Private ruling: Employee Share Scheme: Consequences for Trustee of the employee share trust
Date of advice: 8 March 2017
Published: August 2017
Ruling period: Income years 1 July XXXX to 30 June XXXX
Date scheme commenced: Income year commencing 1 July XXXX

Ruling: Q1: Will the cash contributions made by Company A to the employee share trust in accordance with the Plan Rules and the Trust Deed to fund the subscription for, or acquisition on-market of, the ordinary shares in Company A be assessable income of the Trust pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 or Division 6 of the Income Tax Assessment Act 1936 ? | A1: No | Q2: Will any capital gain or capital loss made by the Trustee of the Trust arising as a result of either CGT event E5 or CGT event E7 happening on the transfer of Allocated Trust Shares to a Participant be disregarded under section 130-90 of the Income Tax Assessment Act 1997 ? | A2: Yes | Q3: Will CGT event A1 happen under section 104-10 of the Income Tax Assessment Act 1997 when the Trustee of the Trust transfers Allocated Trust Shares to the Participant in accordance with the Trust Deed? | A3: No | Q4: Will dividends or other income received by the Trustee of the Trust in respect of Allocated Trust Shares held in trust by the Trustee on behalf of the Participant be included in the calculation of the net income of the Trust under section 95 of the Income Tax Assessment Act 1936 ? | A4: Yes | Q5: Will dividends and other income received by the Trustee of the Trust in respect of Unallocated Trust Shares held in trust be included in the calculation of the net income of the Trust under section 95 of the Income Tax Assessment Act 1936 ? | A5: Yes | Q6: Will the Trustee of the Trust be assessed under section 99A of the Income Tax Assessment Act 1936 on the net income of the trust calculated in accordance with section 95 of the Income Tax Assessment Act 1936 to the extent that net income relates to Unallocated Trust Shares held on trust? | A6: Yes | Q7: Will the Trustee of the Trust be entitled to the benefit of the franking credits attached to franked distributions received in respect of Unallocated Trust Shares under Subdivision 207-B of the Income Tax Assessment Act 1997 ? | A7: Yes, provided the Trustee does not make a related payment in respect of the distribution and holds the Unallocated Trust Shares for a continuous period of not less than 45 days during the period beginning the day after the Trustee acquires the Unallocated Trust shares and ending on the 45 th day after the Unallocated Trust Shares become ex-dividend.

Relevant facts and circumstances: Company A is a publicly listed company that carries on business in Australia. Company A and its subsidiaries is referred to collectively as 'the Group'. The Trust is an employee share trust settled by Company A for the purposes of administering various award plans. Company B (Trustee) is the trustee for the Trust. The Trustee is not a subsidiary of the Group, nor a related entity of the Company A. The Plans Company A has established employee award plans (the Plans) as part of its reward and retention policy for certain employees. The Plans were approved under the terms and conditions of the Plans (Plan Terms). The purpose of the Plans is specified in the Plan Terms. The Plans operate in accordance with the Plan Rules. The Plan Rules together with the Plan Terms set out the requirements, terms and conditions of the Plans. Key definitions of the Plans are specified in the definitions clause of the Plan Terms. Plan Participants Under the Plan Terms, Company A may from time to time invite an eligible employee to acquire a right under the Plans. Eligible employees are those employees of the Group whose participation in the Plans is approved by the Company A board of directors (Board). An eligible employee who accepted the invitation to participate in the Plans is referred to as 'the Participant'. Performance Rights Grant of performance rights Pursuant to the Plan Rules, each Participant is granted a number of performance rights as determined by the Board (Performance Rights). Participants acquire Performance Rights for nil monetary consideration. Under the Plan Terms, the Performance Rights granted under the Plans will be subject to the terms and conditions of the Plan Terms until such time as the Performance Right is registered in the name of the Participant and is not subject to any Vesting Conditions. Performance condition The Performance Rights will vest in accordance with the performance condition set out in the Plan Rules. The number of Performance Rights which may vest in respect of the specified Performance Period will be determined by reference to achievement of specific performance targets (Performance Condition) for that period. Vesting and conversion of performance rights Performance Rights will vest in accordance with a specified schedule over a three year vesting period and provided the Participant remains employed by the Group at the relevant date (collectively, the Vesting Conditions). The Plan Rules state that provided the Participant remains employed by the Group at the relevant date, the Performance Rights will be converted into shares in Company A (Shares) on a one-for-one basis at nil financial cost to the Participant. Each Participant will be notified when their respective Performance Rights are converted to Shares. The Plan Terms provide that the vesting and conversion of Performance Rights does not confer any legal or equitable interests in Shares represented by the Performance Rights until the relevant Vesting Date and any conversion to Shares has been completed. Lapse and forfeiture of Performance Rights The Plan Terms provide that subject to the Plan Rules, the Performance Rights will lapse upon the earliest of: ● the expiry date ● failure to meet a Performance Condition within the Performance Period, or ● occurrence of a forfeiture condition. The Plan Rules set out the forfeiture condition for Performance Rights granted under the Plans and includes the circumstance where the Participant ceases employment with the Group or commits an act of gross misconduct in relation to the Group. The Plan Terms state that where a Participant acts fraudulently or dishonestly or in breach of its obligations for Company A, any unvested Performance Rights and/or Shares will lapse or deemed to be forfeited immediately. No consideration or compensation will be payable in relation to the lapse of a Performance Right. The Plan Terms sets out limitations on the offers of Performance Rights: ● the Plans must be operated in accordance with the company's constitution, any Law, Australian Securities Exchange (ASX) Listing Rules and the ASX Settlement Operating Rules ● Participant must not assign to any person any of their legal or equitable rights to Performance Rights and/or their right to be delivered Shares upon vesting of Performance Rights The Trust The Plan Terms provide that Company A may appoint a trustee to acquire and hold Shares either on behalf of Participants or for the purpose of the Plans. Company A settled the Company A employee share trust under the terms of the Deed of Trust. The definitions clause of the Trust Deed contains definitions of terms used in the Trust Deed: Allocated Trust Share means a Share allocated to and held by the Trustee on behalf of a specified Participant. Sole Activities Test means the requirements to satisfy the definition of 'employee share trust' for the purposes of section 130-85(4) of the ITAA 1997. Trust Assets means all the property, rights and income of the Trust Trust Share means a Share which is held by the Trustee in accordance with the terms of the Trust Deed. Unallocated Trust Share means a Trust Share held by the Trustee pursuant to the Deed which has not been allocated to a specified Participant. Company A established the Trust in accordance with the Trust Deed. The Recitals of the Trust Deed provides: ● Company A operates the Plans to provide certain eligible employees with increased incentives to make contribution to long term growth and performance of the company. ● Company A wishes to establish a trust for the sole purpose of subscribing for, acquiring, allocating, holding and delivering Shares in Company A under the Plans. The Trust Deed contains a 'Sole Activities Test' clause which provides that the Trust must at all times be managed and administered so that it satisfies the Sole Activities Test in subsection 130-85(4) of the Income Tax Assessment act 1997 . The Trust Deed contains a Trustee general powers clause giving the Trustee all the powers in respect of the Trust, Trust Shares and Trust Assets to discharge its obligations under the Trust Deed. The Trust Deed also contains certain limitations on the Trustee's general powers. The Trustee must not carry out activities that are not matters or things which are necessary of expedient to administer and maintain the Trust and the Trust Assets. The Trustee must not carry our activities which result in the Participants being provided with additional benefits other than the benefits that arise from the relevant Plan Rules. The Trust Deed governs the operation of the Trust. Under the Trust Deed, the Trustee will in accordance with the instructions received from the Board pursuant to the Plan Rules and as soon as reasonably practicable, acquire, allocate and deliver or transfer Shares for the benefit of a Participant provided that the Trustee receives sufficient payment to subscribe for or purchase Shares for that purpose and/or has sufficient Unallocated Trust Shares available. The Trustee must acquire Shares in accordance with the specific terms of the Trust Deed. Subject to the Trustee receiving sufficient funds or having sufficient capital and notice from Company A instructing the Trustee to subscribe for and/or purchase Shares, the Trustee must within a specified period of time purchase the requisite number of Shares on-market or, subscribe for the requisite number of Shares. Pursuant to the Trust Deed, the Trustee allocates and holds Trust Shares for an on behalf of the Participants. Unallocated Trust Shares must be held by the Trustee on trust for Participants generally from time to time in accordance with the Trust Deed and applied for the benefit of Participants by allocation of any Unallocated Trust Shares to specified Participants upon notice given by Company A in accordance with the Trust Deed and Plan Rules. Allocated Trust Shares are held by the Trustee on behalf of the relevant Participant in accordance with the Trust Deed and subject to the relevant Plan Rules. Under the Trust Deed, each specified Participant is absolutely entitled to Allocated Trust Shares held by the Trustee on their behalf and the Trustee will deal with the Allocated Trust Shares in accordance with the directions of the relevant Participant. The Participants on whose behalf the Trustee holds Allocated Trust Shares have substantially the same rights in respect of those Allocated Trust Shares (other than bare legal title) as if the Allocated Trust Shares were registered directly in the name of the relevant Participant. The Trustee may sell or transfer Allocated Trust Shares to a Participant upon written direction by the relevant Participant. Rights attached to Trust Shares Voting rights The Trustee must not exercise any voting rights in relation to any Unallocated Trust Shares. In relation to Allocated Trust Shares, each Participant may direct the Trustee as to how to exercise the voting rights attached to Allocated Trust Shares standing to their account. Distributions The terms of the Trust Deed provide for the Trustee's obligations in respect of dividends received by the Trustee - ● in respect of Allocated Trust Shares - the Participant will have an absolutely vested and indefeasible entitlement to receive from the Trustee all dividends actually paid by the Company A on all Allocated Trust Shares held by the Trustee on behalf of the Participant and the Trustee agrees to pay any such dividends to Participants as soon as reasonably practicable after those dividends are paid by Company A. ● in respect of Unallocated Trust Shares - the Trustee may apply any capital receipts, dividends or other distributions received in respect of Unallocated Trust Shares to purchase further Shares to be held on trust for the purposes of this Trust. Pursuant to the Trust Deed, a Participant is presently entitled to so much of the net income of the Trust for a year of income which is attributable to the Allocated Trust Shares held by the Trustee on behalf of the Participant, proceeds of sale arising from transactions or events related to Allocated Trust Shares. The balance of net income of the Trust for a year of income to which no Participant is entitled may be accumulated by the Trustee as an addition to the Trust Assets. Funding Cash contributions Under the Trust Deed, Company A provides cash contributions to the Trustee of the Trust for the purposes of acquiring Shares in accordance with the Plans. All funds received by the Trustee from Company A will constitute accretions of the corpus of the Trust and will not be repaid to Company A (or any member of the Group). Funds received by the Trustee from Company A may be paid to the Company where the Trustee subscribes for Shares in accordance with the Trust Deed and the Plan Rules. The amount of funds provided by Company A will be determined based on an estimated forecast of the likelihood of Performance Rights vesting to determine if Trust holds sufficient Shares to satisfy future potential vesting. None of the cash contributions provided by Company A to the Trust is or will, either in whole or in part, be used for the purpose of providing loans or financial assistance to Participants under any circumstances. Trustee remuneration and reimbursement of costs Pursuant to the Trust Deed, Company A will pay fees to the Trustee for the provision of independent trustee services. The Trustee will reimburse the Trustee for costs incurred in relation to the ongoing administration of the Plans and the Trust. Rights of Company A in Trust Assets Company A has no proprietary or beneficial interest in the Shares or Trust Assets. The Trustee must not pay the proceeds of sale of any forfeited shares to any member of the Group. The Trustee must not pay any balance or apply remaining Trust Assets to any member of the Group. Other matters Company A's reasons for implementing the Plans via a Trust include: ● The Trust assures the Participants that the Shares, and any incidental dividend income or associated rights, are held independently of Company A and the Trustee has a fiduciary obligation to act in the interests of its beneficiaries, i.e. the Participants ● The Trust provides opportunity to improve cash flow planning, manage costs and the company's share capital position. ● The Trust is the most appropriate vehicle to acquire Shares and accumulate dividend income during the Vesting Period, thus assisting Company A to meet the costs of the Plans. ● The Trust enables easier administration of the Plans.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 44(1) | Income Tax Assessment Act 1936 Division 6 | Income Tax Assessment Act 1936 Section 95 | Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1936 Section 98 | Income Tax Assessment Act 1936 Section 99A | Income Tax Assessment Act 1936 Subsection 99A(4) | Income Tax Assessment Act 1936 Subsection 99A(4A) | Income Tax Assessment Act 1936 Former Part III Division 1A | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Section 83A-20 | Income Tax Assessment Act 1997 Subsection 83A-20(1) | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Subsection 104-75(1) | Income Tax Assessment Act 1997 Subsection 104-75(2) | Income Tax Assessment Act 1997 Section 104-85 | Income Tax Assessment Act 1997 Subsection 104-85(1) | Income Tax Assessment Act 1997 Section 106-5 | Income Tax Assessment Act 1997 Subsection 130-85(4) | Income Tax Assessment Act 1997 Section 130-90 | Income Tax Assessment Act 1997 Subsection 130-90(1) | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1997 Subsection 207-5(3) | Income Tax Assessment Act 1997 Subsection 207-5(4) | Income Tax Assessment Act 1997 Section 207-20 | Income Tax Assessment Act 1997 Subsection 207-20(1) | Income Tax Assessment Act 1997 Subsection 207-20(2) | Income Tax Assessment Act 1997 Subdivision 207-B | Income Tax Assessment Act 1997 Section 207-25 | Income Tax Assessment Act 1997 Section 207-35 | Income Tax Assessment Act 1997 Section 207-45 | Income Tax Assessment Act 1997 Section 207-50

Reasons for decision: Summary: Section 95 of the ITAA 1936 defines net income in relation to a trust, insofar as it is relevant: net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions … Subsection 6-5(1) states: Your assessable income includes income according to ordinary concepts, which is called ordinary income. Subsection 6-10(1) states: Your assessable income also includes some amounts that are not ordinary income. Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5. None of the provisions in section 10-5 are relevant in the present circumstances. Therefore, the cash contributions received from Company A will not be assessable income under section 6-10. Accordingly, the cash contributions will only be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936 if the amounts are assessable as income according to ordinary concepts under section 6-5. The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case: The fundamental relation of “capital” to “income” has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being “derived” that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description. In GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. The court further stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not derived in carrying on a business. In this case, the cash contributions 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. Accordingly, the cash contributions received by the Trustee of the Trust to fund the acquisition of Shares will constitute capital receipts of the Trust and will not be assessable income under section 6-5, and therefore will not be included in the net income of the trust under section 95 of the ITAA 1936. Section 130-90 operates to disregard any capital gain or capital loss if the conditions in that section are satisfied, relevantly: Shares held to satisfy future exercise of rights acquired under employee share schemes (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 Subdivison 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 CGT event happens. In order for subsection 130-90(1) to apply and disregard a particular capital gain or capital loss of a trust (or a beneficiary of that trust), the following requirements must be satisfied: ● the Trust is an employee share trust ● CGT event E5 or CGT event E7 happens in relation to a share ● the Participant (a beneficiary of the Trust) acquired a beneficial interest in the share by exercising a right, which was an ESS interest to which Subdivision 83A-B or 83A-C applied Each of these requirements is considered in turn below. | Detailed Reasoning - Employee share trust: For section 130-90 to apply, the Trust must be an employee share trust for the purposes of the ITAA 1997. An 'employee share trust' for an employee share scheme is defined in subsection 130-85(4) to mean a trust whose sole activities are: (a) obtaining shares or rights in a company; (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). | Detailed Reasoning - ESS interest: An 'ESS interest' in a company, as defined in subsection 83A-10(1), to mean a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company. Pursuant to the Plans, a Performance Right is a right to receive a beneficial interest in a Share, subject to the Participant satisfying the Vesting Conditions. Accordingly, the Performance Right is an 'ESS interest' granted under the Plans. | Detailed Reasoning - Employee share scheme: An 'employee share scheme' is defined in subsection 83A-10(2) to mean: (2) An employee share scheme is 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 employees' employment. The Plans are employee share schemes for the purposes of Division 83A as they are arrangements under which an ESS interest (the Performance Right) to a Participant in relation to their employment. | Detailed Reasoning - Is the Trust an employee share trust?: In this case, paragraphs 130-85(4)(a) and (b) are satisfied because the Trust was established in accordance with the Trust Deed for the sole purpose of acquiring and allocating Shares to Participants in satisfaction of Performance Rights (i.e. ESS interests) acquired by the Participant under the Plans. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) requires the Trustee to undertake incidental activities that are a function of managing the Plans and administering the Trust. The Commissioner considers merely incidental activities of managing an employee share scheme and administering a trust include: ● the opening and operation of a bank account to facilitate the receipt and payment of money ● the receipt of dividends in respect of shares held by the trust on behalf of an employee and their distribution to the employer ● dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme ● the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares ● the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries, and ● receiving and immediately distributing shares under a demerger. Activities that the Commissioner considers will not satisfy the sole activities test include: ● any activities that are not a necessary function of managing an employee share scheme or administering the trust, and ● any activities which result in employees being provided with additional benefits such as the provision of financial assistance including a loan to acquire shares. On the facts, the requirement in paragraph 130-85(4)(c) is satisfied Therefore, the Trust is an employee share trust for the purposes of section 130-90. | Detailed Reasoning - CGT event happens in relation to the Share: Section 130-90 will only operate to disregard a capital gain or capital loss made by the employee share trust to the extent that it results from either CGT event E5 or CGT event E7 happening. | Detailed Reasoning - CGT event E5: Subsection 104-75(1) states: CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under). Note: Division 128 deals with the effect of death The time of the event is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)). The Trustee makes 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 this case, CGT event E5 will happen in relation to a Share when the Participant becomes absolutely entitled to that Share. This occurs, subject to the terms of the Plans, at the time when the Shares are allocated to the Participant by the Trustee of the Trust. | Detailed Reasoning - CGT event E7: Subsection 104-85(1) states: 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 a trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. Note: Division 128 deals with the effect of death CGT event E7 may happen in relation to a Share when the Trustee disposes of the Share in satisfaction of a Participant's beneficial interest in the Share. However, section 106-50 affects the operation of section 104-85 such that CGT event E7 may not happen in these circumstances. Accordingly, paragraphs 130-90(1)(a) and (b) are satisfied. | Detailed Reasoning - ESS interest to which Subdivision 83A-B or 83A-C applies: In considering whether the Trust was an employee share trust within the meaning in subsection 130-85(4), it has been established (above) that the Performance Rights granted under the Plans are ESS interests as defined in subsection 83A-10(1). In this case, the Trustee of the Trust subscribes for or purchases Shares for allocation to the Participant in satisfaction of Performance Rights granted under the Plans. On the facts, the Performance Right is an ESS interest to which Subdivision 83A-B or 83A-C applies. Accordingly, paragraphs 130-90(1)(c) and (d) are satisfied. The exception in subsection 130-90(2) does not apply in this case. Therefore, the Trustee disregards any capital gain or capital loss arising from CGT event E5 or CGT event E7 happening when Allocated Trust Shares are transferred to the Participant. | Detailed Reasoning - Question 3: Subsections 104-10(1) and (2) state: (1) CGT event A1 happens if you dispose of a CGT asset. (2) You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of the law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. However, section 106-50 can affect the operation of section 104-10. Section 106-50 states: | Detailed Reasoning - Absolutely entitled beneficiaries: (1) For the purposes of this Part and Part 3-3 (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust). (2) This Part, Part 3-3 and Subdivision 328-C apply, from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), to an act done in relation to the asset by the trustee as if the act had been done by you (instead of by the trustee). On the facts, section 106-50 applies to the Allocated Trust Shares. Accordingly, CGT event A1 will not happen to the disposal of the Allocated Trust Share when the Trustee transfers legal title in the Allocated Trust Share to the Participant, due to the operation of section 106-50. | Detailed Reasoning - Question 4: Section 95 of the ITAA 1936 defines net income in relation to a trust estate, insofar as it is relevant: net income , in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, … except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate … Subsection 6-5(1) states: Your assessable income includes income according to ordinary concepts, which is called ordinary income. Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income. Subsection 6-10(1) states: Your assessable income also includes some amounts that are not ordinary income. Note: These are included by provisions about assessable income. For a summary list of these provisions see section 10-5. Section 10-5 provides that dividends assessable under subsection 44(1) of the ITAA 1936 and credits on franked dividends pursuant to subsections 207-20(1), 207-35(1) and 207-35(3) are to be included in assessable income. Subsection 44(1) of the ITAA 1936 relevantly states: The assessable income of a shareholder in a company (whether the company is a resident of a non-resident) includes: (a) if the shareholder is a resident: (i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and (ii) all non-share dividends paid to the shareholder by the company; Accordingly, dividends assessable under subsection 44(1) of the ITAA 1936 in relation to Allocated Trust Shares (i.e. Shares held on trust that have been allocated to a specified Participant) will be included in the calculation of the net income of the Trust. | Detailed Reasoning - Question 5: As established above, section 95 of the ITAA 1936 provides that the net income in relation to a trust estate means the total assessable income of the trust estate. Section 10-5 provides that dividends assessable under subsection 44(1) of the ITAA 1936 are to be included in assessable income pursuant to subsection 6-10(1). In this case, dividends received in respect of Unallocated Trust Shares must be applied in accordance with the terms of the Trust Deed. Accordingly, dividends received in relation to Unallocated Trust Shares (i.e. Shares held on trust and not yet allocated to a specified Participant) will be included in the net income of the Trust pursuant to section 95 of the ITAA 1936. | Detailed Reasoning - Question 6: Section 99A of the ITAA 1936 relevantly states: (4) Where there is no part of the net income of a resident trust estate: (a) that is included in the assessable income of a beneficiary or the trust estate in pursuance of section 97 (b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or (c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia; the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section. (4A) Where there is a part of the net income of a resident trust estate: (a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97; (b) in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and (c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia; the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section. Subsection 97(1) of the ITAA 1936 determines the assessable, exempt and non-assessable non-exempt (NANE) income of a beneficiary who is not under any legal disability and who is presently entitled to a share of the income of the trust estate. Paragraph 97(1)(a) of the ITAA 1936 relevantly states: (1) Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate: (a) the assessable income of the beneficiary shall include: (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia … Where no beneficiary is presently entitled to the income of a trust estate, the net income of that trust estate will be taxed in the hands of the trustee under either section 99 or 99A of the ITAA 1936. Section 99A will apply unless one of the exclusions from its operation contained in subsection 99A(2) applies. Where there is no part of the net income of a resident trust estate that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97 of the ITAA 1936, the trustee will be assessed and is liable to pay tax on the net income of the trust estate. Where there is a part of the net income of a resident trust estate that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97 of the ITAA 1936, the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate. Therefore, the Trustee will be assessed and liable to pay tax on the part of the net income of the trust estate to the extent that the income relates to Unallocated Trust Shares and income that is not included in the assessable income of a Participant. | Detailed Reasoning - Question 7: Division 207 deals with the effect of receiving franked distributions. As far as it is relevant to this case, subsection 207-5(3) provides that if a franked distribution is made to a member that is a trustee of a trust, an amount equal to the franking credit on the distribution is also included in the member's assessable income. However, subsection 207-5(4) provides that a tax offset in relation to that distribution is only available to an entity (who may be a trustee) if the distribution flows indirectly to it and does not flow indirectly through it to another entity. The tax offset is equal to its share of the franking credit on the distribution. Subdivision 207-B deals with the effect of receiving a franked distribution through certain partnerships and trusts. Section 207-25 explains, relevantly, that: This Subdivision deals with an entity that receives a benefit of a franked distribution where: (a) the distribution is made to a partnership or the trustee of a trust, and (b) the benefit is received either directly or through other interposed partnerships or trusts. The distribution is regarded as flowing indirectly to the entity under this Subdivision. On the basis of a notional amount of the entity's share of the distributions, the entity may be entitled to have an amount included in its assessable income and/or a tax offset under this Subdivision. Subsection 207-35(1) states: If: (a) a franked distribution is made in an income year to an entity that is a partnership or the trustee of a trust; and (b) the entity is not a corporate tax entity when the distribution is made; and (c) if the entity is the trustee of a trust - the trust is not a complying superannuation entity when the distribution is made; the assessable income of the partnership or trust for that income year includes the amount of the franking credit on the distribution. Section 207-50 set out the circumstances when a franked distribution flows indirectly to or through an entity. Subsection 207-50(4) relevantly provides that a franked distribution will be taken to flow indirectly to the trustee of a trust if: ● the distribution is made to the trustee ● the trustee is liable to be assessed on all or part of the trust's net income for that year under section 99A, and ● the trustee's share of the distribution under section 207-55 is a positive amount, whether or not the trustee actually receives any of that share. Consequently, where the Trustee receives a franked distribution in respect of an Unallocated Trust Share, an amount equal to the franking credit attached to the distribution will be included in the assessable income of the Trustee. | Detailed Reasoning - Tax offset: Subsection 207-45 relevantly states: An entity to whom a franked distribution flows indirectly in an income year is entitled to a tax offset for that income year that is equal to its share of the franking credit on the distribution if it is: … (c) the trustee of a trust that is liable to be assessed on a share of, or all of a part of, the trust's net income under section 98, 99 or 99A of the Income Tax Assessment Act 1936 for that income year; As established in Questions 5 and 6 above, the Trustee will be liable to be assessed under section 99A of the ITAA 1936 in relation to dividends on Unallocated Trust Shares. However, where a franked distribution is paid to an entity, subsection 207-145(1) denies a gross-up and tax offset where that entity is not a qualified person for the purposes of Division 1A of the former Part IIIAA of the ITAA 1936. | Detailed Reasoning - Qualified person: Former section 160APHO of the ITAA 1936 relevantly states: (1) A taxpayer who has held shares or an interest in shares on which a dividend has been paid is a qualified person in relation to the dividend if: (a) where neither the taxpayer nor an associate of the taxpayer has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend - the taxpayer has satisfied subsection (2) in relation to the primary qualification period in relation to the dividend; or (b) where the taxpayer or an associate of a taxpayer has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend - the taxpayer has satisfied subsection (2) in relation to the secondary qualification period in relation to the dividend. (2) A taxpayer who has held shares or an interest in shares on which a dividend has been paid satisfies this subsection in relation to a qualification period in relation to the shares or interest if, during the period: (a) where the taxpayer held the shares - the taxpayer held the shares for a continuous period (not counting the day on which the taxpayer acquired the shares or, if the taxpayer has disposed of the shares, the day on which the disposal occurred) of not less than: (i) if the shares are not preference shares - 45 days; or (ii) … (b) where the taxpayer held the interest in the shares—the taxpayer held the interest for a continuous period (not counting the day on which the taxpayer acquired the interest or, if the taxpayer has disposed of the interest, the day on which the disposal occurred) of not less than: (i) if the shares are not preference shares - 45 days; or (ii) … Former section 160APHD of the ITAA 1936 relevantly defines: primary qualification period , in relation to a taxpayer in relation to shares or an interest in shares, means the period beginning on the day after the day on which the taxpayer acquired the shares or interest and ending: (a) if the shares are not preference shares - on the 45 th day after the day on which the shares or interest became ex dividend ; secondary qualification period , in relation to a taxpayer in relation to shares or an interest in shares, means: (a) if the shares are not preference shares - the period beginning on the 45th day before, and ending on the 45th day after, the day on which the shares or interest became ex dividend ; The term 'related payment' is defined in former section 160APHN to relevantly mean: (2) The taxpayer or associate is taken, for the purposes of this Division, to have made, to be under an obligation to make, or to be likely to make, a related payment in respect of the dividend or distribution if, under an arrangement, the taxpayer or associate has done, is under an obligation to do, or may reasonably be expected to do, as the case may be, anything having the effect of passing the benefit of the dividend or distribution to one or more other persons. Consequently, where the Trustee does not make a related payment in respect of the Trust Shares, the Trustee will be a qualified person in respect of the dividend if the Trustee held the Trust Shares at risk for a continuous period of not less than 45 days (excluding day the Trust Shares were acquired and if the Trust Shares have been disposed of, the day the disposal occurred) during the period beginning on the day after the day on which the Trustee acquired the Trust Shares and ending on the 45 th day after the day on which the Trust Shares became ex dividend (primary qualification period). However, where the Trustee makes a related payment in respect of the Trust Shares, the Trustee will be a qualified person in respect of the dividend if the Trustee held the Trust Shares at risk for a continuous period of not less than 45 days (excluding day the Trust Shares were acquired and if the Trust Shares have been disposed of, the day the disposal occurred) during the period beginning on the 45 th day and ending on the 45 th day after the day on which the Trust Shares become ex dividend (secondary qualification period). The meaning of ' ex dividend ' is defined in former section 160APHE to mean: (1) A share in respect of which a dividend is to be paid, or an interest (other than an interest as a beneficiary of a widely held trust) in such a share, becomes ex dividend on the day after the last day on which the acquisition by a person of the share will entitle the person to receive the dividend. (2) An interest as a beneficiary of a widely held trust in a share in respect of which a dividend is to be paid becomes ex dividend on the day after the last day on which the acquisition by a person of the interest will entitle the person to receive a distribution from the trust. Accordingly, provided that the Trustee did not make a related payment in respect of the Unallocated Trust Share and held the Unallocated Trust Share at risk for a continuous period of not less than 45 days (not counting the day the share was acquired and if disposed of, the day the disposal occurred) during the period beginning on the day after the Unallocated Trust Share was acquired and ending on the 45 th day after the day the share became ex dividend , the Trustee will be a qualified person in respect of the distribution and be entitled to the benefit of the franking credits attached to the distribution paid in respect of Unallocated Trust Shares. The refundable tax offset rules in Division 67 may apply to the tax offset available to the Trustee under Division 207. | Detailed Reasoning - Refundable tax offset rules: Subsection 67-25(1) states: Tax offsets available under Division 207 (which sets out the effects of receiving a franked distribution) or Subdivision 210-H (which sets out the effects of receiving a distribution franked with a venture capital credit) are subject to the refundable tax offset rules, unless otherwise stated in this section. Subsection 67-25(1B) provides that the tax offset is only subject to the refundable tax offset rules if the Trustee entitled to the tax offset is not liable to be assessed under section 98 or 99A of the ITAA 1936. As franked distributions flow indirectly to the Trustee, the Trustee is entitled to a franking tax offset under section 207-45. However, the Trustee is assessed on the distributions received in respect of Unallocated Trust Shares under section 99A of the ITAA 1936. Therefore, the tax offsets available to the Trustee is limited to the amount of tax payable and any excess franking tax offset is not refundable. | Detailed Reasoning - Conclusion: Where a franked distribution is paid in respect of an Unallocated Trust Share, the Trustee will include an amount equal to the franking credit on the distribution in its assessable income under section 207-35. Provided that the Trustee does not make a related payment in relation to an Unallocated Trust Share and holds the Unallocated Trust Share at risk for a continuous period of not less than 45 days during the period beginning the day after the Trustee acquires the Unallocated Trust Share and ending of the 45 th day after the Unallocated Trust Share becomes ex dividend , then the Trustee will be a qualified person in respect of the distribution and be entitled to the benefit of the franking credits attached to franked distributions on Unallocated Trust Shares to the extent of tax payable. Any excess franking tax offset is not refundable pursuant to section 67-25.

Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.