Edited version of private advice

Authorisation Number: 1051899724501

Date of advice: 19 October 2021

Ruling

Subject: Employer remuneration trust

Question 1

Will the contributions of monies by the Employer to the Trustee pursuant to the Trust Deed be included as assessable income of the Contractor under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the contributions of monies by the Employer to the Trustee pursuant to the Trust Deed be included as assessable income of the Contractor under section 15-2 of the ITAA 1997?

Answer

No.

Question 3

Will the contributions of monies by the Employer to the Trustee pursuant to the Trust Deed be included as assessable income of the Contractor under section 21A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 4

Will the loans of monies by the Employer to the Trustee pursuant to the Trust Deed be included as assessable income of the Contractor under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 5

Will the loans of monies by the Employer to the Trustee pursuant to the Trust Deed be included as assessable income of the Contractor under section 15-2 of the ITAA 1997?

Answer

No.

Question 6

Will the loans of monies by the Employer to the Trustee pursuant to the Trust Deed be included as assessable income of the Contractor under section 21A of the ITAA 1936?

Answer

No.

Question 7

Will the acquisition of the Allocated Investments by the Contractor in return for payment of market value consideration be included as assessable income of the Contractor under subsection 83A-25 of the ITAA 1997?

Answer

No.

Question 8

Will the issue of the Allocated Investments to the Contractor in return for payment of market value consideration give rise to any assessable income under section 6-5 of the ITAA 1997 for the Contractor?

Answer

Yes.

Question 9

Will the issue of the Allocated Investments to the Contractor in return for payment of market value consideration give rise to any assessable income under section 15-2 of the ITAA 1997 for the Contractor?

Answer

No.

Question 10

Will the issue of the Allocated Investments to the Contractor in return for payment of market value consideration give rise to any assessable income under section 21A of the ITAA 1936 for the Contractor?

Answer

No.

Question 11

Will the interest free loan provided by the Trustee to the Contractor for the purpose of acquiring the Allocated Investments constitute assessable income under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 12

Will the interest free loan provided by the Trustee to the Contractor for the purpose of acquiring the Allocated Investments constitute assessable income under section 15-2 of the ITAA 1997?

Answer

No.

Question 13

Will the interest free loan provided by the Trustee to the Contractor for the purpose of acquiring the Allocated Investments constitute assessable income under section 21A of the ITAA 1936?

Answer

No.

Question 14

Will the taxable value of a non-cash business benefit constituted by the interest free loan be reduced to nil due to the application of the "otherwise deductible rule" under section 21A(3) of the ITAA 1936?

Answer

As the correctness of the ruling on this matter would depend on which assumptions were made, we decline to make the ruling as per paragraph 357-110(1)(a) of Schedule 1 to the Taxation Administration Act 1953 (TAA) and in accordance with the Full Federal Court in Commissioner of Taxation v Hacon Pty Ltd [2017] FCAFC 181 (Hacon).

Question 15

Will the first element of the CGT cost base of the Allocated Investments acquired by the Contractor, in accordance with section 110-25 of the ITAA 1997, equal the amount paid for those Allocated Investments?

Answer

No.

Question 16

Will the distribution of dividends included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936 by the Trustee to the Contractor, to which the Contractor is presently entitled, be included as assessable income of the Contractor under section 97 of the ITAA 1936?

Answer

No.

Question 17

Will the proceeds received by the Contractor upon redemption of the Allocated Investments constitute assessable income under 6-5 of the ITAA 1997?

Answer

Yes.

Question 18

Will the proceeds received by the Contractor upon redemption of the Allocated Investments constitute assessable income under section 15-2 of the ITAA 1997?

Answer

No.

Question 19

Will the proceeds received by the Contractor upon redemption of the Allocated Investments constitute assessable income under section 21A of the ITAA 1936?

Answer

No.

Question 20

To the extent that any proceeds received on the redemption of the Allocated Investments constitute assessable income for the Contractor under section 6-5 or section 15-2 of the ITAA 1997 or section 21A of the ITAA 1936, will the net proceeds (i.e. gross proceeds less the cost of the Allocated Investments) be assessable, rather than the gross proceeds?

Answer

Yes.

Question 21

Where the Trustee disposes of the Allocated Investments allocated to the Contractor's Allocated Investments and makes a capital gain from that disposal, will that capital gain be treated as the Contractor's capital gain pursuant to Subdivision 115-C of the ITAA 1997?

Answer

Yes.

Question 22

To the extent that proceeds received on the redemption of the Allocated Investments do not constitute assessable income under section 6-5 or 15-2 of the ITAA 1997 for the Contractor:

(a)  Will the redemption of the Allocated Investments constitute a CGT event as set out in Division 104 of the ITAA 1997?

Answer

No.

(b)  Will the proceeds received by the Contractor upon the redemption of the Allocated Investments be taken into account in calculating his net capital gain under Division 102 of the ITAA 1997?

Answer

There is no need to consider this question.

(c)   Will the CGT discount provisions in Division 115 of the ITAA 1997 apply where the Allocated Investments were acquired at least one year before the redemption?

Answer

There is no need to consider this question.

(d)  To the extent the proceeds are distributed by the Trustee and paid to the Contractor in respect of Subdivision 115-C of the ITAA 1997 (whether due to present entitlement or specific entitlement), as part of the consideration for redemption of their Allocated Investments, will the CGT event arising from the redemption of the Allocated Investments as per question 22(b) of this ruling be the sole taxing event for the Contractor in respect of that distribution?

Answer

This is not a valid ruling question. A particular provision has not been identified by the Applicant.

Question 23

To the extent that the proceeds from any given redemption of Allocated Investments are included in assessable income under section 6-5 or section 15-2 of the ITAA 1997 and are taken into account in calculating a net capital gain, will the anti-overlap provisions of section 118-20 of the ITAA 1997 operate to reduce the capital gain by the amount included in assessable income or to zero in accordance with subsection 118-20(2) and 118-20(3) of the ITAA 1997?

Answer

There is no need to consider this question.

Question 24

If the Allocated Investments are redeemed at a time that coincides with the cessation of the Contractor's contract will the proceeds on redemption be a termination payment under section 82-130 of Part 2-40 of the ITAA 1997?

Answer

There is no need to consider this question.

Question 25

If the Trustee pursuant to clause JJ of the Trust Deed, decides to pay ordinary assessable income to the Contractor on behalf of the Employer will the amounts paid to the Contractor be included as assessable income of the Contractor under section 6-5 of the ITAA 1997?

Answer

No.

Question 26

Where the Contractor does not qualify for the small shareholder exemption pursuant to former subsection 160APHT(1) of the ITAA 1936, will the Contractor be entitled to tax offsets for franking credits attached to franked distributions (within the meaning of Subdivision 207-B of the ITAA 1997) that the Contractor receives from the Trust?

Answer

No.

Question 27

Is the interest in the Trust the Contractor receives under the Plan consideration (as defined in section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)) for a supply the Contractor makes to the Employer for the purposes of the GST Act?

Answer

Yes.

This ruling applies for the following periods:

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.

Assumptions

The contractual relationship between the Eligible Contractor and the Employer is a contract for services and the Eligible Contractor is considered to be an independent contractor.

The Eligible Contractor will have an Australian Business Number (ABN) and be registered for GST purposes.

The Eligible Contractor accounts for GST on a cash basis.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-5(2)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1936 section 21A

Income Tax Assessment Act 1936 subsection 21A(2)

Income Tax Assessment Act 1936 subsection 21A(3)

Income Tax Assessment Act 1936 subsection 21A(5)

Income Tax Assessment Act 1936 section 84

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 98A

Income Tax Assessment Act 1936 section 100A

Income Tax Assessment Act 1997 subsection 102AG(3)

Income Tax Assessment Act 1936 Division 6E

Income Tax Assessment Act 1936 former Division 1A of Part IIIAA

Income Tax Assessment Act 1936 former section 160APHJ

Income Tax Assessment Act 1936 former section 160APHL

Income Tax Assessment Act 1936 former subsection 160APHL(2)

Income Tax Assessment Act 1936 former subsection 160APHL(4)

Income Tax Assessment Act 1936 former subsection 160APHL(7)

Income Tax Assessment Act 1936 former subsection 160APHL(10)

Income Tax Assessment Act 1936 former subsection 160APHL(11)

Income Tax Assessment Act 1936 former subsection 160APHL(12)

Income Tax Assessment Act 1936 former paragraph 160APHL(12)(a)

Income Tax Assessment Act 1936 former paragraph 160APHL(12)(b)

Income Tax Assessment Act 1936 former subsection 160APHL(14)

Income Tax Assessment Act 1936 former paragraph 160APHL(14)(c)

Income Tax Assessment Act 1936 former subsection 160APHM(2)

Income Tax Assessment Act 1936 former subsection 160APHM(3)

Income Tax Assessment Act 1936 former section 160APHO

Income Tax Assessment Act 1936 former section 160APHP

Income Tax Assessment Act 1936 former section 160APHQ

Income Tax Assessment Act 1936 former section 160APHR

Income Tax Assessment Act 1936 former section 160APHT

Income Tax Assessment Act 1936 former subsection 160APHT(1)

Income Tax Assessment Act 1936 former section 160APHU

Income Tax Assessment Act 1936 former section 318

Income Tax Assessment Act 1997 section 6-5

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

Income Tax Assessment Act 1997 subsection 6-5(4)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 15-2

Income Tax Assessment Act 1997 subsection 15-2(1)

Income Tax Assessment Act 1997 subsection 15-2(3)

Income Tax Assessment Act 1997 paragraph 15-2(3)(d)

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 subsection 82-130(1)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

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

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

Income Tax Assessment Act 1997 section 83A-25

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 paragraph 104-10(3)(a)

Income Tax Assessment Act 1997 section 104-70

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

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 subsection 110-25(2)

Income Tax Assessment Act 1997 Division 112

Income Tax Assessment Act 1997 section 112-15

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 subsection 112-20(1)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 section 115-215

Income Tax Assessment Act 1997 subsection 115-215(3)

Income Tax Assessment Act 1997 subsection 115-215(5)

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

Income Tax Assessment Act 1997 section 115-227

Income Tax Assessment Act 1997 paragraph 115-227(b)

Income Tax Assessment Act 1997 section 115-228

Income Tax Assessment Act 1997 subsection 115-228(1)

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 subsection 118-20(2)

Income Tax Assessment Act 1997 subsection 118-20(3)

Income Tax Assessment Act 1997 Subdivision 207-B

Income Tax Assessment Act 1997 subsection 207-35(1)

Income Tax Assessment Act 1997 subsection 207-35(3)

Income Tax Assessment Act 1997 subsection 207-35(4)

Income Tax Assessment Act 1997 section 207-37

Income Tax Assessment Act 1997 paragraph 207-38(4)(a)

Income Tax Assessment Act 1997 section 207-45

Income Tax Assessment Act 1997 paragraph 207-45(a)

Income Tax Assessment Act 1997 section 207-50

Income Tax Assessment Act 1997 subsection 207-50(3)

Income Tax Assessment Act 1997 section 207-55

Income Tax Assessment Act 1997 subsection 207-55(3)

Income Tax Assessment Act 1997 subsection 207-55(4)

Income Tax Assessment Act 1997 paragraph 207-55(4)(a)

Income Tax Assessment Act 1997 paragraph 207-55(4)(d)

Income Tax Assessment Act 1997 section 207-57

Income Tax Assessment Act 1997 section 207-58

Income Tax Assessment Act 1997 subsection 207-58(1)

Income Tax Assessment Act 1997 paragraph 207-145(1)(a)

Income Tax Assessment Act 1997 section 207-150

Income Tax Assessment Act 1997 paragraph 207-150(1)(a)

Income Tax Assessment Act 1997 section 960-410

Income Tax Assessment Act 1997 section 974-160

Income Tax Assessment Act 1997 section 995-1

Tax Administration Act 1953 paragraph 357-110(1)(a) of Schedule 1

Reasons for decision

Question 1

Summary

Yes.

Detailed Reasoning

Section 6-5 of the ITAA 1997[1] outlines that assessable income includes any ordinary income that a taxpayer derives directly or indirectly from all sources during the income year.

A taxpayer is taken to have derived an amount when it is received, or when it is applied or dealt with in any way on their behalf or as they direct (subsection 6-5(4)).

A contribution to the Trust is assessable income of a Contractor under section 6-5 where it has the character of ordinary income, is applied or dealt with on the Contractor's behalf or as the Contractor directs, and is not excluded from the operation of section 6-5.

Does the contribution to the Plan have the character of ordinary income?

A Contactor's ordinary income includes benefits (in the form of money or money's worth) that are received for services they provided under a contract. The contribution to the Plan does not have the character of ordinary income in a Contractor's hands where it is paid to the Trustee before the Contractor has provided services to the Employer.

According to the Contractor Agreement between the Employer and the Contractor, the Contractor provides accounting and business advisory services and in return for those services, the Contractor may elect to receive fringe benefits[2] in lieu of fees invoiced for future services. These fringe benefits may include participation in the Trust as described in the Contractor Agreement. The Contractor Agreement provides that the Contractor is to be provided "Allocated Investments in the XX Trust and an interest free loan". These fringe benefits as defined by the Contractor Agreement will form part of the Contractor's total remuneration package (this is further discussed at Question 8 below).

Where the Contractor provides services and the Employer subsequently makes a contribution to the Trust and the Contractor receives Allocated Investments in the Trust, there is a link between the services provided by the Contractor and the contribution. The contribution has the character of ordinary income and that income has been dealt with on the Contractor's behalf in accordance with the Contractor Agreement. Therefore, in these circumstances, the contribution of monies by the Employer to the Trustee will result in that amount being assessable to the Contractor under section 6-5.

Question 2

Summary

No.

Detailed Reasoning

Subsection 15-2(1) states:

Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you.

However, in accordance with subsection 15-2(3), the value of an amount that is assessable as ordinary income under section 6-5 is not included in assessable income under section 15-2.

We consider that the reasoning contained in the answer to Question 1 above applies equally here.

Question 3

Summary

No.

Detailed Reasoning

Section 21A of the ITAA 1936 provides (in part):

21A(1)

For the purposes of this Act, in determining the income derived by a taxpayer, a non-cash business benefit that is not convertible to cash shall be treated as if it were convertible to cash.

21A(2)

For the purposes of this Act, if a non-cash business benefit (whether or not convertible to cash) is income derived by a taxpayer:

(a) the benefit shall be brought into account at its arm ' s length value reduced by the recipient ' s contribution (if any); and

(b) if the benefit is not convertible to cash - in determining the arm ' s length value of the benefit, any conditions that would prevent or restrict the conversion of the benefit to cash shall be disregarded.

Section 21A of the ITAA 1936 does not deem any benefit in the form of property or services to be income. Nor does it include an amount 'as assessable income'. Its effect is that in the event that the non-cash benefit is already considered to be income derived in carrying on a business, subsection 21A(2) of the ITAA 1936 specifies that the amount to be brought to account is the amount that the taxpayer would have paid the provider for the property or services under an arm's length transaction.

Question 4

Summary

Yes.

Detailed Reasoning

Clause 4.1 of the Trust Deed provides that the Employer will settle on the Trustee from time to time for the benefit of their Contractors 'such further contributions of amounts of moneys or loans of amounts of moneys as the Employer may decide is appropriate ...' [emphasis added].

Therefore, whether the Employer settles on the Trustee for the benefit of their Contractors, either contributions of monies or loans of monies, the situation will be equally analogous.

As a result, we consider that the reasons given at Question 1 are equally applicable to answering this question.

Question 5

Summary

No. The loans of monies by the Employer to the Trustee pursuant to the Trust Deed will not be included in the Contractor's assessable income under section 15-2 as to the extent that the loans are assessable, they will be included in the Contractor's ordinary income under section 6-5 and therefore section 15-2 will not apply.

Detailed Reasoning

Subsection 15-2(1) states:

Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you.

However, in accordance with paragraph 15-2(3)(d), the value of an amount that is assessable as ordinary income under section 6-5 is not included in assessable income under section 15-2.

We consider that the reasoning contained in the answer to Question 1 above applies equally here.

Question 6

Summary

No.

Detailed Reasoning

We consider that the reasoning contained in the answer to Question 3 above applies equally here.

Question 7

Summary

No. The Plan is not an employee share scheme for the purposes of Division 83A.

In considering this question, we note that the Commissioner was not required to form a view about whether the Allocated Investments were acquired by the Contractor for payment of market value consideration and has not done so for the purposes of answering this question.

Detailed Reasoning

Subsection 83A-10(1) defines an ESS interest in a company as:

...a beneficial interest in:

(a) a share in the company; or

(b) a right to acquire a beneficial interest in a share in the company.

Subsection 83A-10(2) defines an employee share scheme as:

...a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of:

(a) the company; or

(b) subsidiaries of the company:

in relation to the employee's employment.

We do not consider that the Plan is an employee share scheme within the meaning of

section 83A-10 as the Investments that are acquired under the Plan are not shares or rights to acquire shares in a company that is the Employer of the Employees or a holding company of the Employer of the Employees.

Question 8

Summary

Yes, the acquisition of the interest in the Trust will be included in the Contractor's assessable income under section 6-5.

Detailed Reasoning

Subsection 6-5(1) provides that assessable income includes income according to ordinary concepts.

Commonly, ordinary income of a business includes fees for services provided in the context of that business. Therefore, a Contractor who provides services in the course of a business and is provided a fee for those services must include in their assessable income that fee, as ordinary income.

Section 21A of the ITAA 1936 provides that for the purposes of the Act, in determining the income derived by a taxpayer, a non-cash business benefit that is not convertible to cash shall be treated as if it were convertible to cash. Further, subsection 21A(2) of the ITAA 1936 provides that for the purposes of the Act, if a non-cash business benefit (whether or not convertible to cash) is income derived by a taxpayer, the benefit shall be brought into account at its arm's length value reduced by the recipient's contribution (if any); and if the benefit is not convertible to cash, in determining the arm's length value of the benefit, any conditions that would prevent or restrict the conversion of the benefit to cash shall be disregarded.

A 'non-cash business benefit' is defined in subsection 21A(5) of the ITAA 1936 to mean property or services provided after 31 August 1988 wholly or partly in respect of a business relationship or wholly or partly for or in relation directly or indirectly to a business relationship.

Relevantly, the Contractor Agreement between the Employer and the Contractor provides that accounting and business advisory services are to be provided by the Contractor and in return for those services, the Contractor may elect to receive fringe benefits[3] in lieu of fees invoiced for future services. These fringe benefits may include participation in the Trust as described in the Contractor Agreement. The Contractor Agreement provides that the Contractor is to be provided "Allocated Investments in the XX Trust and an interest free loan". Further, the Contractor Written Agreement provides:

"Re: Remuneration Package: Agreement in Writing

Please find enclosed a remuneration package that we discussed previously for [the Contractor's] consideration, input, and agreement by signing this letter above [the Contractor's] name at the bottom of the page.

As we agreed with [the Contractor], we will provide [the Contractor] with $YY worth of investments in the XX Trust, in which [the Contractor] are now a participant.

The YY worth of investments in the XX Trust will comprise a part of [the Contractor] total remuneration package.

If [the Contractor] consent[s] to proceeding with this inclusion of the Employee Investment Trust in [the Contractor] annual total remuneration package please sign below."

An additional Contractor Written Agreement provided to the Commissioner slightly alters this agreement and instead, it reads:

The $YY worth of investments in the XX Trust will comprise a part of your remuneration and is over and above your invoiced amounts during the year for services rendered to us.

Therefore, it is clear that when reading both the Contractor Agreement and the Contractor Written Agreement (both the original version and the amended version), that govern the terms of the arrangement between the Contractor and the Employer, services are to be provided by the Contractor in exchange, in part, for $YY worth of investments in the Trust, which is to comprise the 'total remuneration package'.

This conclusion stands, despite modification to the Contractor Written Agreement that the investments are "over and above" "invoiced amounts during the year for services rendered to us".

It was originally understood that when services are provided and amounts are invoiced by the Contractor to the Employer, $YY of the fees payable to the Contractor are to be satisfied by $YY worth of investments in the Trust. This no longer appears to be the case. However, it remains that the investments will still "comprise part of the remuneration".

The receipt of Allocated Investments is a non-cash business benefit, being property provided to the Contractor wholly in respect of the business relationship that arises between the Contractor and the Employer.

Whilst there are limitations inherent in holding the Allocated Investments, and the Contractor is prevented from selling those investments, section 21A of the ITAA 1936 requires us to treat it as if it were so convertible. Furthermore, we are also required to ignore any such restrictions to convertibility to cash in order to determine the arm's length value of the benefit.

As we have concluded that the non-cash business benefit provided to the Contractor is income derived by the Contractor (as remuneration), subsection 21A(2) of the ITAA 1936 provides that the amount must be brought to account at its arm's length value, reduced by the recipient's contribution.

'Arm's length value' in relation to a non cash business benefit means, per subsection 21A(5) of the ITAA 1936, the amount that the recipient could reasonably be expected to have been required to pay to obtain the benefit from the provider under a transaction where the parties to the transaction are dealing with each other at arm's length in relation to the transaction; or if such an amount cannot be practically determined - such amount as the Commissioner considers reasonable.

In order to arrive at the arm's length value of the Allocated Investments in the Trust, the entire bundle of accompanying rights will need to be included in the value. This includes the rights to income, capital growth, as well as the residual right to a share of the capital of the Trust upon winding up of the Trust.

For present purposes, the $YY worth of investments will be considered to be worth at least $YY.

Under subsection 21A(2) of the ITAA 1936, the benefit's arm's length value will be reduced by the 'recipient's contribution'. A 'recipient's contribution' is also defined in subsection 21A(5) of the ITAA 1936 to mean the amount of any consideration paid to the provider by the recipient in respect of the provision of the benefit, reduced by the amount of any reimbursement paid to the recipient in respect of that consideration.

'Consideration paid' is an undefined term and must take its ordinary meaning.

The Macquarie Dictionary defines "consideration" as:

" 5. Law. in a contract, or other legal transaction, the promise by which some right or benefit accrues to one party, in return for which the party who receives the benefit promises or conveys something to the other."

A general principle of contract law is that "whilst consideration need not be adequate it must be of value" (Halsbury's Laws of England). In Thomas v. Thomas[4], Patteson J said:

"Consideration means something which is of value in the eye of the law, moving from the plaintiff ..".

And in Currie v. Misa[5]:

"A valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other".

However, the interpretation of a word appearing in a statute should not be divorced from its context (Cooper Brookes (Wollongong) Pty Ltd v. FC of T[6]). In this regard, it should be noted that the reference to "consideration" appearing in subsection 21A(5) of the ITAA 1936 is in the context of the amount of any consideration "paid" to the provider "in respect of the provision of the benefit" and not simply to "consideration".

The present context indicates that the reference to "consideration" should be understood as a reference to a payment that actually passes between the parties as payment for the provision of the benefit (in this case, the Allocated Investment). This is reflected in the Explanatory Memorandum to the Bill[7] that introduced section 21A of the ITAA 1936:

If a non-cash business benefit is of an income nature, the amount to be assessable is to be the arm's length value of the benefit less any cash contributions made by the recipient.

...

By paragraph 21A(2)(a) the amount to be included as assessable income is the arm's length value of the non-cash benefit less any amount contributed by the recipient in acquiring the benefit.

Subsection 21A(4) ensures that only money consideration may constitute a recipient's contribution for purposes of this section.

In the current arrangement, the Contractor agrees to pay an amount to acquire the benefit, being the Allocated Investment. This amount is satisfied by way of finance provided by the Trustee to the Contractor. In the Trustee's books of account, a set-off occurs. That is, the amounts to be forwarded to the Contractor by the Trustee pursuant to the loan are set off against the liability owed by the Contractor to the Trustee for the acquisition of the benefit. Where the set off happens correctly, the Commissioner accepts that there has been a payment contributed by the recipient in acquiring the benefit.

However, the agreement between the parties is such that under the terms of the loan agreement, governed by clause X of the Trust Deed, the Trustee will, in accordance with clause JJ of the Trust Deed, pay amounts to the Contractor from repayments of loan pursuant. The Trustee will do so 'when instructed by the Employer'. The Employer has asserted that in respect of the Contractor, the instruction by the Employer will happen on every occasion. In substance, clause JJ of the Trust Deed and the agreement between the parties is that the loan principal (being the amounts payable for the acquisition of the Allocated Investment) will be repaid, refunded or reimbursed to the Contractor.

The agreement by the Contractor to pay an amount for the Allocated Investment is countered by a cross agreement to repay those amounts to the Contractor under clause JJ of the Trust Deed. We consider that this agreement has one of two alternative effects:

• the agreement to refund or return the principal amount to the Contractor effectively means that no amount has been contributed by the Contractor to acquire the investments, or
• the agreement to refund or return the principal amount to the Contractor constitutes a reimbursement paid to the recipient in respect of that consideration.

In either situation, the recipient's contribution is reduced by the clause JJ amount.

Under section 21A of the ITAA 1936, the consideration paid by the recipient is reduced by the amount of any reimbursement paid to the recipient in respect of that consideration. Reimbursement is not defined for the purposes of the Act and must take its ordinary meaning. The Commissioner explains the ordinary meaning of reimbursement in Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement. Paragraph 3 states:

A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption.

Having regard to the arrangement between the parties, clause JJ of the Trust Deed provides that the Trustee will pay amounts to the Contractor "from repayments of loan pursuant to Clause ... of the Trust Deed." The Trust Deed provides that the amount of the loan repayable on the cancellation of any Allocated Investment shall be equal to the Issue Price of the Allocated Investment. It is the 'Issue Price of the Allocated Investment' that the Contractor agrees to pay for the Allocated Investment. Therefore, the amounts to be paid to the Contractor under clause JJ are a reimbursement, or compensation wholly or partly, for the expense incurred in relation to the Issue Price of the Allocated Investment. In real terms, due to the operation of clause JJ and the inherent non-recourse nature of the loan terms, the Contractor receives the Allocated Investment as consideration for services provided to the Employer under the Contractor Agreement without being required to pay money for it - other than by way of a financing arrangement with the Trustee, which is neutralised once the Trustee makes the clause JJ payment.

Question 9

Summary

No.

In considering this question, we note that the Commissioner was not required to form a view about whether the Allocated Investments were acquired by the Contractor for payment of market value consideration and has not done so for the purposes of answering this question.

Detailed Reasoning

Section 6-10 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 lists those provisions about assessable income. Included in this list is section 15-2.

Section 15-2 provides that the value to the taxpayer of all gratuities and benefits provided to them in respect to, or for or in relation directly or indirectly to, any employment or services rendered will be included in their assessable income.

However, subsection 15-2(3) provides that the value of the following are not included in assessable income under this section:

....

(d) an amount that is assessable as ordinary income under section 6-5.

As the acquisition of an interest in the Trust by the Contractor, represented by the Allocated Investment and the associated bundle of rights is assessable as the Contractor's ordinary income for the purposes of section 6-5, section 15-2 does not apply.

Question 10

Summary

No. Section 21A of the ITAA 1936 does not operate to "include" amounts as assessable income, rather it provides a mechanism through which income derived by a taxpayer is calculated.

In considering this question, we note that the Commissioner was not required to form a view about whether the Allocated Investments were acquired by the Contractor for payment of market value consideration and has not done so for the purposes of answering this question.

Detailed Reasoning

Section 21A of the ITAA 1936 does not actually deem any benefit in the form of property or services to be income. Nor does it include an amount 'as assessable income'. Its effect is that in the event that the non-cash benefit is already considered to be income derived by a taxpayer, subsection 21A(2) of the ITAA 1936 specifies that the amount to be brought to account is the amount that the taxpayer would have paid the provider for the property or services under an arm's length transaction.

For that reason, the acquisition of the interest in the Trust is not the Contractor's assessable income under section 21A of the TTAA 1936. However, the acquisition of the interest in the Trust is included in the Contractor's assessable income as ordinary income under section 6-5 and it is this amount that section 21A of the ITAA 1936 applies to. The full application of section 21A of the ITAA 1936 to the Contractor's ordinary income is discussed above at Question 8.

Question 11

Summary

Yes, the amount included in assessable income under section 6-5 is the difference between the amount of interest that the Contractor could reasonably be expected to pay on the loan if the arrangement was at arm's length and the amount of interest which has actually been paid.

We consider the analysis contained above (see Question 8) is equally applicable here.

Detailed Reasoning

Subsection 6-5(1) provides that assessable income includes income according to ordinary concepts.

Commonly, ordinary income of a business includes fees for services provided in the context of that business. Therefore, a contractor who provides services in the course of a business and is provided a fee for those services must include in their assessable income that fee, as ordinary income.

Section 21A of the ITAA 1936 provides that for the purposes of the Act, in determining the income derived by a taxpayer, a non-cash business benefit that is not convertible to cash shall be treated as if it were convertible to cash. Further, subsection 21A(2) of the ITAA 1936 provides that for the purposes of the Act, if a non-cash business benefit (whether or not convertible to cash) is income derived by a taxpayer, the benefit shall be brought into account at its arm's length value reduced by the recipient's contribution (if any); and if the benefit is not convertible to cash, in determining the arm's length value of the benefit, any conditions that would prevent or restrict the conversion of the benefit to cash shall be disregarded.

A 'non-cash business benefit' is defined in subsection 21A(5) of the ITAA 1936 to mean property or services provided after 31 August 1988 wholly or partly in respect of a business relationship or wholly or partly for or in relation directly or indirectly to a business relationship.

Relevantly, the Contractor Agreement between Salary Masters and the Contractor provides that accounting and business advisory services are to be provided by the Contractor and in return for those services, the Contractor may elect to receive fringe benefits in lieu of fees invoiced for future services. These fringe benefits may include participation in the Trust as described at item 6 of the Schedule. Item 6 of the Schedule to the Contractor Agreement provides that The Contractor is to be provided "Allocated Investments in the X Trust and an interest free loan".

In the course of the arrangement as described and under an arrangement with the Employer, the trustee of the Trust provides the Contractor with an interest free loan. This is done, as noted in the Contractor Agreement, in satisfaction of receipt of fees for services provided.

The receipt of the interest free loan is therefore a benefit provided to the Contractor wholly in respect of the business relationship that arises between the Contractor and the Employer.

In accordance with Taxation Ruling TR 93/38 Income tax and fringe benefits tax: taxation consequences of insurance companies providing interest free or low interest loans to insurance agents or their employees (TR 93/38), an interest free loan may constitute a non-cash business benefit for the purposes of section 21A of the ITAA 1936.[8] 'Non-cash business benefit' is defined to include both property and services. 'Services' is then further defined to include any benefit provided under an arrangement for or in relation to the lending of money.

Subsection 21A(2) of the ITAA 1936 requires any non-cash business benefit that is income derived by a taxpayer to be brought into account at its arm's length value, reduced by the recipient's contribution (if any). In the present case, the amount to be brought into account is the difference between the amount of interest that the Contractor could reasonably be expected to pay on the loan if the arrangement was at arm's length and the amount of interest which has actually been paid. For the purpose of determining an 'arm's length value', a value calculated with reference to the statutory interest rate used for the purposes of the FBTAA will be accepted.[9]

Question 12

Summary

No. The interest free loan provided by the Trustee to the Contractor for the purpose of acquiring an interest in the Trust will not be included as the Contractor's assessable income under section 15-2.

Detailed Reasoning

Section 6-10 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 lists those provisions about assessable income. Included in this list is section 15-2.

Section 15-2 provides that the value to the taxpayer of all gratuities and benefits provided to them in respect to, or for or in relation directly or indirectly to, any employment or services rendered will be included in their assessable income.

However, subsection 15-2(3) provides that the value of the following are not included in assessable income under this section:

...

(d) an amount that is assessable as ordinary income under section 6-5.

In accordance with Taxation Ruling TR 93/38, the benefit received by the Contractor in relation to the interest free loan is included in the Contractor's ordinary income for the purposes of section 6-5 and therefore, section 15-2 does not apply.

Question 13

Summary

No.

Detailed Reasoning

Section 21A of the ITAA 1936 does not actually deem any benefit in the form of property or services to be income. Its effect is that in the event that the non-cash benefit is already considered to be income derived in carrying on a business, subsection 21A(2) of the ITAA 1936 specifies that the amount to be brought to account is the amount that the taxpayer would have paid the provider for the property or services under an arm's length transaction.

For that reason, the benefit in the interest free loan is not the Contractor's assessable income under section 21A of the ITAA 1936. However, the loan benefit is the Contractor's assessable income under section 6-5 and it is this amount that section 21A of the ITAA 1936 applies to. The full application of section 21A of the ITAA 1936 to the Contractor's ordinary income is discussed above at Question 8.

Question 14

Summary

As the correctness of the ruling on this matter would depend on which assumptions were made, we decline to make the ruling as per paragraph 357-110(1)(a) of Schedule 1 to the TAA and in accordance with the Full Federal Court in Hacon.

Detailed Reasoning

The income amount calculated under subsection 21A(2) of the ITAA 1936 may be reduced if, had the recipient incurred and paid an amount in respect of the provision of the benefit, the recipient would have been entitled to a 'once-only deduction' for the expenditure. The reduced amount will be the difference between the amount calculated under subsection 21A(2) of the ITAA 1936 and the otherwise deductible amount of the expenditure had it been incurred by the taxpayer as per subsection 21A(3) of the ITAA 1936.

Subsection 21A(3) of the ITAA 1936 states:

Where:

(a)  a non-cash business benefit is income derived by a taxpayer in a year of income; and

(b)  if the taxpayer had, at the time the benefit was provided, incurred and paid unreimbursed expenditure in respect of the provision of the benefit equal to the amount of the arm's length value of the benefit - a once-only deduction would, or would but for section 82A, and Subdivisions F, GA and G of Division 3 of this Part, of this Act, and Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the taxpayer in respect of a percentage (in this subsection called the deductible percentage) of the expenditure;

the amount that, apart from this subsection, would be applicable under subsection (2) of this section in respect of the benefit shall be reduced by the deductible percentage.

The Commissioner may decline to make a private ruling if the Commissioner considers that the correctness of a private ruling would depend on which assumptions were made about a future event or other matter.

The Commissioner considers that the correctness of a determination on whether the taxable value of a non-cash business benefit constituted by the interest free loan will be reduced to nil due to the application of the 'otherwise deductible rule' under subsection 21A(3) of the ITAA 1936 would require the Commissioner to make assumptions. The Contractor has stated that the Allocated Investments include a beneficial interest in Investments acquired by the Trustee and that broadly the Trustee will acquire listed shares and units. The Commissioner would be required to make assumptions as to whether there is a reasonable expectation of the underlying investments made by the Trustee ever generating profit, or assessable income at all.

As the correctness of the ruling on this matter would depend on which assumptions were made, we decline to make the ruling as per paragraph 357-110(1)(a) of Schedule 1 to the TAA and the Full Federal Court in Hacon.

Question 15

Summary

No. Section 112-20 provides that where the Contractor does not deal at arm's length with the other entity in connection with the acquisition, the first element of the cost base of a CGT asset is its market value at the time of acquisition, and not the amount of consideration provided.

Detailed Reasoning

Under subsection 110-25(2), the first element of the cost base of a CGT asset is the total of the money the Contractor paid, or is required to pay, in respect of acquiring it, and the market value of any other property the Contractor gave, or is required to give, in respect of acquiring it.

The application of subsection 110-25(2) has been called into question in cases where loans of monies to employees to acquire shares has been considered. For example, see E Fice SM in Munnery v FC of T[10], where it was stated:

Therefore, I find the notional loan cannot properly be described as monies paid or monies required to be paid in respect of acquiring the shares. Nor is anything which the employee is required to do to preserve (retain) the shares in the plan properly described as the market value of any other property given in respect of acquiring the shares. It cannot fall within the first element of section 110-25(2) of the ITAA 1997.[11]

In light of this, it is therefore considered necessary to consider the cost base modification rules in Division 112.

Note 2 to subsection 110-25(2) provides that the first element of the cost base of a CGT asset is replaced with another amount in many situations under Division 112. Division 112 tells you situations that may modify the general rules about the cost base and reduced cost base of a CGT asset.

However, under section 112-15, if a cost base modification replaces an element of the cost base of a CGT asset with an amount, Part 3-1 and 3-3 apply as if the amount that had been paid for the asset was the substituted value.

Under section 112-20, the first element of the cost base of a CGT asset the Contractor acquires from another entity is its market value (and not the amount paid or payable for acquiring it) if the Contractor did not deal at arm's length with the other entity in connection with the acquisition.

'Arm's length' is a defined term under section 995-1. In determining whether parties are dealing at arm's length, consider any connection between them and any other relevant circumstance.

If it is concluded that the Contractor and the Trustee were not dealing with each other at arm's length in connection with the acquisition of the interest in the Trust, the first element of the cost base will not be the amount paid to acquire it, but rather its market value. Section 960-410 provides that "[i]n working out the market value of a *non-cash benefit, disregard anything that would prevent or restrict conversion of the benefit to money".

Are the Contractor and the Trustee dealing at arm's length in connection with the acquisition of the interest in the Trust?

The interpretation of the phrase 'not dealing with each other at arm's length' was considered (for the purposes of interpreting the same phrase in subsection 102AG(3) of the ITAA 1936) by the Federal Court in The Trustee for the Estate of the late AW Furse No. 5 Will Trust v. FC of T[12] (Furse) where Hill J noted:

The first of the two issues [i.e. whether the parties to the relevant agreement were dealing with each other at arm's length] is not to be decided solely by asking whether the parties to the relevant agreement were at arm's length to each other. The emphasis in the subsection is rather upon whether those parties, in relation to the agreement, dealt with each other at arm's length. The fact that the parties are themselves not at arm's length does not mean that they may not, in respect of a particular dealing, deal with each other at arm's length. This is not to say that the relationship between the parties is irrelevant to the issue to be determined under the subsection. The distinction was pointed out by Davies J in connection with similar words used in sec. 26AAA(4) of the Act in Barnsdall v. FC of T 88 ATC 4565 at p. 4568, in a passage which with respect I agree: ...

What is required in determining whether parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining.[13]

In line with Hill J's comments in Furse, parties are not dealing with each other at arm's length when they are not involved in real bargaining.

More relevantly, the authority in Barnsdall and Furse was considered and applied by the Federal Court in Granby Pty Ltd v. Federal Commissioner of Taxation[14] (Granby) in the statutory predecessor to the current market value substitution rule in the CGT rules. In Granby, Lee J followed Barnsdall and Furse and added:

... the term 'at arm's length' means, at least, that the parties to a transaction have acted severally and independently in forming their bargain. ...

If the parties to the transaction are at arm's length it will follow, usually, that the parties will have dealt with each other at arm's length. That is, the separate minds and wills of the parties will be applied to the bargaining process whatever the outcome of the bargain may be.

That is not to say, however, that parties at arm's length will be dealing with each other at arm's length in a transaction in which they collude to achieve a particular result, or in which one of the parties submits the exercise of its will to the dictation of the other, perhaps, to promote the interests of the other. As in Minister of National Revenue v. Merritt 69 DTC 5159 at 5166 where the parties to the transaction were parties at arm's length, the terms of a loan transaction made between them had been dictated by a unilateral decision of one of them and no independent will in the formation of that transaction had been exercised by the other.[15]

As concluded in Taxation Ruling TR 2006/7 Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income:

199. ...... if the relationship of the parties is such that one party has the ability to influence or control the other, this will suggest that the parties may not be dealing with each other at arm's length, but it will not be determinative. The Commissioner will only be satisfied that the parties are not dealing with each other at arm's length in relation to a transaction if it is established that the independent minds and wills of the parties are not applied to the transaction such that their dealing is not a matter of real bargaining.

The Contractor is being offered an interest in the Trust by the Trustee as part of a suite of benefits provided to the Contractor in the broader context of the Contractor relationship with the Employer. The acquisition of the interest in the Trust is on 'take it or leave it' terms. The terms are set out in the Employee Investment Trust Handbook, to be read together with the terms of the Trust Deed. There is no evidence that the offer (and acceptance) of the interest in the Trust is a result of independent minds and wills of each party striking a real bargain. There is no negotiation, no examination or alteration of the terms of the bargain following negotiation. In fact, the application of Allocated Investments of a nominated Investment is at the Employer's absolute discretion.

Therefore, it cannot be concluded that the acquisition of the interest in the Trust by the Contractor is as a result of a dealing at arm's length between the parties.

As such, subsection 112-20(1) applies to substitute the amount paid to acquire the interest in the Trust for the market value. When arriving at market value, anything that would prevent or restrict the conversion of that interest to money is to be disregarded.

In order to work out the first element of the cost base of the interest in the Trust upon acquisition by the Contractor, the Contractor will need to arrive at the market value of that interest, having regard to all of the rights and entitlements, obligations and liabilities conferred on the Contractor and the Trustee of the Trust.

Question 16

Summary

No, it is Subdivision 207-B that deals with the inclusion in assessable income of franked distributions, not section 97 of the ITAA 1936. However, section 97 of the ITAA 1936 would deal with 'other income'. Our understanding of the arrangement is that if the Investments were to generate income, that income would largely be productive of 'franked distributions'. Therefore, it is unknown what 'other income' is likely to be made up of.

Detailed Reasoning

Will franked distributions be included in the Contractor's assessable income?

Subdivision 207-B deals with franked distributions received by a trustee of a trust where the benefit is received by a beneficiary of that trust.

Section 207-50 contains rules for when a franked distribution flows via a trust to a beneficiary. Subsection 207-50(3) relevantly provides:

(3) A franked distribution flows indirectly to a beneficiary of a trust in an income year if, and only if:

(a) during that income year, the distribution is made to the trustee of the trust... and

(b) the beneficiary has this amount for that income year (the share amount):

(i) a share of the trust's net income for that income year that is covered by paragraph 97(1)(a) of the Income Tax Assessment Act 1936; or

(ii) ...

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

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

Section 207-55, and in particular, item 3 of the table in subsection 207-55(3), contains rules to ensure the amount of a franked distribution made to a trustee of a trust is allocated notionally amongst the beneficiaries of that trust and that allocation corresponds with the way in which those benefits were derived.

Column 2 of item 3 provides that where a trustee has a positive amount of net income for the income year, the trustee's share is the amount of the franked distribution. Otherwise, the trustee's share is nil.

Column 3 of item 3 provides the beneficiary's share of the franked distribution is the amount in subsection 207-55(4).

Subsection 207-55(4) relevantly states:

For the purposes of column 3 of item 3 of the table in subsection (3), the amount is the sum of:

(a) so much of the amount worked out under column 2 of item 3 of the table in subsection (3) to which:

(i) ... the focal entity is specifically entitled;...

(b) if there is an amount of the franked distribution to which no beneficiary is specifically entitled - that amount multiplied by:

(i)... the focal entity's adjusted Division 6 percentage of the income of the trust for the relevant income year...

The term 'specifically entitled' is defined in subsection 207-58(1) as:

A beneficiary of a trust estate is specifically entitled to an amount of a franked distribution made to the trust estate in an income year equal to the amount calculated under the following formula:

Franked distribution x Share of net financial benefit

Net financial benefit

Where:

Net financial benefit means an amount equal to the financial benefit that is referable to the franked distribution (after any application by the trustee of expenses that are directly relevant to the franked distribution.)

Share of net financial benefit means an amount equal to the financial benefit that, in accordance with the terms of the trust:

(a) the beneficiary has received, or can be reasonably expected to receive; and

(b) is referable to the franked distribution... and

(c) is recorded, in its character as referable to the franked distribution, in the accounts or records of the trust no later than the end of the income year.

Under the Trust Deed, the Contractor, in the Contractor's capacity as a Participant, is considered to be presently and absolutely entitled to the net income of the Trust Fund derived during an Accounting Period that is 'attributable to [the Contractor's] particular Allocated Investment Distribution Entitlement'.

The Contractor's Investment Distribution Entitlement (IDE) is defined in the Trust Deed as being, in respect of an Accounting Period: 'a sum equal to any dividends or other income received by the Trustee during that Accounting Period on Allocated Investments referable to that Allocated Investment'.

In these circumstances, the Contractor will be presently and absolutely entitled to a sum equal to the amount of any dividends arising from the Allocated Investments referable to the Contractor's rights to the Allocated Investments. Therefore, the Contractor is reasonably expected to receive any franked distributions referable to the Contractor's Allocated Investments under the terms of the Trust Deed. That is, the Contractor's share of the franked distributions will be 100% of those franked distributions received by the Trustee during that Accounting Period on Allocated Investments referable to the Contractor's Allocated Investment.

Under clause Z of the Trust Deed, the Employer has agreed to reimburse the Trustee for all expenses incurred in the operation of the Trust. Therefore, the net financial benefit will also be 100% of those franked distributions received by the Trustee during that Accounting Period on Allocated Investments referable to the Contractor's Allocated Investment.

As such, for the purposes of paragraph 207-38(4)(a) and section 207-58, the amount of a franked distribution to which the Contractor is specifically entitled is calculated as follows for each franked distribution:

To the extent there are any Unallocated Investments for which the Trustee receives franked distributions, and the Trustee exercises its discretion to make the Contractor presently entitled to a share of those franked distributions, the Contractor will also include an amount representing the Contractor's share of these franked distributions for the purposes of paragraph 207-55(4)(b).

The Contractor's share of franked distributions received by the Trustee will therefore include, for the purposes of column 3 of item 3 of the table in subsection 207-55(3), the sum of:

• each franked distribution received by the Trustee during that Accounting Period on Allocated Investments referable to the Contractor Allocated Investment as the amount to which the Contractor is specifically entitled per the formula above (per
• paragraph 207-55(4)(a)), and
• the Contractor's share of any franked distributions to which the Contractor is entitled as a result of the Trustee exercising its direction (per paragraph 207-55(4)(b)).

As such, under section 207-50, where a franked distribution is paid to the Trustee during an income year:

(a)  there will be a distribution made to the Trustee

(b)  the Contractor will have a share amount (being a share of the Trust's net income will be included in the Contractor's assessable income or the Contractor's interest covered by section 98A or 100A of the ITAA 1936 (per the Trust Deed, the Contractor will be presently and absolutely entitled to a share in the net income that represents the Contractor's Allocated Investment)), and

(c)   the Contractor's share of a franked distribution, under section 207-55, will be positive.

The Contractor's assessable income for that income year, per section 207-37, therefore includes the Contractor's share of the franked distributions.

Will franking credits attributed to those franked dividends be included in the Contractor's assessable income?

Under subsection 207-35(1), the assessable income of a trust includes the amount of a franking credit where:

(a)  a franked distribution is made to the trustee

(b)  the trust is not a corporate tax entity when the distribution is made, and

(c)   the trust is not a complying superannuation entity or FHSA trust when the distribution is made.

Under subsection 207-35(4), a beneficiary's assessable income also includes so much of the franking credit attributed to their share of the franked distributions where the following conditions in subsection 207-35(3) are met:

(a)  a franked distribution is made to the trustee of a trust

(b)  the assessable income of the trust includes an amount under subsection 207-35(1)

(c)   the distribution flows indirectly to a beneficiary of the trust, and

(d)  disregarding Division 6E of the ITAA 1936, the beneficiary would have been presently entitled to an amount of assessable income under section 97 of the ITAA 1936.

Under the Plan, the Trustee is likely to receive franked distributions in respect of the Investments.

The Trust is not a corporate tax entity, complying superannuation fund or FSHA trust. As such, the assessable income of the Trust would include franking credits per subsection 207-35(1).

As outlined above, the distribution would flow directly to the Contractor, as a beneficiary of the Trust, through the Contractor's IDE.

But for Division 6E of the ITAA 1936, the Contractor's assessable income would have included the franked distribution and franking credits as the Contractor was presently entitled to the Contractor's IDE (which includes franked distributions) under clause F of the Trust Deed.

As such, the Contractor's assessable income also includes, under subsection 207-35(4), the Contractor's share of the franking credits. The additional amount included in the Contractor's assessable income is calculated under section 207-57 for each franked distribution using the following formula:

Question 17

Summary

Yes. The proceeds received on the redemption of the Allocated Investments will be included in the Contractor's assessable income under section 6-5.

Detailed Reasoning

As stated above, section 6-5 outlines that the Contractor's assessable income includes any ordinary income that the Contractor derives directly or indirectly from all sources.

In the context of carrying on of a business, ordinary income from that business may include fees for services provided or receipt of amounts for goods sold. Gains earned by the carrying on of a business, in the ordinary course of that business, are usually ordinary income in nature[16].

Upon redemption of the Contractor's interest in the Trust, the Contractor will receive two amounts:

(a)  a Cancellation Entitlement, which will be applied first against the loan the Contractor owes to the Trustee, with the balance being payable directly to the Contractor, and

(b)  an amount pursuant to clause JJ of the Trust Deed from repayment of the loan.

As previously discussed, the amount pursuant to clause JJ of the Trust Deed is a reimbursement or recoupment or refund of the Issue Price of the Allocated Investment undertaken to be paid by the Contractor at the outset of the arrangement.

The net benefit received by the Contractor of the Cancellation Entitlement is a benefit that derives from an investment made by the Contractor in the ordinary course of carrying on a business. As part of the Contractor Agreement and provision of the Allocated Investments as consideration for services provided, the entire bundle of rights enjoyed by the Contractor in holding the Allocated Investments are done so in the ordinary course of carrying on a business.

In FC of T v. The Myer Emporium Ltd[17] (Myer Emporium), the High Court provided that profits or gains made in the ordinary course of carrying on a business are income. As a business is carried on with a view to profit, profits or gains are invested with a profit-making purpose and are thereby stamped with the character of income.

In Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income(TR 92/3), two types of profits or gains come within the Myer description namely:

(a)  a profit or gain arising from a transaction which is itself a part of the ordinary business of a taxpayer (judged by reference to the transactions in which the taxpayer usually engages) - provided that the gross receipts from the transaction lack the character of income (Commercial and General Acceptance Ltd v. FC of T[18]), and

(b)  a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity e.g. profits of insurance companies and banks on the sale of investments are generally income (Chamber of Manufactures Insurance Ltd v. FC of T[19] and C of T v. Commercial Banking Co. of Sydney[20]).

Support for this view is found in the judgment of Hill J in Westfield Ltd v. FC of T[21](Westfield).

Whilst, at a fundamental level, the business activities of the Contractor relate to carrying on a professional business and the provision of professional services, acts done in carrying on a business are not limited to acts in relation to a taxpayer's primary business (see, for example, Colonial Mutual Life Assurance Society Ltd v. Federal Commissioner of Taxation[22]).

The acquisition of the Allocated Investment occurred as an essential act of the Contractor in the course of its business activity as much as the specific business activities that gave rise more directly to the taxpayer's assessable income (compare Hill J in Commissioner of Taxation v. Cooling[23]).

The business was carried on with a view to profit, and therefore a gain made in the ordinary course of carrying on that business is thereby stamped with the character of income (see Myer Emporium[24]).

Because the transaction which gives rise to the gain is itself a part of the taxpayer's ordinary business, the identification of the business activity itself stamps the transaction as one having a revenue character. The same can be said where the transaction is an ordinary incident of the business activity of the taxpayer, albeit not directly its main business activity (see Hill J in Westfield[25]).

The unprecedented form of the specific gain does not prevent it from being revenue, because it results from a transaction incidental to the conduct of the taxpayer's business (see Stephen J, AL Hamblin Constructions Pty Ltd v. Federal Commissioner of Taxation[26]).

The gain on the Allocated Investment may be said to be consideration for past business between the Contractor and the Employer, and so an incident of the Contractor's business.

Question 18

Summary

No.

Detailed Reasoning

Section 6-10 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 lists those provisions about assessable income. Included in this list is section 15-2.

Section 15-2 provides that the value to the taxpayer of all gratuities and benefits provided to them in respect to, or for or in relation directly or indirectly to, any employment or services rendered will be included in their assessable income.

However, subsection 15-2(3) provides that the value of the following is not included in assessable income under this section:

...

an amount that is assessable as ordinary income under section 6-5.

The benefit received by the Contractor upon redemption of the Allocated Investment is included in the Contractor's ordinary income for the purposes of section 6-5 and therefore, section 15-2 does not apply.

Question 19

Summary

No.

Further Reasoning

Section 21A of the ITAA 1936 provides that any non-cash business benefit is to be treated as convertible to cash for the purpose of determining the income of a taxpayer from the carrying on of a business. 'Non-cash business benefit' is defined in subsection 21A(5) of the ITAA 1936 to include property and services provided in respect of a business relationship.

Section 21A of the ITAA 1936 does not actually deem any benefit in the form of property or services to be income. Its effect is that in the event that the non-cash benefit is already considered to be income derived in carrying on a business, subsection 21A(2) of the ITAA 1936 specifies that the amount to be brought to account is the amount that the taxpayer would have paid the provider for the property or services under an arm's length transaction.

For that reason, the benefit on redemption of the Allocated Investment is not included in the Contractor's assessable income under section 21A of the ITAA 1936. However, the benefit on redemption of the Allocated Investment is included in the Contractor's assessable income under section 6-5 and it is this amount that section 21A of the ITAA 1936 applies to. The full application of section 21A of the ITAA 1936 to the Contractor ordinary income is discussed above at Question 8.

Question 20

Summary

Yes.

Detailed Reasoning

The amount to be included in the Contractor's assessable income from redemption of the Allocated Investments will equal the net amount received by the Contractor.

Question 21

Summary

Yes. Where the Trustee disposes of the Allocated Investments and makes a capital gain from that disposal, that capital gain (or part thereof) will be treated as the Contractor's capital gain pursuant to Subdivision 115-C.

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.

Once you have worked out a capital gain or loss arising from a CGT event, this capital gain or loss will be factored into Step 1 of working out your net capital gain under the method statement in subsection 102-5(1). Where a trustee of a trust holds an asset such as a share or unit and disposes of that share or unit, the trustee must include that gain or loss in its calculation of the net capital gain of the trust estate in that year.

Subdivision 115-C applies where a trust has a net capital gain for an income year and that net capital gain is taken into account in working out the trust's net income. For the purposes of explaining the application of Subdivision 115-C in these circumstances, it is assumed that the trust has a net capital gain and that net capital gain is taken into account in working out the trust's net income.

Broadly, Subdivision 115-C provides the mechanism by which a net capital gain made by a trustee of a trust is attributed to a beneficiary of a trust.

Subsection 115-225(1) applies to calculate a beneficiary's 'attributable gain'. The attributable capital gain is the product of:

(a)  the capital gain remaining after applying steps 1 to 4 of the method statement in

(b)  subsection 102-5(1), and

(c)   the beneficiary's share of the capital gain (section 115-227) divided by the amount of the capital gain.

A beneficiary's share of the capital gain of the trust pursuant to section 115-227 is the sum of:

(a)  the amount of the capital gain to which the beneficiary is specifically entitled, and

(b)  if there is an amount of the capital gain to which no beneficiary of the trust estate is specifically entitled and to which the trustee is not specifically entitled, that amount calculated in accordance with paragraph 115-227(b).

Section 115-228 prescribes when a beneficiary is specifically entitled to an amount of a capital gain. In subsection 115-228(1), to be specifically entitled to an amount of a capital gain made by the trust estate, a beneficiary must identify their relevant 'share of net financial benefit'. This is defined to mean the amount equal to the financial benefit[27] that, in accordance with the terms of the trust, including in accordance with the exercise of a power conferred by the terms of the trust:

• the beneficiary has received or can be reasonably expected to receive (paragraph (a) of the definition)
• is referable to the capital gain (paragraph (b) of the definition), and
• is recorded in its character as an amount referable to the capital gain in the accounts or records of the trust within 2 months after the end of the income year (paragraph (c) of the definition).

Where the Trustee disposes of the Allocated Investments, makes a capital gain and distributes to the beneficiary the proceeds from the sale all in the same income year, paragraph (a) of the definition of "share of net financial benefit" in subsection 115-228(1) is satisfied. However, where the sale of Investments occurs in one year but proceeds are received and distributed in the subsequent financial year, the matter is not as straightforward.

Taxation Determination TD 2012/11Income tax: capital gains: for the purposes of

subsection 115-228(1) of the Income Tax Assessment Act 1997, can a beneficiary of a trust estate be reasonably expected to receive an amount of a financial benefit referable to a capital gain made by the trust estate in an income year if the fact that the capital gain was made is not established until after the end of the income year? (TD 2012/11) discusses what is meant by 'can be reasonably expected to receive'. The requirement that a beneficiary be 'reasonably expected to receive' an amount equal to a financial benefit does not focus on whether the beneficiary has a reasonable expectation of the relevant capital gain arising. The provision is premised on there being such a gain. Accordingly, the requirement instead focuses on whether the beneficiary has a reasonable expectation of receiving an amount referrable to that gain (should the gain arise).

When a CGT asset is disposed of under a contract, CGT event A1 happens when the contract was entered into (paragraph 104-10(3)(a)) and not when the contract settles and the change of ownership of the asset occurs. A contract entered into in one income year may settle in a later income year. Satisfying the 'reasonably expected to receive' test is not directed to the likelihood of the disposal occurring and does not require an expectation that the disposal will occur. Rather, the test is whether, assuming there is a disposal that gives rise to a capital gain, there is a reasonable expectation that an amount of a financial benefit that is referable to any such capital gain made by the trust estate will be received by the beneficiary.

The expression 'reasonably expected' is not defined for the purposes of the ITAA 1997 and accordingly takes its ordinary meaning in the context in which it appears. TD 2012/11 provides a full discussion of the expression 'reasonably expected'. In summary, the Commissioner's position, as articulated in TD 2012/11, is that a beneficiary can establish a reasonable expectation of receiving an amount referable to a capital gain in the context of paragraph (a) of the definition of 'share of net financial benefit' in subsection 115-228(1) if there are grounds to justify an expectation that, in accordance with the terms of the trust, the receipt of the amount (should such a gain be made) is likely. It follows that a reasonable expectation of receipt of the amount (should the capital gain be made by the trust estate) is an expected outcome that is reliably based, rather than one that is a mere possibility. It necessarily excludes a predicted outcome that is unreasonable, irrational or absurd.

Then, under subsection 115-215(3), for each capital gain of the trust estate, Division 102 is taken to apply to each beneficiary as if that beneficiary had a capital gain amount equal to, twice or four times the amount mentioned in subsection 115-225(1), depending upon the circumstances of the gain as calculated by the trustee (and access by the trustee to various concessions).

In accordance with the Trust Deed, the Trustee has the power to calculate and distribute a 'Cancellation Entitlement' to a Contractor (beneficiary). In accordance with clause RR of the Trust Deed and subject to repayment of outstanding loan moneys:

The Trustee shall on cancellation of an Investment distribute to the Participant the Cancellation Entitlement pursuant to Clause XX for that the Allocated Investment....

The distribution shall be made as soon as practicable after the cancellation of the relevant Allocated Investment.

A Cancellation Entitlement arises from the redemption of Allocated Investments (the descriptor used in relation to the nature of the interest the beneficiary obtains in the Trust) upon request by the Contractor/Beneficiary. The operation of these provisions in the Trust Deed enable a conclusion that the Contractor/Beneficiary will receive or at the least, can be reasonably expected to receive a financial benefit that is referable to the capital gain that the Trustee makes on disposing of the Allocated Investments.[28]

Therefore, in accordance with Division 115-C, the Contractor/Beneficiary will have an amount of a gain attributable to them under section 115-215 when the Trustee disposes of their Allocated Investment. This amount of the gain will be calculated in accordance with section 115-225 as the Contractor/Beneficiary has a share of the capital gain to which the Contractor/Beneficiary is specifically entitled. Depending upon the circumstances, this amount may be grossed up in accordance with section 115-215.

Questions 22 (a) - (d)

Summary

(a)             No. There is no CGT event that happens.

(b)             There is no need to consider this question. There is no CGT event that happens in relation to the Contractor as a result of the redemption of the Allocated Investments.

(c)              There is no need to consider this question. There is no CGT event that happens in relation to the Contractor as a result of the redemption of the Allocated Investments.

(d)             This is not a valid ruling question. A particular provision has not been identified by the Applicant. The question asks whether the CGT event is the sole taxing event. This does not allow for the Commissioner to readily identify a provision in order to provide a ruling on how the law applies.

Detailed Reasoning

No CGT event on making of the Cancellation Entitlement

A CGT asset is defined in subsection 108-5(1) as any kind of property, or a legal or equitable right that is not property. An interest in a trust is a CGT asset.

The Commissioner considers the rights that the Contractor has acquired is an interest in the Trust for the purposes of subsection 108-5(1).

In accordance with section 104-70, CGT event E4 happens if the trustee of a trust makes a payment in respect of the your interest in the trust (except where CGT events A1, C2, E1, E2, E6 or E7 happen in relation to that interest) and some or all of the payment is not included in your assessable income. This is called the non-assessable part.

None of CGT events A1, C2, E1, E2, E6 or E7 happen to the Contractor's interest in the Trust upon redemption of the rights to the Allocated Investments and all of the payment that the Contractor receives from the trustee is included in the Contractor's assessable income under section 6-5 (see Question 17). As such, CGT event E4 does not happen when the trustee makes that payment to the Contractor.

As such, there is no CGT event that happens in relation to the Contractor as a result of the redemption of the Allocated Investments.

As there is no CGT event that happens in relation to the Contractor as a result of the redemption of the Allocated Investments, there is no need to consider the remaining questions.

Question 23

Summary

There is no need to consider this question. There is no CGT event that happens in relation to the Contractor as a result of the redemption of the Allocated Investments. Notwithstanding that a capital gain (or part thereof) made by the Trustee on redemption of Allocated Investments is treated as the Contractor's capital gain pursuant to Subdivision 115-C, subsection 115-215(5) states that section 118-20 does not reduce a capital gain that subsection 115-215(3) treats you as having for the purpose of applying Division 102 .Therefore, any amount treated as the Contractor's capital gain under 115-215(3) is not reduced by the amount included in the Contractor's assessable income under section 6-5.

Question 24

Summary

There is no need to consider this question. It is not applicable as the nature of the relationship between the Contractor and the Employer is not one of employment. In order to be an employment termination payment, subsection 82-130(1) requires that the payment be received by you in consequence of the termination of your employment, or after another person ' s death, in consequence of the termination of the other person ' s employment.

Question 25

Summary

No.

Detailed Reasoning

The amounts are a reimbursement or a refund of the Issue Price of the Allocated Investments and are not included in the Contractor's assessable income under section 6-5.

Question 26

Summary

No. The Contractor will not be entitled to a tax offset for franking credits attached to the franked distributions, unless the Contractor qualifies for the small shareholder exemption in former subsection 160APHT(1) of the ITAA 1936.

Detailed reasoning

Under paragraph 207-45(a), an individual is entitled to a tax offset equal to their share of franking credits on franked distributions which flow indirectly to that individual (e.g. through a trust). See the analysis above at Question 16 for further explanation about what happens when a franked distribution flows indirectly to a beneficiary.

However, where any of the circumstances set out in section 207-150 apply, including where the Trustee or the Contractor is not a 'qualified person' in respect of those distributions for the purposes of Division 1A of former Part IIIAA of the ITAA 1936, the Contractor will not be entitled to a tax offset for their share of any franking credits attached to those distributions. Section 207-150 relevantly states:

(1) If a franked distribution flows indirectly to an entity in an income year in one or more of the following circumstances:

(a) the entity is not a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936;

...

Then, for the purposes of this Act:

(f) subsection... (3)... applies to the entity in relation to that income year; and

(g) the entity is not entitled to a tax offset under this Division because of the distribution...

...

(3) If the franked distribution flows indirectly to the entity as a beneficiary of a trust under subsection 207-50(3), the entity can deduct an amount for that income year that is equal to the lesser of:

(a) its share amount in relation to the distribution that is mentioned in that subsection; and

(b) its share of the franking credit on the distribution.

In accordance with Taxation Determination TD 2007/11 Income tax: imputation: franked distributions: qualified persons: does an entity have to be a qualified person within the meaning of Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 to avoid the application of paragraphs 207-145(1)(a) and 207-150(1)(a) of the Income Tax Assessment Act 1997 in respect of a franked distribution made directly or indirectly to the entity on or after 1 July 2002?, it is necessary to have regard to the rules in Division 1A of former Part IIIAA of the ITAA 1936, as in force at 30 June 2002, in determining whether an entity is a qualified person for the purposes of paragraphs 207-145(1)(a) and 207-150(1)(a) in respect of a franked distribution made directly or indirectly to the entity after 30 June 2002.

A beneficiary of an employer remuneration trust (ERT) will generally not satisfy the qualified person test in respect of the franked distributions because their interest will not be vested and indefeasible, unless they qualify for the small shareholder exemption.

Former section 160APHO of the ITAA 1936 sets out the definition of a 'qualified person' for the purpose of Division 1A of the former Part IIIAA of the ITAA 1996. It provides 'qualified person', in relation to a dividend paid on shares, has the meaning given by former sections 160APHO, 160APHP, 160APHQ, 160APHR or 160APHT of the ITAA 1936 as that meaning is affected by former section 160APHU of the ITAA 1936. In this case, former sections 160APHP and 160APHT of the ITAA 1936 are relevant.

A taxpayer is a qualified person pursuant to former subsection 160APHT(1) of the ITAA 1936 if they are a small shareholder. A taxpayer is a small shareholder if they are an individual and the total of all franking credits they are entitled to (directly or indirectly) does not exceed $5,000.

On the information provided, it is not possible to determine if the Contractor will be a small shareholder, and therefore, a qualified person under former section 160APHT of the ITAA 1936.

In Soubra v Commissioner of Taxation[29](Soubra), the Administrative Appeals Tribunal considered an appeal to a similar private binding ruling question. That is, whether a participant of an ERT, which it is noted has similar features to the ERT in which the Contractor will be a Participant, was entitled to tax offsets equal to their share of the franking credits on the franked distributions under section 207-45.

In reaching its decision, that Ms Soubra was not entitled to tax offsets equal to her share of the franking credits on the franked distributions from an ERT, the Tribunal provided an instructive explanation of how the provisions in Division 1A of former Part IIIAA of the ITAA 1936 operate regarding a participant of an ERT. Former section 160APHL of the ITAA 1936 sets out how a taxpayer's interest in the relevant shares is to be calculated in determining whether the taxpayer is a qualified person in relation to a dividend paid on the shares (i.e. under former section 160APHP of the ITAA 1936). Former subsection 160APHL(2) of the ITAA 1936 applies in respect of a widely held trust.

A taxpayer who as a beneficiary of a widely held trust has held an interest in shares contained in the trust holding (within the meaning of former subsection 160APHL(4) of the ITAA 1936) of the widely held trust is a qualified person, under former section 160APHP of the ITAA 1936, in relation to a dividend paid on any of the shares to which a distribution from the trust to the taxpayer is attributable, where they have held an interest in the shares contained in the trust holding as a beneficiary of the trust for a continuous period of not less than 45 days.

In the Contractor's case, it is envisaged that a franked dividend will flow indirectly to the Contractor through the Contractor's interest in the Trust being the rights to Allocated Investments. Through these rights, the Contractor will hold an interest in the shares (i.e. the Investments allocated to the Contractor by the Trustee referred to as Allocated Investments) for, presumably, more than 45 days when a franked distribution is made to the Trustee.

However, under former subsection 160APHP(2) of the ITAA 1936, in calculating the number of days for which the taxpayer continuously held the interest, any days on which the taxpayer has materially diminished risks of loss or opportunities for gain in respect of the interest are to be excluded.

Former subsection 160APHL(4) of the ITAA 1936 provides, in applying former section 160APHL of the ITAA 1936 in relation to a widely held trust, 'trust holding' is all the shares and interests in shares that the trustee has held or holds.

A beneficiary of a trust is taken to have 'materially diminished' risks of loss or opportunities for gain on a particular day in respect of their interest in shares held by the trust if their 'net position' on that day in relation to their interest in the shares is less than 30% of those risks or opportunities (former subsection 160APHM(2) of the ITAA 1936). Therefore, in order to be a qualified person, the Contractor must be exposed to at least 30% of those risks and opportunities (a delta of at least 0.3).

The Contractor's 'net position' (former section 160APHJ of the ITAA 1936) in relation to the shares held by the Trustee, is worked out by netting off positive deltas (long positions) and negative deltas (short positions) (see former subsection 160APHM(3) of the ITAA 1936).

Due to the combined operation of former subsections 160APHL(7) and 160APHL(10) of the ITAA 1936, the net position of the Contractor's interest in the shares held in the Trust by the Trustee will start at 0. Former subsection 160APHL(10) of the ITAA 1936 provides a taxpayer has an additional short position equal to the taxpayer's long position under former subsection 160APHL(7) of the ITAA 1936 and an additional long position equal to so much of the taxpayer's interest in the trust holding as is a fixed interest. In accordance with former subsection 160APHL(11) of the ITAA 1936 a taxpayer's interest in the trust holding is a fixed interest to the extent that the interest is constituted by a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding.

Former subsection 160APHL(12) of the ITAA 1936 deems certain interests in trust holding to be defeasible, such as when the interest may be redeemed under the terms of the trust for less than its value or where the value of the interest may be materially reduced.

Paragraph 77 of Taxation Ruling TR 2018/7 Income tax: employee remuneration trusts outlines circumstances which are relevant and likely to impact whether an interest in the ERT is vested and indefeasible sufficient to conclude that the individual is a qualified person with respect to the dividends that pass to them through the ERT:

(a)          Vesting or holding periods: an employee may not be able to redeem interests in an ERT until a minimum period of employment has been satisfied.

(b)          Investment powers conferred on the trustee or the administrators by the trust deed that have the effect of reducing or diminishing the employee beneficiary's right to capital in the trust: this may include a power conferred on the trustee to acquire, sell or otherwise dispose of the property of the trust (such as shares held by the trustee), without regard to the interests of the employee beneficiary.

(c)           Amount payable on redemption: the amount payable upon redemption of a beneficiary's interest in the ERT at a particular point in time might be less than the acquisition/subscription price paid by the beneficiary for the interest in the ERT.

(d)          Dilution of value of interest: an effect of increasing the number of beneficiaries of the ERT without a corresponding accretion to the capital of the ERT may have the result of diminishing the interest of existing beneficiaries in the ERT.

Having regard to the terms of the Trust Deed, we have concluded the Contractor's interest in the Trust to not be vested and indefeasible. In particular:

•         The Trust Deed does not confer on the Contractor a right to the shares which are referrable to the Contractor's Allocated Investments. The Contractor only obtains, per clause B of the Trust Deed:

­        rights to receive a distribution in respect of each Accounting Period equal to the Contractor's Investment Distribution Entitlement

­        tight to a Cancellation Entitlement in accordance with clause PP of the Trust Deed

­        voting rights in respect of Investments in accordance with clause Q of the Trust Deed

­        rights to request the Trustee cancel the Contractor's Allocated Investments in accordance with clause C of the Trust Deed, and

­        voting rights attaching to Allocated Investments in accordance with the Trust Deed.

•         The Trust Deed provides the Trustee may from time to time cause Allocated Investments to be created and may increase the number of Allocated Investments on issue by accepting in whole or in part applications for Allocated Investments, which may result in the Contractor's overall entitlement to the interest in the Trust being diluted. This means that, under former paragraph 160APHL(12)(b) of the ITAA 1936 the Contractor's interest in the Trust is deemed to be defeasible.

•         The Trust Deed provides the Contractor 'cannot transfer or assign or otherwise deal with [the Contractor's] Allocated Investments in favour of any person nor can any equitable, contingent, future or partial interest or other security interest be created in an Allocated Investment', meaning the Contractor's interest in the Trust is not vested in possession because the Contractor will not be able to deal with it in any way.

•         The Trust Deed provides the amount payable to the Contractor on redemption is subject to the repayment of any outstanding loan monies. In particular, where the Contractor's Cancellation Entitlement is insufficient to repay this loan (i.e. the shares referrable to the Allocated Investment have declined in value), the Contractor's Allocated Investment is surrendered to the Trustee. This means the Contractor may ultimately receive nothing from the Trust Fund. This means that, under former paragraph 160APHL(12)(a) of the ITAA 1936 the Contractor's interest is deemed to be defeasible.

•         Under the Trust Deed, the Trustee must cancel some or all of the Allocated Investments registered in the Contractor's name on notification by the Employer of the termination of the Contractor's employment together with a request by that Employer that some or all of the Allocated Investment registered in the Participant's name should be cancelled immediately or on a particular date or dates. This means the Contractor's interest in the Trust is defeasible by the actions of the Employer and the Trustee.

•         Under the Trust Deed, the Trustee is empowered to meet a Cancellation Entitlement from the Trust Fund or any part thereof any monies in its hands whether received, held or deemed to be income or being cash contributed to the Trust, meaning the Contractor's interest in the whole of the Trust can be diluted.

•         The Trust Deed, as in Soubra, 'vests in the trustee the power to purchase or otherwise acquire and to sell or otherwise dispose of property, rights and privileges on such terms and conditions as it thinks fit.' This means the Contractor's interest in the Trust can be defeated by the actions of the Trustee.

Under former subsection 160APHL(14) of the ITAA 1936, the Commissioner has a discretion to determine an interest to be vested and indefeasible. ATO Interpretative Decision ATO ID 2014/10[30]sets out the Commissioner's position in respect of franking credit tax offsets for an arrangement which is substantially similar to the Contractor's arrangement. In particular, it considers the circumstances in which the Commissioner might exercise his discretion under former

subsection 160APHL(14) of the ITAA 1936. In accordance with ATO ID 2014/10, a conclusion that a beneficiary of a unit trust cannot satisfy the qualification period in the former section 160APHO of the ITAA 1936 is not a relevant matter for the Commissioner to consider in exercising the discretion to treat the unit holder's interest as vested and indefeasible under former paragraph 160APHL(14)(c) of the ITAA 1936.

Whether the discretion will be exercised in a taxpayer's favour is dependent on an examination of the circumstances so as to understand where the true economic ownership of the shares is held.

ATO ID 2014/10 sets out some factors which indicate that a unitholder may not be sufficiently exposed to the risk of loss or opportunity for gain in respect of their shares. These include:

•         The limited recourse nature of the loan (so that the unit holder is wholly protected from a fall in the market value of the shares);

•         The loan not being interest bearing;

•         The requirement for the unit holder to repay the loan from their own funds before being eligible to an in specie distribution;

•         The arrangement being generally promoted or operated on the basis that a unit holder will, upon cancellation of the units, receive cash rather than an in specie distribution; and

•         The various discretions of the trustee affecting the vesting of the shares.

Other than when the shares are directly transferred to the Contractor as an in specie distribution under the Contractor's Cancellation Entitlement, we consider the Contractor will not be exposed to the risk of loss in respect of these shares due to the following reasons:

•         The Contractor will obtain rights to the Allocated Investments, which grant the Contractor an interest in the shares, through an interest free, limited recourse loan. To the extent that the shares, which are referrable to the Contractor's Allocated Investments, fall in value, the Contractor will only be required to repay the amount of the loan that represents this reduced value. This means that the Contractor will be protected from any risk if the shares decline in value.

•         The Contractor is required to repay the loan from the proceeds of the sale of the shares or from accepting that the value of shares assigned to the Contractor's rights will be applied by the Trustee to repay the loan. This means that, until the Contractor repays the loan, the Contractor has no entitlement to call for the shares. To the extent that the shares or the profits from the sale of the shares are used to service the loan, the Contractor's interest in them is not indefeasible.

•         The Contractor can elect, under the Trust Deed, to receive cash rather than an in specie distribution of the shares; this means that the Contractor may never receive a vested and indefeasible interest in the shares themselves.

In addition, having regard to the matters in former subsection 160APHL(14) of the ITAA 1936 and ATO ID 2014/10, the Commissioner considers it is not appropriate to exercise his discretion in the Contractor's case.

We therefore consider that the Contractor will not be a 'qualified person' within the meaning of Division 1A of former Part IIIAA of the ITAA 1936 as the Contractor will not have a 'delta' of at least +0.3 in respect of any shares referrable to the Contractor's Allocated Investments. Unless the Contractor is a qualified person because the Contractor is a small shareholder, under Division 1A of former Part IIIAA of the ITAA 1936, the Contractor will not be entitled to a tax offset for franking credits attached to the franked distributions from the Trust.

Question 27

Summary

Yes. The interest in the Trust that the Contractor receives under the Plan is consideration for a taxable supply the Contractor makes to the Employer and that consideration should be included in the Contractor's business activity statement at the time the Contractor receives the interest in the Trust.

We have assumed, for the purposes of answering this question, that:

•         the Contractor is registered for GST, and

•         the Contractor accounts for GST on a cash basis.

Detailed Reasoning

GST is payable on any taxable supply that the Contractor makes. The Contractor makes a taxable supply where the Contractor satisfies all of the requirements of the GST Act. Section 9-5 of the GST Act provides the following:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you *carry on; and

(c) the supply is connected with the indirect tax zone; and

(d) you are registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is GST-free or input taxed.

As the Contractor is required to be registered for GST, the Contractor makes a supply by providing services to the Employer in the course of an enterprise that the Contractor carries on and those services are connected with Australia. The services are not GST-free or input taxed. In return for the services provided under the Contractor Agreement and the Contractor Written Agreement, the Contractor receives an amount of Allocated Investments in the Trust and an interest free loan. For GST purposes, the Contractor accounts for GST on a cash basis.

In determining whether a payment is consideration for the purposes of section 9-15 of the GST Act and whether there is a 'supply for consideration' we take the view[31] that:

•         the test whether there is a sufficient nexus between the supply and the payment made is an objective one

•         regard needs to be had to the true character of the transaction, and

•         an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances of the transactions (Marac Finance Ltd v. Virtue[32]).

Has the Contractor made the supply for consideration for the purposes of the GST Act?

Where the Contractor accounts for GST on a cash basis, the Contractor attributes GST payable on a taxable supply to the tax period in which the Contractor receives consideration for the supply, but only to the extent that the consideration is received in that tax period. Subsection 29-5(2) of the GST Act states

However, if you account on a cash basis, then:

(a) if, in a tax period, all of the consideration is received for a taxable supply - GST on the supply is attributable to that tax period; or

(b) if, in a tax period, part of the consideration is received - GST on the supply is attributable to that tax period, but only to the extent that the consideration is received in that tax period; or

(c) if, in a tax period, none of the consideration is received - none of the GST on the supply is attributable to that tax period.

For a taxpayer that accounts on a cash basis, attribution of GST or an input tax credit is determined by the meaning of 'consideration' and whether 'consideration' was received or provided and not by reference to the ordinary meaning of 'cash'.

'Consideration' is defined in subsection 9-15(1) of the GST Act and provides that consideration for a supply includes any payment, or any act or forbearance, in connection with, in response to or for the inducement of a supply of anything. Further, subsection 9-15(2) of the GST Act states that the consideration does not have to come from the recipient of the supply. The definition of consideration is intended to be broader than it is for contractual purposes[33].

Section 195-1 of the GST Act defines consideration to mean as follows:

consideration, for a supply or acquisition, means any consideration, within the meaning given by section 9-15, in connection with the supply or acquisition.

Payments will be consideration for a supply if the payment is made "in connection with", "in response to" or "for the inducement" of a supply (subsection 9-15(1) of the GST Act) (see Keenhilt Pty Ltd v FC of T[34]. In Vidler v FC of T[35] the Tribunal noted at paragraph 65:

The GST Act uses expressions such as "make [a] supply for consideration" (s 9-5(a)) and "consideration for the supply" (s 75-10(2)), but then, in the Dictionary in s 195-1 and also in the definition in s 9-15(1)(a), embraces within the concept of "consideration" any payment that is made "in connection with" a supply. The introduction of that broader concept "in connection with" cannot have been accidental. It must be assumed that the object of the legislation is to cast the net more widely than would have been the case if, in both s 195-1 and s 9-15(1)(a), the relationship between "supply" and "consideration" had been governed by the word "for" rather than the expression "in connection with".

According to the High Court, the word "for" is not used to adopt contractual principles. Rather, it requires a connection or relationship between the supply and the consideration (FC of T v Qantas Airways Ltd[36]).

Goods and Services Tax Ruling GSTR 2012/2 Goods and services tax: financial assistance payments (GSTR 2012/2) at paragraph 129 notes that the nature of the connection between consideration and supply was considered by the High Court in FC of T v Reliance Carpet Co Pty Ltd[37] where it was noted that under section 9-15 of the GST Act consideration includes among other things any payment "in connection with" a supply of anything. The court further gave an indication that the connection need not be direct though it did not expand on what the extent of the connection needs to be.

In American Express International Inc v FC of T[38], Emmett J said at [55]:

The phrase in connection with signifies, in its broadest sense, any relationship between two subject matters, no matter how remote. The phrase is capable of describing a spectrum of relationships ranging from the direct and immediate to the tenuous and remote (see Commissioner of Taxation v Amway of Australia Limited 2004 ATC 4893; (2004) 141 FCR 40 at [65] and Collector of Customers v Pozzolanic Enterprises Pty Limited (1993) 43 FCR 280 at 288). (emphasis added)

In Berry v FC of T[39], Kitto J, in considering the meaning of consideration "for or in connection with" in relation to section 84 of the ITAA 1936, held that consideration will be in connection with something where the receipt of the payment had a substantial relation in a business or practical sense to that thing:

The words "for or in connection with" imply that a consideration may satisfy the definition as being "in connection with" one of the subjects mentioned, although not "for" it. Now, while it is true that a payment cannot be described as a consideration "for" anything but that which is given in exchange for it, to speak of a consideration being "in connection with" an item of property parted with is to use language quite appropriate to the case of a payment received as consideration "for" something other than the property in question, so long as the receipt of the payment has a substantial relation, in a practical business sense, to that property. A consideration may be "in connection with" more things than that "for" which it is received.

The question that arises is whether consideration is received in respect of a supply or something else. GSTR 2012/2 at paragraph 16 states:

Reference to all of the surrounding circumstances of the arrangement, in particular any written documentation, determines whether a financial assistance payment is "in connection with", "in response to" or "for the inducement of" a supply. The surrounding circumstances may include the statutory purpose of the payer in providing the financial assistance, the activities which are to be undertaken by the payee and any other terms and conditions attached to the payment. However, none of these factors will be determinative on their own and the arrangement must be considered as a whole. The description the parties may give to the arrangement, while relevant, is not determinative[40].

The contractual concept of consideration appears to be found in the context of a bargain. Sir Frederick Pollock put forward the following definition: "[a]n act of forbearance of one party or the promise thereof is the price for which the promise is bought..." (Pollock's Principles of Contract, 8th Ed, 1911, p 175 approved in the House of Lords in Dunlop Pneumatic Tyre Company v Selfridge & Co Ltd [1915] AC 847 at 855).

In Australian Woollen Mills Pty Ltd v The Commonwealth[41], the High Court considered whether a contract existed between a taxpayer and the Commonwealth under which the Commonwealth bound itself to pay to the taxpayer a sum described as a subsidy in respect of the wool bought by the taxpayer at auction for the purpose of manufacture. The court made the following observations as to what is required by way of connection between the statement or announcement by the offeror which was relied on as a promise and what would be consideration for the promise:

... it is necessary, in order that a contract may be established, that it should be made to appear that the statement or announcement which is relied on as a promise was really offered as consideration for the doing of the act, and that the act was really done in consideration of a potential promise inherent in the statement or announcement. Between the statement or announcement, which is put forward as an offer capable of acceptance by the doing of an act, and the act which is put forward as the executed consideration for the alleged promise, there must subsist, so to speak, the relation of a quid pro quo...

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration at paragraph 35 notes that a promise to pay an amount of money is consideration expressed as an amount of money. Section 195-1 of the GST Act defines money to include:

(a) currency (whether of Australia or of any other country);

(b) promissory notes and bills of exchange;

(c) any negotiable instrument used or circulated, or intended for use or circulation, as currency (whether of Australia or of any other country); and

(d) postal notes and money orders; and

(e) whatever is supplied as payment by way of:

(i) credit card or debit card;

(ii) crediting or debiting an account; or

(iii) creation or transfer of a debt.

However, it does not include:

(f) a collector's piece;

(g) an investment article;

(h) an item of numismatic interest; or

(i) currency the market value of which exceeds its stated value as legal tender in the country of issue.

Application to the Contractor's circumstances

Under the Plan, the Contractor works under a contract to provide services to the Employer. The Contractor Agreement with the Employer outlines the Contractor will provide services and in return may receive Allocated Investments and an interest free loan. The Contractor has agreed along with the Employer, as provided in the Contractor Written Agreement, that the Employer will "provide the Contractor with $YY worth of investments in the XX Trust, in which the Contractor is now a participant" of the Plan. The Investments are described as part of the Contractor's total remuneration package (as discussed further at Question 8).

According to the agreements entered into between the Contractor and the Employer, there is an obligation by the Employer to provide the Contractor with $YY worth of Allocated Investments and this value is consideration due to the following:

•         The supply (the services provided under the Contractor Agreement) is made by the Contractor to the Employer.

•         The $YY is provided to the Contractor in connection with the supply of the Contractor services to the Employer.

•         The Plan facilitates the provision of the Allocated Investments by providing the Contractor an interest in the Trust.

•         The Contractor Written Agreement creates an obligation (a promise) that the Employer will provide the Allocated Investments worth $YY to the Contractor in connection with services.

•         The Contractor is able to cancel their interest in the Trust and receive the Allocated Investments (i.e. Cancellation Entitlement and amounts under clause JJ of the Trust Deed). For the purpose of subsection 29-5(2) of the GST Act the Contractor has received the consideration at the time the Contractor receives the interest in the Trust.

Therefore the interest in the Trust that the Contractor receives under the Plan is consideration as defined in section 9-15 of the GST Act for a taxable supply the Contractor makes to the Employer and that consideration should be included in the Contractor's business activity statement at the time the Contractor receives the interest in the Trust.

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

[2] A reference to fringe benefits in the Contractor's Agreement is not a reference to fringe benefits as defined in subsection 136(1) of the FBTAA, but rather a form of non-cash benefits obtained when participating in the Plan.

[3] A reference to fringe benefits in the Contractor's Agreement is not a reference to fringe benefits as defined in subsection 136(1) of the FBTAA, but rather a form of non-cash benefits obtained when participating in the Plan.

[4] (1842) 2 QB 851 at p859

[5] (1875) LR 10 Exch 153 at 162.

[6] (1981) 147 CLR 297.

[7] Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1988.

[8] Paragraph 2 and paragraphs 22 to 28 of TR 93/38.

[9] Paragraph 27 of TR 93/38.

[10] 2012 ATC 10-241.

[11] 2012 ATC10-241 at [31].

[12] (1990) 21 ATR 1123; 91 ATC 4007.

[13] (1990) 21 ATR 1123 at 1132; 91 ATC 4007 at 4014-15.

[14] (1995) 129 ALR 503.

[15] (1995) 129 ALR 503 at 507.

[16] Taxation Ruling TR 95/6 Income tax: primary production and forestry.

[17] (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693.

[18] (1977) 137 CLR 373 at 381; 77 ATC 4375 at 4380; 7 ATR 716 at 722.

[19] (1984) 2 FCR 455; 84 ATC 4315; 15 ATR 599.

[20] (1927) 27 SR(NSW) 231).

[21] 91 ATC 4234; (1991) 21 ATR 1398.

[22] (1946) 73 CLR 604; (1946) 8 ATD 137; (1946) 3 AITR 450).

[23] (1990) 22 FCR 42; 90 ATC 4472; (1990) 21 ATR 13, at FCR 56; ATC 4484; ATR 26).

[24] (1986-1987) 163 CLR 199 at 209; 87 ATC 4363 at 4366; (1987) 18 ATR 693 at 697.

[25] (1991) 28 FCR 333 at 342; 91 ATC 4234 at 4242; (1991) 21 ATR 1398 at 1407).

[26] (1974) 130 CLR 159; 74 ATC 4001; (1974) 4 ATR 208).

[27] Defined in section 974-160.

[28] See paragraph 30 of TD 2012/11.

[29] [2009] AATA 775.

[30] ATO ID 2014/10 Income Tax Entitlements to franking credits in an employee remuneration arrangement: Commissioner's discretion.

[31] See GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlements at paragraphs 89 to 96 and GSTR 2001/6 Goods and Services Tax: non-monetary consideration at paragraphs 64 to 72, where the Commissioner discusses the close coupling between supply and consideration in the GST Act.

[32] [1981] 1 NZLR 586.

[33] Explanatory Memorandum to the to A New Tax System (Goods and Services Tax) Bill 1998, [3.9]. See also TT-Line Company Pty Ltd v. Federal Commissioner of Taxation [2009] FCAFC 178; 2009 ATC 20-157; (2009) 74 ATR 771 at [46]-[48] per Edmonds J.

[34] 2007 ATC 2794.

[35] 2009 ATC 10-093.

[36] 2012 ATC 20-352.

[37] 2008 ATC 20-028.

[38] 2009 ATC 20-113.

[39] (1953) 89 CLR 653 at paragraph 659.

[40] Radaich v. Smith (1959) 101 CLR 209 at 214 per McTiernan J: '... the parties cannot by the mere words of their contract turn it into something else. Their relationship is determined by law and not by the label they choose to put on it.'

[41] (1954) 92 CLR 424.