1 Will the irretrievable cash contributions made by Company X Limited (the Company) to Company Y Pty Limited (the Trustee) as trustee for the Company X Equity Trust (the Trust) to fund the acquisition of, or subscription for, the Stapled Securities for the purposes of allocating the Stapled Securities to Participants under the Plans be assessable income of the Trust under sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No Question 2A Will CGT event E5 happen at the time when the Participants become absolutely entitled to Stapled Securities held by the Trustee of the Trust? Answer Yes Question 2B If CGT event E5 does happen, will a capital gain or capital loss made by the Trustee as a result of CGT event E5 happening be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Stapled Securities for the same, or less than, the cost base of the Stapled Securities in the hands of the Trustee? Answer Yes Question 2C Will CGT event E7 happen in respect of Stapled Securities held by the Trustee of the Trust? Answer No - the specified scheme does not include any facts that gives rise to CGT event E7 happening. Question 2D If CGT event E7 does happen, will a capital gain or capital loss made by the Trustee as a result of CGT event E7 happening be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Stapled Securities for the same, or less than, the cost base of the Stapled Securities in the hands of the Trustee? Answer Not applicable. Question 3
If the Trustee receives and accumulates distributions on unallocated Stapled Securities held in the Trust, will the distributions and any franking credits be assessed under section 95 and section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the Trustee? Answer Yes Question 4 If the Trustee receives and accumulates distributions on unallocated Stapled Securities held in the Trust, will the Trustee be entitled to a tax offset for any franking credits attaching to the distributions under Subdivision 207-B of the ITAA 1997? Answer Yes Question 5 If the Trustee receives a distribution on allocated Stapled Securities held for a Participant in the Trust during an income year, and applies the Trust property representing it for the benefit of the Participant by the end of the income year, will the distribution and any franking credit calculated and included under section 95 be assessed under section 99A of the ITAA 1936 in relation to the Trustee? Answer No - provided the relevant share of the distribution and any allowable franking credit is included in all of the Participant's assessable income. Question 6
If the Trustee receives a distribution on allocated Stapled Securities in the Trust during an income year and applies Trust property representing it for the benefit of the Participant by the end of the income year, will the Trustee be entitled to a tax offset for any franking credits attaching to the distribution under Subdivision 207-B of the ITAA 1997? Answer No - on the basis that Participants will be entitled to the relevant tax offset for any franking credits attaching to the distribution, provided that they hold their interest at-risk for the required qualification period This ruling applies for the following period : 1 July 20XX to 30 June 20XX The scheme commenced on: In a particular income year
Company X Limited (the Company) 1. Company X Limited (the Company) is the responsible entity of X Trust and Y Trust, which together form the stapled entity traded on the Australian Stock Exchange (ASX) as 'XY'. Each unit in X Trust is stapled to a unit in Y Trust. 2. XY carries on a business for the purpose of gaining or producing assessable income. 3. X Trust is a 'public trading trust' as defined in Division 6C of the ITAA 1936. X Trust has made an election under section 713-135 of the ITAA 1997 to form an income tax consolidated group (X Trust TCG), of which X Trust is the head entity with effect from 1 July 20XX. 4. The X Trust TCG comprises X Trust and its wholly owned entities. Y Trust and its wholly owned sub-trusts are not members of the X Trust TCG. 5. All employees of XY are employed by entities that are members of the X Trust TCG. The XY Employee Plans 6. XY has implemented the following Employee Plans (together, the Plans) to allocate units in X Trust and Y Trust (together, a Stapled Security):
• an equity-based employee plan whereby rights, options or restricted securities (collectively, Plan Securities) are issued for no consideration to Participants (Umbrella Plan); and • an Employee Security Plan (ESP) which grants Participants $Z of Stapled Securities subject to certain criteria being satisfied (ESP Plan). 7. The purpose of the Plans is, among other things, to align the interests of Participants with security holders of XY through the sharing of personal interest in the future growth and development of XY. The Plans operate broadly to provide Participants with the opportunity to acquire XY Stapled Securities. All Participants will be Australian residents. 8. It is intended that the Plans will achieve the following objectives: • provide incentives in order to attract, retain and motivate Eligible Employees for the long-term benefit of XY; and • provide Eligible Employees with both long-term and short-term incentives ultimately by way of acquiring Stapled Securities. 9. In order to receive the Stapled Securities, the Participant must satisfy all relevant criteria outlined in the:
• relevant offer letters and documentation; and • Umbrella Plan Rules; or • ESP Plan Rules (collectively, the Plan Rules). 10. When the relevant criteria are satisfied, the Participant will be entitled to the Stapled Securities allocated to them. Umbrella Plan 11. Subject to the Umbrella Plan Rules, the board of directors of the Company (Board) may invite 'Eligible Employees' to participate in the grants of Plan Securities (Offer) (Rule 1.1). 12. Plan Securities may comprise of any one or more of: • an entitlement to a Stapled Security or, in certain circumstances, to a cash payment, subject to the satisfaction of certain conditions (including relevant vesting conditions) and compliance with any applicable exercise procedures (Rights); • an entitlement to receive a Stapled Security or, in certain circumstances, to a cash payment subject to satisfaction of applicable conditions (including relevant vesting conditions) and compliance with the applicable exercise procedure (including payment of any applicable Exercise Price) or compliance with any procedures as set out by the Board for cashless exercise (Options); or
• a Stapled Security allocated in accordance with Rule 4.1 that is subject to restrictions on Dealing, Vesting Conditions, and/or other restrictions or conditions (Restricted Security) (Rule 1.1). 13. 'Eligible Employees' for the purposes of the Umbrella Plan are employees of XY (including a director employed in an executive capacity) or any other person who is declared by the Board to be eligible to receive Plan Securities under the Umbrella Plan (Rule 16). 14. It is intended that Subdivision 83A-C of the Tax Act applies to both the Rights and Options under the Umbrella Plan Rules (subject to the requirements of the Tax Act) (Rules 2.1(b)(3) and 3.1(b)(3)). 15. The Company will grant the Rights to Participants. No amount is payable by the Participant in respect of the grant of the Right (Rule 2.1). 16. The Company will grant Options to Participants with a pre-determined Exercise Price per Option. No amount is payable by the Participant in respect of the grant of the Option (Rule 3.1). 17. The Company will allocate Restricted Securities in accordance with the terms of the relevant Offer to the Participant by way of either (Rule 4.1):
• issuing Restricted Securities; • procuring the transfer of Restricted Securities; or • procuring the setting aside of Restricted Securities. 18. No amount is payable by the Participant in respect of the grant of a Restricted Security unless the Board determines otherwise (Rule 4.1(c)). 19. As soon as practicable following Vesting, Stapled Securities are to be transferred to, or set aside for, Participants (Rules 2.3, 3.3 and 4.1). 20. The Vested Rights of Participants who are directors must be satisfied by way of Stapled Securities which have been purchased on-market (Rules 2.3(b) and 3.3(b)). 21. The Plan Securities under the Umbrella Plan are subject to certain performance, service or other conditions that must be satisfied or circumstances which must exist before any Plan Security Vests under the Umbrella Plan Rules (Rules 2.2, 3.2 and 4.2). 22. Subject to certain conditions, the Board may exercise its discretion to make a cash payment to a Participant in lieu of Stapled Securities for Rights and Options. The amount of the cash payment will be calculated with reference to the Current Market Price (Rules 2.4 and 3.4).
23. The Current Market Price is the arithmetic average of the daily volume weighted average market price (VWAP) of all Stapled Securities traded on the ASX during the previous thirty trading days, or any other calculation as determined by the Board (Rule 16.1). 24. Both the Rights and Options may lapse on the occurrence of the events prescribed in Rules 2.5 and 3.5. 25. Restricted Securities may be forfeited on the occurrence of the events prescribed in Rule 4.3. Broadly, forfeiture of the Stapled Securities will result in one of the following occurring (Rule 7): • Where the Stapled Securities are held by the Participant - the Participant is deemed to have agreed to dispose of his or her legal and/or beneficial interest (as appropriate) for total aggregate consideration of A$Z for all of his or her Stapled Securities, which will be transferred into the name of the Company's nominee;
• Where the Stapled Securities are held by the Trustee - the Participant's rights in the Stapled Securities will be extinguished for total aggregate consideration of A$Z for all of his or her Stapled Securities, which will then be held as General Trust Property in accordance with the terms of the Trust Deed; • Where a Participant forfeits Stapled Securities allocated to him or her on exercise of Options pursuant to the Umbrella Rules, the Company may, but need not, procure the Participant be repaid the Exercise Price paid by the Participant in respect of the forfeited Stapled Securities. 26. Certain Dealings with respect to the Plan Securities are prohibited in accordance with Rule 5, including with respect to Dealings prior to Vesting (subject to the XY Securities Trading Policy (Securities Trading Policy)). 27. The Board is empowered with discretion to determine the consequences for a Participant's Plan Securities upon cessation of his or her employment (Rule 8). 28. The Options and Rights carry no entitlement to participate in new issues of Stapled Securities prior to the Vesting and exercise (if applicable) of the Right or Option (Rule 10(a)).
29. The Board is empowered to grant additional Rights or Options or make any adjustments it considers appropriate to the terms of the Rights or Options in certain circumstances (Rule 10). 30. Subject to the terms of the Trust Deed or Offer, the following rules apply to the Stapled Securities allocated to a Participant (Rule 11.1): • the Participant is entitled to receive all distributions or benefits payable to the Participant or to the Trustee in respect of the Stapled Securities; • the Participant is entitled to exercise, or to direct the Trustee in writing how to exercise, voting rights attached to the Stapled Securities, either generally or in a particular case; • any bonus securities that are issued in respect of the Stapled Securities will be issued to the Participant, or to the Trustee on the Participant's behalf, and will be held by the Participant or Trustee as Stapled Securities subject to the same terms, conditions and restrictions on Dealing (if any) as the Stapled Securities in respect of which they are issued; and
• if rights arise on a rights issue in respect of the Stapled Securities, the Participant may deal with or exercise those rights, or instruct the Trustee in relation to those rights in accordance with the Trust Deed. If the Stapled Securities are held by the Trustee on the Participant's behalf and the Participant does not instruct the Trustee how to deal with the rights, the rights will be dealt with in accordance with the Trust Deed. 31. Unless or until the Stapled Securities are allocated to the Participant following Vesting or exercise of their Rights or Options, the Participant has no interest in those Stapled Securities (Rule 11.2(a)). 32. However, the Board is empowered to determine that a distribution equivalent payment is payable to a Participant in certain circumstances. The payment (Rule 11.2): • will be approximately equal to the amount of distributions that would be payable to the Participant if they had been the owner of the Stapled Securities during the relevant Vesting Period; • will not be grossed up or otherwise adjusted for tax; and • may be satisfied through the allocation of Stapled Securities or the payment of cash.
33. Where an employee transfers overseas but continues to hold an office or remain an employee of XY, the Board has the discretion to determine the consequences of the transfer on the Participant's Plan Securities in accordance with Rule 14. 34. The Board is empowered to exercise its discretion under Rule 6 so as to prevent inappropriate benefits being granted to employees pursuant to the Umbrella Plan. 35. Subject to Rule 15.3, the Umbrella Plan is to be administered by the Board, who has the power to: • determine the relevant procedures for the administration of the Umbrella Plan consistent with the Umbrella Plan Rules, including to implement an employee security trust or impose a holding lock for the purpose of delivering and holding Stapled Securities on behalf of Participants; and • delegate to any one or more persons the exercise of any functions, powers or direction arising under the Umbrella Plan Rules. 36. Except as expressly stated otherwise, the Board has absolute and unfettered discretion to exercise any power or direction under the Umbrella Plan (Rule 15.3(b)). ESP Plan
37. Subject to the ESP Plan Rules, the Board may invite 'Eligible Employees' to acquire up to $Z worth of Stapled Securities in the financial year ending 30 June 20XX for no financial consideration (Invitation). 38. 'Eligible Employees' for the purposes of the ESP Plan are employees who satisfy the criteria outlined in Rule 3.1(15), being they must: • be permanent (not casual or fixed term) employees of the specified XY subsidiary companies (see below); • have been employed for at least one year on the 30th June immediately preceding the date of the Invitation; • not be a member of the XY Executive Leadership Team; and • not be a director of the Company. 39. The specified XY subsidiary companies (all of which are members of the X Trust TCG) are (Rule 3.1(15)): • A Pty Limited; • B Pty Limited; • C Pty Limited; • D Pty Limited. 40. Generally, the Stapled Securities will be subject to the ESP Plan Rules until such a time as they are not subject to any Holding Lock or other restriction imposed on the Stapled Securities under the ESP Plan Rules (Rule 4.4).
41. The Holding Lock Period is the period commencing on the date that the Stapled Security is registered in the name of the Participant (Date of Registration) and the earlier of: • three years after the Date of Registration; and • the date that the Participant ceases employment with XY for any reason (Rule 3.1(18)). 42. The ESP Plan Rules are binding on XY and each Participant (Rule 4.5). 43. Stapled Securities allocated to Participants under the ESP Plan can be sourced via purchase on-market, or by way of new issuance at the Board's discretion (Rule 4.6). 44. Subject to the Board's discretion to determine otherwise, the Stapled Securities will be allocated to Participants at a value determined by the volume weighted average price of the XY Stapled Securities traded on the ASX during a period determined by the Board and disclosed on the Invitation (Rule 4.7). 45. The Stapled Securities allocated under the ESP Plan will rank equally to all existing XY Stapled Securities on and from the Date of Registration, and thus Participants will be entitled to rights issues, bonus issues and distributions arising out of their allocated Stapled Securities (Rule 4.8).
46. No issue of Stapled Securities can be made under the ESP Plan, subject to certain conditions, where that issue, when aggregated with the number of Stapled Securities issued during the previous 5 years under the ESP Plan or another employee incentive scheme, exceeds 5% of the total number of issued XY Stapled Securities at the time of the offer (Rule 5.1). 47. Participants are not able to sell, transfer, grant an option or otherwise dispose of the Stapled Securities during the Holding Lock Period (Rule 5.2). 48. Disposal is only permitted under the Securities Trading Policy (Rule 5.3). 49. Stapled Securities allocated to Participants under the ESP Plan cannot be forfeited (Rule 5.4). 50. Subject to Rule 5.1, the ESP Plan is to be managed by the Board, who is empowered to, among other things (Rule 8.2): • make/amend existing and/or additional Rules and procedures with regards to the ESP Plan; • delegate to one or more persons the exercise of any functions, powers or discretions arising under the ESP Plan Rules; and • engage any person to administer the ESP Plan.
51. Unless otherwise determined by the Board, XY is responsible for all costs relating to the establishment and operation of the ESP Plan, including all costs and expenses in relation to the delivery of Stapled Securities, except for any taxes which may be payable in connection with the Stapled Securities (Rule 11.1). Company X Equity Trust (the Trust) 52. In accordance with the Plan Rules, the Company established the Trust for the benefit of the Participants. 53. The Board has nominated the Trust for the purposes of administering the Plans. 54. Those Stapled Securities acquired under the Plans will be held on trust on behalf of the Participant subject to the conditions outlined in the Plan Rules. 55. When those conditions are satisfied, the Participant can withdraw the allocated Stapled Securities from the Trust. 56. Company Y Pty Limited is the current trustee for the Trust. 57. The Trust provides capital management flexibility for XY, in that the Trust can use contributions made by the Company to either acquire shares on-market, or subscribe for new XY Stapled Securities.
58. The Trust provides an arm's length vehicle through which XY Stapled Securities can be acquired and held on behalf of Participants. 59. In accordance with clause 2.4 of the Trust Deed, the Trustee: • agrees to comply with the Rules of each relevant Plan; • subject to its obligations under clause 3, will give consideration to any request given to it by the Board, but will not be bound to act in accordance with any such request; and • agrees that its activities, and exercise of its discretions under the Trust Deed will comply with section 130-85(4) of the ITAA 1997. 60. The Trustee must not charge any fees or charges for administering the Trust unless they are reasonable disbursements charged to the Trust, or amounts charged to the Company (clause 2.5). 61. The activities of the Trustee are limited to managing the employee security schemes of XY (clause 2.6).
62. Upon termination of the Trust, the Trustee must apply the trust assets in whole or part towards the full repayment of any outstanding liabilities, distributions to Participants or application of Trust capital, an employee share trust established for the benefit of Employees or Participants, or any charity nominated by the Company (clause 16(b)). 63. The Trust Fund comprises of the Settlement Sum and the corpus of the trust (including any contributions made by the Company and Stapled Securities) that may be paid, transferred or credited to the Trust (whether by way of income or capital) (clause 1.1). 64. The Trustee will hold the Trust Fund on trust for all the Participants as beneficiaries in accordance with the Trust Deed (clause 3.1(a)). 65. The Trustee must comply with any direction of the Board to acquire Stapled Securities in accordance with the relevant Plan Rules and must apply any amount paid to it by an XY Company pursuant to the Plan Rules in accordance with any direction from the Board (clause 3.1(c)).
66. At the request of the Board, the Trustee will set aside and hold Stapled Securities allocated to identified Beneficiaries (i.e., Participants) in accordance with the Plan Rules (Allocated Trust Property) or for all Beneficiaries of the Trust generally (General Trust Property) (clause 3.2(a)). 67. Subject to the terms and conditions imposed by the Board and the Plan Rules, the Trustee must transfer the allocated Stapled Securities into the name of the Participant (i.e., legal title) (clause 3.2(d)). 68. The Company acknowledges that no XY company is a beneficiary of the Trust, has no entitlement to any Stapled Securities forming part of the Trust Fund, and has no entitlement to any return of contributions made to the Trust (clause 17.1). 69. Nothing in the Trust Deed confers, or is intended to confer, on the Company any Encumbrance, proprietary right or proprietary interest in the Stapled Securities acquired by the Trustee (clause 17.2(a)). 70. Participants are entitled to receive all distributions, bonus issues and other benefits in relation to the Stapled Securities allocated to them (clause 5.1(a)(1)).
71. The Trustee may direct XY to pay distributions and other benefits directly to the Participants in relation to the Stapled Securities allocated to them (clause 5.1(a)(2)). 72. Any distributions payable on allocated Stapled Securities may be reinvested under the XY distribution reinvestment plan (if any) where the Trustee is requested to do so by the Participant (clause 5.1(a)(3)). 73. If the Trustee holds Stapled Securities on behalf of a Participant and an Accretion arises other than by way of cash distributions, bonus Stapled Securities, or Rights issued in respect of those Stapled Securities, the Trustee may decide to transfer, or provide the benefit of, all or part of the Accretion to the Participant as the Trustee determines (clause 5.1(e)). 74. The balance of any Distributable Income of the Trust to which no Beneficiary is presently entitled immediately prior to the end of that Year of Income will be accumulated by the Trustee as an Accretion to the Trust (clause 5.2(b)). 75. The Trustee is precluded from exercising any voting rights in relation to the General Trust Property (i.e., Stapled Securities which have not been allocated to a Participant) (clause 5.2(a)(3)).
Income Tax Assessment Act 1936 subsection 44(1) Income Tax Assessment Act 1936 section 95 Income Tax Assessment Act 1936 subsection 97(1) Income Tax Assessment Act 1936 section 98 Income Tax Assessment Act 1936 section 99A Income Tax Assessment Act 1936 section 102T Income Tax Assessment Act 1936 Former Division 1A of Part III Income Tax Assessment Act 1936 Former Section 160APHO Income Tax Assessment Act 1936 Former Subsection 160APHO(3) Income Tax Assessment Act 1936 Former Subsection 160APHM(2) Income Tax Assessment Act 1936 Part IVA Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 6-10 Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 10-5 Income Tax Assessment Act 1997 Division 67 Income Tax Assessment Act 1997 subsectio
All legislative references are to provisions of the ITAA 1936 or to provisions of the ITAA 1997, unless otherwise indicated. Question 1 Will the irretrievable cash contributions made by Company X Limited (the Company) to Company Y Pty Limited (the Trustee) as trustee for the Company X Equity Trust (the Trust) to fund the acquisition of, or subscription for, the Stapled Securities for the purposes of allocating the Stapled Securities to Participants under the Plans be assessable income of the Trust under sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? Detailed reasoning Assessable income includes both ordinary income and statutory income according to sections 6-5 and 6-10 of the ITAA 1997. Ordinary income is income according to ordinary concepts. Statutory income is income that is not ordinary income but is included in assessable income because of a specific provision of the ITAA 1997 or ITAA 1936. As Chief Justice Jordan noted in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 ( Scott ):
.. what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of receipts. Ordinary income Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. The expression " income according to ordinary concepts " is not a defined term. However, case law has identified certain factors which may assist in determining whether a receipt is properly characterised as income according to ordinary concepts. As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In GP International Pipecoaters v. Federal Commissioner of Taxation
(1990) 170 CLR 124; (1990) 64 ALJR 392; (1990) 93 ALR 193; (1990) 21 ATR 1; 90 ATC 4413; [1990] HCA 25 ( Pipecoaters ), the High Court of Australia found that: To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. The contributions made by the Company to the Trust forms part of the corpus of the Trust (clause 3 of the Trust Deed) that will be applied for the sole purpose of acquiring, or subscribing for, Stapled Securities for the benefit of the Participants under the Plans (clause 4 of the Trust Deed). The cash contributions received by the Trustee are therefore of a capital character.
It is irrelevant that, from the Company's perspective, the cash contribution may be deductible under section 8-1 of the ITAA 1997 because whether a receipt is income or capital depends on its objective character in the hands of the recipient, rather than the payer. This is made clear in Pipecoaters , where the High Court held that: ...although the amount expended on the construction of the plant was a capital expenditure, it does not follow that the taxpayer's receipt of the establishment costs was a receipt of capital. From the Trustee's perspective, the irretrievable cash contributions made by the Company are capital in nature and therefore not assessable to the Trust under section 6-5 of the ITAA 1997. Statutory income Section 10-5 of the ITAA 1997 provides a list of provisions of assessable income for section 6-10 purposes. None of the provisions apply to a cash contribution made by an employer to a trust established under an employee share scheme (ESS).
Therefore, the irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the acquisition of, or subscription to, Stapled Securities are also not assessable income of the Trust pursuant to section 6-10 of the ITAA 1997. [1] Question 2A Will capital gains tax (CGT) event E5 happen at the time when the Participants become absolutely entitled to Stapled Securities held by the Trustee of the Trust? Detailed reasoning Pursuant to section 102-20 of the ITAA 1997, an entity can make a capital gain or loss if, and only if, a CGT event happens. Under subsection 104-75(1) of the ITAA 1997, CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) as against the trustee. The time of the event is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)).
According to subsection 104-75(3), if CGT event E5 happens, the trustee may make a capital gain if the market value of the asset, at the time of the event, is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base. In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 of the ITAA 1997 applies. Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) explains the principles set out in the leading English trust law case of Saunders v. Vautier (1841) 49 ER 282 in relation to 'absolutely entitled' as follows:
... if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustees to transfer the trust property to them or at their direction, even though the trust deed contains a contrary intention. The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway. Pursuant to clause 5 of the Trust Deed, a Participant is the beneficial owner of and absolutely entitled to their allocated Stapled Securities. Allocated Stapled Securities is defined as a Trust Stapled Security that is credited to the Trust Stapled Security account of a Participant. Once credited, the Participant (i.e., the beneficiary) will become absolutely entitled to the allocated Stapled Securities (i.e., a CGT asset of the Trust) as against the Trustee. Accordingly, pursuant to subsection 104-75(1), CGT event E5 happens. Question 2B
If CGT event E5 does happen, will a capital gain or capital loss made by the Trustee as a result of CGT event E5 happening be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Stapled Securities for the same, or less than, the cost base of the Stapled Securities in the hands of the Trustee? Detailed reasoning If CGT event E5 happens, any capital gain or loss that the Trustee makes is disregarded if section 130-90 of the ITAA 1997 applies. Section 130-90 provides as follows: (1A) Disregard any *capital gain or *capital loss made by an *employee share trust to the extent that it results from a *CGT event, if: (a) immediately before the event happens, an *ESS interest is a *CGT asset of the trust; and (b) either of the following subparagraphs applies: (i) the event is CGT event E5, and the event happens because a beneficiary of the trust becomes absolutely entitled to the ESS interest as against the trustee; (ii) the event is CGT event E7, and the event happens because the trustee *disposes of the ESS interest to a beneficiary of the trust; and (c) Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest.
(1) Disregard any *capital gain or *capital loss made by an *employee share trust, or a beneficiary of the trust, to the extent that it results from a *CGT event, if: (a) the CGT event is CGT event E5 or E7; and (b) the CGT event happens in relation to a *share; and (c) the beneficiary had acquired a beneficial interest in the share by exercising a right; and (d) the beneficiary's beneficial interest in the right was an *ESS interest to which Subdivision 83A-B or 83A-C (about employee share schemes) applied. (2) Subsection (1A) or (1) does not apply if the beneficiary acquired the beneficial interest in the *share for more than its *cost base in the hands of the *employee share trust at the time the *CGT event happens. To qualify for the exemption in section 130-90, there must be an 'employee share trust' and an 'ESS interest'. Subsection 130-85(4) of the ITAA 1997 defines an employee share trust as a trust whose sole activities are: (a) obtaining shares or rights in a company; and (b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of:
(i) the company; or (ii) a subsidiary of the company; and (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Relevantly, under section 83A-335 of the ITAA 1997, Division 83A applies in relation to a Stapled Security in the same way as it applies to a share in a company if at least one of the interests in the Stapled Security is a share in the company. Subsection 713-135(1) of the ITAA 1997 provides that if the trust chooses to form a consolidated group, the applied law (which includes subsection 130-85(4)) applies in relation to the trust as if it were a company. Under subsection 713-135(1), since X Trust has elected to be the head entity of the X Trust TCG, the units in X Trust will be treated as if they are shares in a company. [2] By extension, the units in Y Trust which are stapled to those in X Trust should also be treated as shares in a company for Division 83A purposes.
Hence, Stapled Securities that are purchased by the Trustee to satisfy its obligation under the Plans, and subsequently allocated to XY's Participants pursuant to the Plans, are ESS interests for the purposes of subsection 83A-10(1). An 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employee's employment. Therefore, XY's Employee Plans each constitute an 'employee share scheme' because each are a scheme under which ESS interests in XY are provided to the employees of XY in relation to their employment with XY. Therefore, paragraphs 130-85(4)(a) and (b) of the definition of an employee share trust are satisfied because: a. The Trust acquires Stapled Securities in a company, namely the Company; and b. The Trust ensures that ESS interests as defined in subsection 83A-10(1) are provided under an employee share scheme by allocating those Stapled Securities to the employees of XY in accordance with the Trust Deed and the Plans.
Paragraph 130-85(4)(c) of the definition of an employee share trust provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b) of the ITAA 1997. The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'? However, whilst the relevant trust documents may include powers and/or duties that are broad reaching, the mere existence of those powers or duties in the trust document does not, of itself, mean that the trustee has breached the requirements to be an employee share trust. In examining whether the requirements of subsection 130-85(4) are met, it is necessary to examine the actual activities that the trustee has undertaken (paragraph 6 of TD 2019/13). The Trust Deed contains only powers and/or duties that are merely incidental, as required by paragraph 130-85(4)(c) of the ITAA 1997. Therefore, the Trust established pursuant to the Trust Deed satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997.
As the rights granted under the Plans will be acquired by the employees at a discount, they are ESS interests to which Subdivision 83A-B of the ITAA 1997 applies. As such, a capital gain or capital loss that arises for the Trustee of the Trust established pursuant to the Trust Deed at the time when CGT event E5 happens in relation to Stapled Securities held by the Trustee will be disregarded under section 130-90 of the ITAA 1997, if the employees acquire the Stapled Securities for the same, or less than, the cost base of the Stapled Securities in the hands of the Trustee. Question 2C Will CGT event E7 happen in respect of Stapled Securities held by the Trustee of the Trust? Detailed reasoning Under subsection 104-85(1) of the ITAA 1997, CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. The timing of the event is when the disposal occurs (subsection 104-85(2)).
According to subsection 104-85(3), if CGT event E7 happens, the trustee may make a capital gain if the market value of the asset, at the time of the disposal, is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base. However, in relation to the scheme as set out in the 'Relevant facts and circumstances' section above, CGT event E7 does not occur. This is because the scheme does not include any facts that gives rise to CGT event E7 happening. Question 2D If CGT event E7 does happen, will a capital gain or capital loss made by the Trustee as a result of CGT event E7 happening be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Stapled Securities for the same, or less than, the cost base of the Stapled Securities in the hands of the Trustee? Detailed reasoning
As per the answer in Question 2C above, CGT event E7 does not arise. Therefore, it is not necessary to consider whether a capital gain or capital loss made by the Trustee as a result of CGT event E7 happening be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Stapled Securities at a price that is the same as, or less than, the cost base of the Stapled Securities in the hands of the Trustee. Question 3 If the Trustee receives and accumulates distributions on unallocated Stapled Securities held in the Trust, will the distributions and any franking credits be assessed under section 95 and section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the Trustee? Detailed reasoning Section 95 Net income is defined by section 95 to mean the total assessable income of the trust estate calculated under the ITAA 1936 as if the trustee were a resident taxpayer in respect of that income, less allowable deductions. The XY stapled structure comprises of: • X Trust - a public trading trust subject to Division 6C of the ITAA 1936; and • Y Trust - a unit trust which maintains flow-through status.
Under subsection 44(1) of the ITAA 1936, the assessable income of a resident shareholder in a company includes dividends that are paid to the shareholder by the company out of profits derived by it from any source. Due to the operation of section 102T of the ITAA 1936, distributions paid to unitholders of public trading trusts are assessable under this provision as dividends paid by a company. In relation to flow-through trusts, subsection 97(1) of the ITAA 1936 determines that the assessable income of the beneficiary of a trust estate amounts to so much of the net income of the trust estate as the beneficiary is presently entitled. Section 10-5 of the ITAA 1997 provides that dividends assessable under subsection 44(1) of the ITAA 1936, the net income of a trust estate to which a beneficiary is presently entitled under subsection 97(1) of the ITAA 1936, and credits on franked dividends pursuant to subsections 207-20(1), 207-35(1) and 207-35(3) of the ITAA 1997 are to be included in assessable income.
Under clause 3.1 of the Trust Deed, unallocated Stapled Securities are held by the Trustee for the general purpose of the Trust and under clause 5.2, if the Trustee receives any distributions derived from unallocated Stapled Securities, the income is held by the Trustee for the general purpose of the Trust and as an accretion to the Trust. As such, distributions received by the Trustee in respect of unallocated Stapled Securities will be included in the calculation of the net income of the Trust under section 95. Section 99A Under section 99A, the trustee of a trust estate is assessed and liable to pay tax on the part of the net income of the trust estate: • that is not included in the assessable income of a beneficiary of the trust estate under section 97 (paragraphs 99A(4)(a) and 99A(4A)(a)) • in respect of which the trustee is not assessed and is not liable to pay tax under section 98 (paragraphs 99A(4)(b) and 99A(4A)(b)), and
• that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident of, and is also attributable to sources out of, Australia (paragraphs 99A(4)(c) and 99A(4A)(c)). The critical requirement for these three exclusion categories is that a beneficiary is presently entitled to a share of the income of a trust estate. Under clause 3.2 of the Trust Deed, a Participant is absolutely entitled to allocated Stapled Securities only and under clause 5.1, a Participant only has a right to receive income, including any distributions, deriving from allocated Stapled Securities. Therefore, as a Participant is not presently entitled to any income derived from unallocated Stapled Securities, none of the three exclusion categories apply, and the Trustee will be assessed and liable to pay tax under section 99A on any distributions and other income received by the Trustee in respect of unallocated Stapled Securities. Question 4
If the Trustee receives and accumulates distributions on unallocated Stapled Securities held in the Trust, will the Trustee be entitled to a tax offset for any franking credits attaching to the distributions under Subdivision 207-B of the ITAA 1997? Detailed reasoning Tax offset Section 207-45 of the ITAA 1997 provides that trustees, who are liable to be assessed under section 99A of the ITAA 1936 and to whom a franked distribution flows indirectly, are entitled to a tax offset for that income year equal to its share of franking credit attached to the distribution. Pursuant to subsection 207-50(4) of the ITAA 1997, a franked distribution will be taken to flow indirectly to the trustee of a trust where, relevantly, the trustee is liable to be assessed on all or part of the trust's net income for that year under section 99A of the ITAA 1936.
As determined above, the Trustee will be liable to be assessed under section 99A of the ITAA 1936 in relation to distributions received by the Trustee in respect of unallocated Stapled Securities. Therefore, the requirements of section 207-45 are satisfied, and the Trustee will be entitled to a tax offset equal to its shares of the franking credits attached to the distributions. Qualified Person However, subsection 207-150(1) of the ITAA 1997 denies a tax offset otherwise available under section 207-45 where the person is not a qualified person for the purposes of Division 1A of the former Part IIIAA of the ITAA 1936. Broadly, a person will be taken to be a qualified person in respect of a distribution paid on Stapled Securities if the Stapled Securities are held at risk for a period of 45 days and the person or an associate does not make a related payment in respect of the distribution (former section 160APHO of the ITAA 1936).
It is accepted that no related payment will be made by the Trustee in respect of the distribution. It is also accepted that the Trustee will hold the unallocated Stapled Securities at risk for a period of not less than 45 days during the period beginning the day after the Trustee acquires the unallocated Stapled Securities and ending on the 45th day after the unallocated Stapled Securities become ex-dividend. Therefore, it is accepted by the Commissioner that the Trustee will be a 'qualified person' for the purposes of Division 1A of the former Part IIIAA of the ITAA 1936. Conclusion The Trustee will be entitled to a tax offset under Subdivision 207-B equal to the franking credits attached to the distributions received in respect of the unallocated Stapled Securities. Question 5 If the Trustee receives a distribution on allocated Stapled Securities held for a Participant in the Trust during an income year, and applies the Trust property representing it for the benefit of the Participant by the end of the income year, will the distribution and any franking credit calculated and included under section 95 be assessed under section 99A of the ITAA 1936 in relation to the Trustee?
Detailed reasoning As per Question 3 which considered the application of both section 95 and section 99A, subsection 97(1) of the ITAA 1936 determines that the assessable income of the beneficiary of a trust estate amounts to so much of the net income of the trust estate as the beneficiary is presently entitled. Under clause 3.2 of the Trust Deed, a Participant is absolutely entitled to allocated Stapled Securities only and under clause 5.1, a Participant only has a right to receive income, including any distributions, deriving from allocated Stapled Securities. Hence, distributions on allocated Stapled Securities must be held and applied by the Trustee for the benefit of the Participant. Therefore, the distribution and any attached franking credit on allocated Stapled Securities will not be assessed under section 95 in relation to the Trustee provided the relevant share of the distribution and any allowable franking credit is included in all of the Participant's assessable income.
In addition, under section 99A, the trustee of a trust estate is assessed and liable to pay tax on the part of the net income of the trust estate that is not included in the assessable income of a beneficiary of the trust estate under section 97 (paragraphs 99A(4)(a) and 99A(4A)(a)). As a Participant is presently entitled to any income derived from allocated Stapled Securities, the Trustee will not be assessed and liable to pay tax under section 99A on any distributions and other income received by the Trustee in respect of allocated Stapled Securities provided the relevant share of the distributions and other income is included in all of the Participant's assessable income. Question 6 If the Trustee receives a distribution on allocated Stapled Securities in the Trust during an income year and applies Trust property representing it for the benefit of the Participant by the end of the income year, will the Trustee be entitled to a tax offset for any franking credits attaching to the distribution under Subdivision 207-B of the ITAA 1997? Detailed reasoning
If the Trustee receives a distribution on allocated Stapled Securities in the Trust during an income year and applies Trust property representing it for the benefit of the Participant by the end of the income year, the Trustee will not be entitled to a tax offset for any franking credits attaching to the distribution under Subdivision 207-B of the ITAA 1997. This is because, as per Question 4 and the purposes of Division 1A of the former Part IIIAA of the ITAA 1936, the Participant will be entitled to a tax offset for any franking credits attaching to the distribution on Stapled Securities allocated to them, provided they have held the interest in those Stapled Securities at risk for a continuous period of at least 45 days, not counting the day of acquisition or disposal. > [1] This view is consistent with ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme, which found that: '
The funds provided to the Trustee are used in accordance with the Trust Deed and Plan Rules for the sole purpose of and under the employee share scheme. The contributions constitute capital receipts to the Trustee, and are not assessable under sections 6-5 or 6-10 of the ITAA 1997'. [2] See note 2 to subsection 713-135(1).