207-35(1)(a))
• the entity is not a corporate tax entity (paragraph 207-35(1)(b))
• in the case of a trustee of a trust, the trust is not a complying superannuation entity (paragraph 207-35(1)(c)).

Subsection 207-50(4) relevantly provides that a franked distribution will be taken to flow indirectly to the trustee of a trust if all the following apply:

• the distribution is made to the trustee
• the trustee is liable to be assessed on all or part of the trust's net income for that year under section 99A (subparagraph 207-50(4)(b)(ii))
• 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.

Consequently, where the Trustee receives a franked distribution in respect of an Unallocated Share, an amount equal to the franking credit attached to the distribution will be included in the assessable income of the Trustee.

Tax offset

Section 207-45 relevantly states that an entity to whom a distribution flows indirectly in an income year is entitled to a tax offset for that income year that is equal to its share of the franking credit on the distribution if it is the trustee of a trust that is liable to be assessed on a share of, or all or a part of, the trust's net income under section 99A for that income year.

As stated above in response to Question 3, the Trustee will be liable to be assessed under section 99A in relation to dividends on Unallocated Shares.

However, where a franked dividend is paid to an entity, subsection 207-145(1) denies a gross-up and tax offset where that entity is not a qualified person for the purposes of Division 1A of the former Part IIIAA.

Qualified person

Former section 160APHO relevantly states:

1)    A taxpayer who has held shares or an interest in shares on which a dividend has been paid is a qualified person in relation to the dividend if:

a)    where neither the taxpayer nor an associate of the taxpayer has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend - the taxpayer has satisfied subsection (2) in relation to the primary qualification period in relation to the dividend; or

b)    where the taxpayer or an associate of a taxpayer has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend - the taxpayer has satisfied subsection (2) in relation to the secondary qualification period in relation to the dividend.

2)    A taxpayer who has held shares or an interest in shares on which a dividend has been paid satisfies this subsection in relation to a qualification period in relation to the shares or interest if, during the period:

a)    where the taxpayer held the shares - the taxpayer held the shares for a continuous period (not counting the day on which the taxpayer acquired the shares or, if the taxpayer has disposed of the shares, the day on which the disposal occurred) of not less than:

i)      if the shares are not preference shares - 45 days ...

b)    where the taxpayer held the interest in the shares-the taxpayer held the interest for a continuous period (not counting the day on which the taxpayer acquired the interest or, if the taxpayer has disposed of the interest, the day on which the disposal occurred) of not less than:

i)      if the shares are not preference shares - 45 days ...

Former section 160APHD defines:

primary qualification period, in relation to a taxpayer in relation to shares or an interest in shares, means the period beginning on the day after the day on which the taxpayer acquired the shares or interest and ending:

a)    if the shares are not preference shares - on the 45th day after the day on which the shares or interest became ex dividend ...

secondary qualification period, in relation to a taxpayer in relation to shares or an interest in shares, means:

a)    if the shares are not preference shares - the period beginning on the 45th day before, and ending on the 45th day after, the day on which the shares or interest became ex dividend...

The term 'related payment' is defined in former section 160APHN to relevantly mean:

2)    The taxpayer or associate is taken, for the purposes of this Division, to have made, to be under an obligation to make, or to be likely to make, a related payment in respect of the dividend or distribution if, under an arrangement, the taxpayer or associate has done, is under an obligation to do, or may reasonably be expected to do, as the case may be, anything having the effect of passing the benefit of the dividend or distribution to one or more other persons.

Where the Trustee does not make a related payment in respect of the dividend paid on the Shares, the Trustee will be a qualified person in respect of the dividend if the Trustee held the Shares at risk for a continuous period of not less than 45 days (excluding the day the Shares were acquired and if the Shares have been disposed of, the day the disposal occurred) during the period beginning on the day after the day on which the Trustee acquired the Shares and ending on the 45^th day after the day on which the Shares became ex dividend (primary qualified period).

However, where the Trustee makes a related payment in respect of the dividend on the Shares, the Trustee will be a qualified person in respect of the dividend if the Trustee held the Shares at risk for a continuous period of not less than 45 days (excluding the day the Shares were acquired and if the Shares have been disposed of, the day the disposal occurred) during the period beginning on the 45^th day before and ending on the 45^th day after the day on which the Shares became ex dividend (secondary qualified period).

A share, in respect of which a dividend is paid, becomes ex dividend on the day after the last day on which the acquisition by a person of the share will entitle that person to receive the dividend.

Refundable tax offsets

Subsection 67-25(1) states:

Tax offsets available under Division 207 (which sets out the effects of receiving a franked distribution) or Subdivision 210-H (which sets out the effects of receiving a distribution franked with a venture capital credit) are subject to the refundable tax offset rules, unless otherwise stated in this 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.

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

Accordingly, where a franked distribution is paid in respect of Unallocated Shares, the Trustee will include an amount equal to the franking credit on the distribution in its assessable income under section 207-35. Provided that the Trustee does not make a related payment in relation to the dividend paid on Unallocated Shares and holds the Unallocated Shares for a continuous period of not less than 45 days during the period beginning the day after the Trustee acquires the Unallocated Shares and ending on the 45^th day after the Unallocated Shares become ex dividend, then the Trustee will be a qualified person in respect of the distribution and be entitled to the benefit of the franking credits attached to franked distributions on Unallocated Shares to the extent of tax payable. Any excess franking tax offset is not refundable pursuant to section 67-25.