Edited version of private advice

Authorisation Number: 1051899723371

Date of advice: 19 October 2021

Ruling

Subject: Employer remuneration trust

Question 1

Will the contributions of monies by the Employer to the Trustee of the Trust pursuant to the Trust Deed be included in the calculation of the net income of the trust estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Will the loans of monies 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 investment incomes 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

(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 a CGT event occur under Division 104 of the ITAA 1997 when the Trustee disposes of Investments?

Answer

Yes.

(iii)      Will the cost base of the Investments include the money the Trustee pays or is required to pay for the acquisition of those Investments pursuant to section 110-25 of the ITAA 1997?

Answer

Yes.

(iv)      Will the CGT cost base of the asset held by Beneficiaries of the Trust, being the interest in the Trust, include the money the Trustee pays or is required to pay to acquire Investments?

Answer

No.

Question 6

Will the transfer of an Allocated Investment to the Unallocated Investment Account by the Trustee constitute a CGT event under Division 104 of the ITAA 1997?

Answer

No.

Question 7

Will the cancellation of the Participant's rights to the Allocated Investments constitute an acquisition of the cancelled rights by the Trustee under section 109-5 of the ITAA 1997?

Answer

No.

Question 8

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

Answer

No.

Question 9

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

Answer

No.

This ruling applies for the following periods:

Fringe benefits tax year ending 31 March 20XX

Fringe benefits tax year ending 31 March 20XX

Fringe benefits tax year ending 31 March 20XX

Fringe benefits tax year ending 31 March 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

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 and/or contractors selected by the board of the employer entity.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1936 subsection 44(1)

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 subsection 99A(4)

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

Income Tax Assessment Act 1936 section 102R

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 Division 6

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 Division 83A

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(3)

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

Income Tax Assessment Act 1997 section 108-5

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 section 109-10

Income Tax Assessment Act 1997 Division 110

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 paragraph 110-25(2)(a)

Income Tax Assessment Act 1997 Division 116

Income Tax Assessment Act 1997 section 207-35

Income Tax Assessment Act 1997 section 318

Reasons for decision

Question 1

Summary

No. The contributions of monies by the Employer to the Trustee pursuant to the Trust Deed will not be included in the calculation of the net income of the trust estate under section 95 of the

ITAA 1936.

Detailed Reasoning

Section 95 of the ITAA 1936 defines the 'net income of the trust estate' as the total assessable income of the trust, calculated under the ITAA 1936 and ITAA 1997[1] as if the trust were a taxpayer in respect of that income, less all allowable deductions.

Division 6 provides that there are two types of income. Section 6-5 includes in an Australian resident taxpayer's assessable income, income according to ordinary concepts they derived directly or indirectly from all sources, whether in or out of Australia, during an income year.

Section 6-10 includes in assessable income of a person 'statutory income', being amounts that are not ordinary income, but are included in assessable income under other provisions about assessable income.

In the present case, the Trustee receives contributions from the Employer. These contributions are made to establish or form part of the Trust Fund, from which the Trustee will make loans to Eligible Employees and/or Eligible Contractors of the Employer. In this way, the Employer is capitalising a financing facility to be utilised by the Trustee for the benefit of its Eligible Employees and Eligible Contractors. As a result, the contributions are neither income according to ordinary concepts under section 6-5 nor would they be included in assessable income under a specific provision of the Act under section 6-10.

Contributions made pursuant to the Trust Deed are therefore not included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936.

Question 2

Summary

No. The loans of monies by the Employer to the Trustee, pursuant to the Trust Deed, will not be included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936.

Detailed Reasoning

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 under the ITAA 1936 and ITAA 1997 as if the trust were a taxpayer in respect of that income, less all allowable deductions.

Division 6 provides that there are two types of income. Section 6-5 includes in an Australian resident taxpayer's assessable income, income according to ordinary concepts they derived directly or indirectly from all sources, whether in or out of Australia, during an income year.

Section 6-10 includes in assessable income of a person 'statutory income', being amounts that are not ordinary income, but are included in assessable income under other provisions about assessable income.

In the present case, the Trustee may receive loans from the Employer. These loans are made to provide the Trustee with capital (a trust fund or 'trust estate') from which the Trustee will make loans to Eligible Employees and/or Eligible Contractors of the Employer. In this way, the Employer is capitalising a financing facility to be utilised by the Trustee for the benefit of its Eligible Employees and Eligible Contractors. As a result, the loans are neither income according to ordinary concepts under section 6-5 nor would they be included in assessable income under a specific provision of the Act under section 6-10.

Loans made pursuant to the Trust Deed are therefore not included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936.

Question 3

Summary

Yes. Dividends and other income received by the Trustee will be included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936.

Detailed Reasoning

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 under the ITAA 1936 and ITAA 1997 as if the trust were a taxpayer in respect of that income, less all allowable deductions.

Dividends

Subsection 44(1) of the ITAA 1936 states:

The assessable income of a shareholder in a company... includes:

(a) 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...

In addition, under section 207-35, where a franked distribution is made to a trustee of a trust, the assessable income of the trust for that income year includes the franking credit on the distribution.

As such, in order to determine whether dividends will be included in the Trustee's assessable income, we must determine whether dividends will be paid to the Trustee in its capacity as shareholder in a company.

At the time of the acquisition of Investments, which will be Australian Securities Exchange (ASX) listed shares and units in Public Trading Trusts (as defined in section 102R of the ITAA 1936), the Trustee will become the legal owner of those Investments and will hold them for the benefit of the Participants. As such, the Trustee is considered to be the shareholder of the ASX listed shares and the unitholder of the units in the Public Trading Trust.

Should the Trustee receive any distributions from companies in which it holds ASX listed shares or from the Public Trading Trust and those distributions meet the definition of a dividend for the purposes of subsection 44(1) of the ITAA 1936, then those amounts will be included in the Trustee's calculation of the net income under section 95 of the ITAA 1936.

Further, where the distribution paid to the Trustee is franked, its assessable income will also include the franking credit on the distribution in accordance with section 207-35.

Other investment income

Our understanding of the Plan is that if the Investments were to generate income, that income would largely be productive of franked distributions. Therefore, it is unknown what 'other investment incomes' is likely to be made up of. If the 'other investment incomes' are productive of franked distributions, then the reasoning above is equally applicable here.

Question 4

Summary

Yes, any part of the net income of the trust estate to which no beneficiary is presently entitled will be assessed to the Trustee under section 99A of the ITAA 1936.

Detailed Reasoning

Subsections 99A(4) and (4A) of the ITAA 1936 state:

(4) Where there is no part of the net income of a resident trust estate:

(a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

(b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or

(c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.

Note: If the trust estate's net income includes a net capital gain, Subdivision 115-C of the Income Tax Assessment Act 1997 affects the assessment of the trustee.

(4A) Where there is a part of the net income of a resident trust estate:

(a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

(b) in respect of which the trustee of the trust estate is not assessed and not liable to pay tax in pursuance of section 98; or

(c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.

As explained above, the Trustee's 'net income' (as defined in section 95 of the ITAA 1936) means the total assessable income of the trust estate calculated under the ITAA 1936 and ITAA 1997 as if the Trustee were a resident taxpayer in respect of that income, less all allowable deductions. There are two types of income that the Trustee might receive in that capacity - these include the proceeds from the disposal of the Investments, and investment income that is received in respect of both Allocated Investments and Unallocated Investments.

To the extent that there is a part of the net income (as defined in section 95 of the ITAA 1936) of the Trust to which no Participant will be presently entitled, the Trustee will be assessed and liable to pay tax on that part of the net income of the Trust under section 99A of the ITAA 1936.

Question 5(i)

Summary

Yes.

Detailed Reasoning

Subsection 102-5(1) provides that your assessable income includes your net capital gain, if any, for an income year. Under section 102-20, you 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), CGT event A1 happens if you dispose of a CGT asset. Shares in a company and units in a unit trust (such as the Investments) are considered to be CGT assets for the purposes of section 108-5. Under subsection 104-10(2), you dispose of a CGT asset if 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.

When the Trustee sells those shares or units and a change of ownership occurs from the Trustee to another entity, this is considered to be a disposal of a CGT asset for the purposes of section 104-10.

The Trustee will make a capital gain if the capital proceeds from the disposal are more than the cost base of the share or unit as per subsection 104-10(4). The Trustee works out the capital proceeds by reference to Division 116. It will make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Once the Trustee has worked out the capital gain or loss from CGT event A1, this gain or loss will be factored into Step 1 of working out the Trustee's net capital gain under subsection 102-5(1), to the extent that the proceeds received on disposal of the Investments are not ordinary income of the Trust.

Question 5(ii)

Summary

Yes.

Detailed Reasoning

If a Participant elects to receive their Cancellation Entitlement in cash (per the Trust Deed), the Trustee may sell Investments to fund that payment.

Under section 104-10, 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), a CGT asset is:

(a) any kind of property; or

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

Where the Trustee sells Investments, it will be disposing of a CGT asset. As a result, CGT event A1 will happen. Under subsection 104-10(3), the time of the event is:

(a) when you enter into the contract for the disposal; or

(b) if there is no contract - when the change of ownership occurs.

Question 5(iii)

Summary

Yes.

Detailed Reasoning

The Investments are CGT assets in accordance with the definition in section 108-5. Division 110 outlines rules for calculating a CGT asset's cost base. Under section 110-25, the cost base of a CGT asset consists of five elements.

Under paragraph 110-25(2)(a), the first element of a CGT asset's cost base includes the money paid, or is required to pay, in respect of acquiring that asset.

Therefore, the cost base of the Investments includes money the Trustee paid or is required to pay for the acquisition of the Investments.

Question 5(iv)

Summary

No.

Detailed Reasoning

As above, the Investments are CGT assets held by the Trustee. The cost base or reduced cost base of each Investment will be calculated in accordance with Division 110. This is a separate asset to that which is being held by the beneficiaries of the Trust, being an interest in the Trust.

Therefore, the money the Trustee pays to acquire Investments is not included in the calculation of the cost base of the CGT asset held by the beneficiaries, being the interest in the Trust.

Question 6

Summary

No.

Detailed Reasoning

The transfer of an Allocated Investment to the Unallocated Investment Account by the Trustee will not constitute a CGT event under Division 104.

The mere transfer of a share or unit to the Unallocated Investment Account, within the Trustee's own books of account, will not of itself, constitute a CGT event under Division 104.

Question 7

Summary

No.

Detailed Reasoning

The cancellation of the Participant's rights to Allocated Investments will not constitute an acquisition of the cancelled rights by the Trustee under section 109-5.

Under section 109-5, you acquire a CGT asset when you become its owner. Subsection 109-5(2) sets out specific rules relating to the time at which you acquire a CGT asset as a result of a CGT event happening. As CGT event C2 relates to the cancellation, surrender and similar endings of a CGT asset, it follows there is no specific acquisition rule for CGT event C2.

In the present case, where the rights to Allocated Investments are cancelled at the request of the Participant or upon the termination of their employment under clause X of the Trust Deed, those rights, for CGT purposes, are brought to an end. However, it does not follow that the cancellation of the Participant's rights to Allocated Investments means the Trustee has acquired those rights. Where a Participant elects to receive their Cancellation Entitlement in cash, their Allocated Investments are redesignated as 'Unallocated Investments'. This similarly does not represent an acquisition by the Trustee of the Participant's rights to the Allocated Investments.

As such, the cancellation of the Participant's rights to the Allocated Investments will not constitute an acquisition of the cancelled rights by the Trustee under section 109-5.

Section 109-10 sets out some specific rules for the circumstances in which, and the time at which, you acquire a CGT asset otherwise than as a result of a CGT event happening. It is considered that none of the items in the table in section 109-10 will apply to the Plan.

Question 8

Summary

No.

Detailed Reasoning

Section 66 of the FBTAA states tax imposed under the FBTAA in respect of the fringe benefits taxable amount of an employer of a year of tax is payable by the employer. Section 67 of the FBTAA is an anti-avoidance provision which allows the Commissioner to cancel a tax benefit obtained in connection with an arrangement that was entered into for the sole or dominant purpose of enabling the employer to obtain a tax benefit.

Section 67 cannot apply to the Trustee as it is not an employer, and is not liable to pay tax imposed under the FBTAA in relation to benefits provided to Participants under the Plan.

Question 9

Summary

No.

Detailed Reasoning

Provided that the Plan 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 to cancel a tax benefit (if any) obtained by the Trustee.

[1] All legislative references are to the ITAA 1997 unless otherwise stated.