Private ruling: Employee share trust for employee share scheme
Date of advice: 30 July 2019
Published: October 2019
Ruling period: Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023

Ruling: Q1: Will the irretrievable cash contributions to the Trustee of the Public Company Limited Employee Incentive Plans Trust ( EST ) to fund the acquisition of Public Company shares by the Trustee for the purposes of the Public Company Long Term Incentive Plan ( Plan ) be assessable income of the EST pursuant to either section 6-5 or 6-10 of the Income Tax Assessment Act 1997 ( ITAA 1997 ) or Division 6 of the Income Tax Assessment Act 1936 ( ITAA 1936 )? | A1: No | Q2: Will the Trustee of the EST derive any assessable income under section 6-5 or 6-10 of the ITAA 1997 when the Trustee allocates or transfers shares to Participants according to the Plan? | A2: No | Q3: Will any capital gain or capital loss that arises for the Trustee of the EST at the time the Participants become absolutely entitled to Public Company shares under the Plan (CGT event E5 under section 104-75 of the ITAA 1997) or when Trustee of the EST transfers legal ownership of Public Company shares of the EST to Participants in accordance with the Deed (CGT event E7 under section 104-85 of the ITAA 1997) be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee? | A3: Yes | Q4: Will the dividends received and distributed by the Trustee of the EST on Shares which have been allocated to a Participant be included in the net income of the Trust under section 95 of the ITAA 1936? | A4: Yes | Q5: Will dividends and other income received by the Trustee on unallocated shares be included in the net income of the Trust under section 95 of the ITAA 1936? | A5: Yes | Q6: Are dividends paid by Public Company to the Trustee of the EST in respect of unallocated shares held by the Trustee to which no beneficiary is presently entitled assessed to the Trustee under section 99A of the ITAA 1936? | A6: Yes | Q7: Will the Trustee of the EST be entitled to a tax offset for any franking credits attached to the franked distributions received in respect of unallocated shares under section 207-45 of the ITAA 1997? | A7: Yes

Relevant facts and circumstances: A public Company ( Public Company ), is listed on the Australian Securities Exchange ( ASX ). The Public Company group comprises legal entities around the world ( Public Company Group ). Public Company has an Australian subsidiary ( Aus Sub Company ), which conducts the business operations in Australia. Aus Sub Company employs all Australian resident employees of the Public Company Group. Public Company and Aus Sub Company are not members of a tax consolidated group. A large part of the Public Company Group's success can be attributed to its ability to motivate its staff and maintain longevity of employment, particularly amongst senior management. As a result, the Public Company Group needs to continue to provide incentives to ensure they attract the right people, especially at the senior management level, and retain high caliber staff to ensure the future success of the group. The Public Company Group's remuneration policy is designed to align the economic interests of senior management and other employees with those of Public Company's shareholders. This is done by providing an opportunity for employees to earn significant rewards by potentially acquiring an equity interest in Public Company, thus motivating the creation of shareholder value. Public Company has implemented the Public Company Long Term Incentive Plan ( Plan ) to provide Eligible Persons the opportunity to become Plan Participants and receive rights to fully paid shares in Public Company ( Rights ) as an incentive. The Rights issued by Public Company to a Participant will be issued at a discount. Public Company has decided to establish an Employee Share Trust ( EST ), which was settled via a Deed ( Deed ) to facilitate the provision of shares in Public Company under the Plan to certain Australian employees of the Public Company Group ( Participants ). It is proposed that current Participants and new employees will be eligible to participate in the Plan administered by the EST. The establishment of the EST will accommodate capital management flexibility for Public Company in that the EST can use the contributions from Public Company to either acquire shares in Public Company from existing shareholders, or, alternatively, subscribe for new shares in Public Company. It also allows for a streamlined approach to the administration of the Plan. Any time there is a grant of Rights pursuant to the Plan, the grant will be subject to the rules of the Plan ( Rules ). While it will be Public Company making the contributions to the Trustee of the EST, these costs will be recharged to Aus Sub Company (as employer of the relevant individuals) ( Recharge Amounts ). Therefore, it will be Aus Sub Company (as employer of the relevant individual) who will ultimately bear these costs. The costs incurred by Public Company are recharged to Aus Sub Company (the Recharge Amounts generate assessable income of Public Company), these costs are incurred by Aus Sub Company (a 100% subsidiary of Public Company) to generate increased profit via enhanced employee performance, thereby generating additional dividend income to Public Company. The Plan broadly operates as follow: - The Board may from time to time, in its absolute discretion, nominate any eligible person for participation in the Plan (Participant) and determine the number of Rights to be offered to that Participant. - The Invitation to participate in the Plan may be made by the Board at any time, in any form and on any conditions or subject to any restrictions as the Board decides. - The Invitation will specify certain information, including a description and the number of Rights offered and the amount (if any payable by the Participant for the rights or shares to which the rights relate), as well as the terms (including any conditions and restrictions) and the time by which and the manner in which the Invitation is to be accepted. - The conditions and restrictions may include time vesting (period of time before the Participant is entitled to exercise the rights and have shares provided), performance vesting (performance conditions to be satisfied before the Participant is entitled to exercise the Rights and have shares provided), forfeiture conditions (circumstances where the Participant will forfeit the rights or any interest in, or right to receive shares) and any other condition that the Board may determine. - After the acceptance of an Invitation by a Participant, Public Company will allocate the number of Rights specified in the Invitation to the Participant and notify them of the date that the Rights were allocated to them ( Grant Date ). - The total number of shares which may be offered to a Participant under the scheme will not at any time exceed 5% of the Public Company's total issued shares. - An invitation must specify the Performance Conditions that apply to the Rights, which may include the testing period (period which performance conditions are assessed), performance measure (standard which performance conditions are measured against), assessment and expiry period. - The Participant may exercise the Right by giving notice to Public Company (which notice must specify the number of Rights provided to the Participant and how to be exercised). - Public Company must as soon as practicable after receipt of the notice, arrange for the Participant to be provided with the number of Shares which corresponds to the number of Rights that have been exercised. - Rights will automatically lapse if Performance Conditions are not satisfied and the period of that Performance Period has expired. - A Right may not be transferred and lapses immediately on the purported transfer, unless the Board approves the transfer. - If the Participant ceases to be an eligible Person, then they will have six months to exercise the vested Right and be provided with a Share. - Shares acquired upon the exercise of Rights under the Plan will rank equally with all existing Shares in all respects from the date of acquisition. The scheme (resulting from the operation of the Plan and the Deed) is an Employee Share Scheme ( ESS ) for the purposes of Division 83A. Under the scheme the ESS interests are acquired at a discount. The relevant clauses of the Deed and the Plan rules are set out in the ruling.


Reasons for decision: Summary: The basic trust income assessing provisions are contained in Division 6 of Part III of the Income Tax Assessment Act 1936 ( ITAA 1936 ). Section 95 of the ITAA 1936 defines net income of a trust as '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...' Section 6-5 Subsection 6-5(1) states: Your assessable income includes income according to ordinary concepts, which is called ordinary income. The nature of the contributions to the EST is informed by the Deed, which stipulates that all funds received by the Trustee from Public Company will constitute Accretions to the corpus of the EST. Therefore, the contributions constitute capital receipts to the EST, and are not assessable under section 6-5 as ordinary income of the Trustee. Section 6-10 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 listed in section 10-5 are relevant in the present circumstances. The irretrievable cash contributions made by Public Company to the Trustee of the EST to fund the acquisition of Public Company's shares by the EST in accordance with the Deed will not be assessable income of the EST pursuant to section 6-10. Division 6 of the ITAA 1936 Given that the irretrievable cash contributions made by Public Company to the Trustee are neither ordinary income nor statutory income, they will not be included in the net income of the EST and will not be assessed to the Trustee under Division 6 of Part III of the ITAA 1936. As discussed in question 1 above, section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is also called ordinary income. Subsection 95(1) of the ITAA 1936 defines net income of a trust as the total assessable income of the trust calculated as if the trustee were a resident taxpayer in respect of that income, less all allowable deductions. The expression 'income according to ordinary concepts' is not defined for the purposes of the income tax legislation, however there is a substantial body of case law which has developed and elaborated on the expression and which established certain factors which may assist in determining whether a receipt should be characterised as income according to ordinary concepts. Gains made by a taxpayer on the realization of trust assets would be included in the net income of the trust under section 95 of the ITAA 1936 as ordinary income if, after a wide survey and exact scrutiny of all of the relevant factors, it is determined that the gain or loss was made by the Trustee: - In the ordinary course of carrying on a business of investment; - Outside of the ordinary course of that business from an arrangement entered into with the intention of making a profit or gain; - From a one-off or isolated transaction where the investment was acquired in a business operation or commercial transaction for the purpose of profit making. In the present case, the activities carried out by the Trustee of the EST in facilitating the Plan do not meet the above criteria. The Trustee is not carrying on a business of investment (there is no systematic course of buying and selling shares with the intent of profit-making). Furthermore, the role of the Trustee is not to enter into investments for the purposes of making a profit or a gain. When the Trustee of the EST allocates or transfers shares to Participants according to the Plan and the Deed, at no point is the Trustee engaged in any activities to derive profits. Rather the Trustee is acquiring shares (upon instruction from Public Company) with the intention of preserving any capital growth for the benefit of the Participants. Therefore, the Trustee should not be considered to derive any ordinary income under section 6-5 as a result of performing its function as Trustee of the EST by acquiring, holding and transferring shares to Participants under the terms of the Deed and the Plan. Section 6-10 Acquiring, holding and transferring shares to Participants under the terms of the Deed and the Plan will not give rise to any particular kind of assessable income contained in the list of provisions in section 6-10. Accordingly, any gains made are not assessable to the Trustee under section 6-5 or 6-10. Section 130-90 operates to disregard any capital gain or loss made by an EST under section 104-75 or 104-85 where specified conditions are satisfied. Section 130-90 states: (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 (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. Employee Share Trust Subsection 130-85(4) states: An employee share trust , for an employee share scheme, is 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). Paragraphs 130-85(4)(a) and (b) The beneficial interest in a share received by a Participant when a share is granted to them under the terms of the Deed and the Rules is an ESS interest within the meaning of subsection 83A-10(1). Subsection 83A-10(2) defines an employee share scheme as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. The Plan is an employee share scheme within the meaning of subsection 83A­-10(2) because it is a scheme under which rights to acquire beneficial interests in ordinary shares in Public Company are provided to employees (Participants) in relation to their employment. Public Company has established the EST to acquire ordinary shares in Public Company and to allocate those shares to Participants in order to satisfy ESS interests acquired by those Participants under the Plan. The beneficial interest in the Public Company share is itself provided under an employee share scheme because it is provided under the same scheme which the shares are provided to the Participant in relation to the Participant's employment, being an employee share scheme as defined in subsection 83A-10(2). The Deed requires the Trustee of the EST to acquire (by either subscription or purchase, or both) the Public Company shares if directed by the Board to do so for the purposes of enabling Public Company to satisfy its obligations to allocate shares under the Plan Paragraphs 130-85(4)(a) and (b) are therefore satisfied because: (a) the Trust acquires shares in a company, namely Public Company; and (b) the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Public Company), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the Participants in accordance with the Deed and the Plan. Paragraph 130-85(4)(c) Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee of the EST undertake incidental activities that are a function of managing the Plan. ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c): - 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 employee; - the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; - 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 result in Participants (employees) being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental. The Deed sets out the powers of the Trustee of the EST. The powers and activities listed are considered to be incidental for the purposes of paragraph 130-85(4)(c). The Deed states that Public Company and the Trustee of the EST agree that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purpose of subsection 130-85(4). Paragraph 130-85(4)(c) is satisfied as any activities undertaken by the Trustee other than the acquisition of Public Company shares and the allocation of those shares to the Participants in accordance with the Deed and the Rules are merely incidental to the operation of the Plan. Therefore, the Trust satisfies the definition of an employee share trust in subsection 130-85(4). | Detailed Reasoning - Shares held to satisfy the future acquisition: subsection 130-90(1A): Subsections 130-90(1A) and 130-90(2) state: Shares held for future acquisition under employee share schemes | Detailed Reasoning - 130-90(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. | Detailed Reasoning - 130-90(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. Under the Plan, Participants are invited to acquire shares in Public Company, which will make contributions to the Trustee of the EST in order to allow it to either subscribe for shares from Public Company or acquire them on or off-market to satisfy the offers made to Participants (the eligible employees) under the Plan. Subsection 130-90(1A) provides that any capital gain or loss made by an employee share trust is disregarded if a beneficiary of the trust becomes absolutely entitled to the ESS interest (CGT event E5), or the trustee disposes of the ESS interest to a beneficiary of the trust (CGT event E7) and the ESS interest is a CGT asset of the trust. For the reasons discussed above, the EST satisfies the definition of an employee share trust in subsection 130-85(4). Paragraph 130-90(1A)(a) is satisfied as the shares held by the Trustee are ESS interests which are CGT assets of the EST. CGT event E5 is the CGT event that will apply under the terms of the Plan at the time the Participant becomes absolutely entitled to the Public Company shares as against the Trustee. Therefore, paragraph 130-90(1A)(b) is satisfied. The Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest is provided to a Participant in relation to their employment in Aus Sub Company in accordance with the Deed. Subdivision 83A-B or 83A-C will apply to Public Company shares acquired under the Plan. Accordingly, paragraph 130-90(1A)(c) will be satisfied. Therefore, all the conditions in subsection 130-90(1A) have been satisfied. Provided a Participant does not acquire the beneficial interest in the Public Company share for more than its cost base in the hands of the EST at the time that CGT event E5 happens, subsection 130-90(1A) will apply to disregard any capital gain or loss made by the Trustee of the EST on any Public Company shares when a Participant becomes absolutely entitled to the ESS interest as against the Trustee under CGT event E5. | Detailed Reasoning - Shares held to satisfy the future exercise of rights: subsection 130-90 (1): Paragraph 130-90(1)(a) CGT event E5 is the CGT event that will apply under the terms of the Plan at the time each Participant becomes absolutely entitled to shares in Public Company upon the exercise of the rights as against the Trustee. Therefore, paragraph 130-90(1)(a) will be satisfied. Paragraph 130-90(1)(b) Section 995-1 defines a share to mean a share in the capital of a company. An ordinary share in Public Company held by the Trustee and to which a Participant is entitled upon exercise of a right is a share in the capital of a company i.e. Public Company. Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph. Paragraph 130-90(1)(c) Paragraph130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a share (in Public Company) by exercising a Right granted under the Plan. Paragraph 130-90(1)(d) Subsection 83A-20(1) of Subdivision 83A-B provides that this Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount. As discussed above, the scheme is an ESS for the purposes of Division 83A. The ESS interests are acquired at a discount. Accordingly, prima facie Subdivision 83A-B will apply to the rights acquired as pursuant to subsection 83A-20(1) the ESS interest will be acquired under an ESS at a discount. Accordingly, all the conditions in subsection 130-90(1) have been satisfied, and provided the Participant does not acquire the beneficial interest in the share for more than its cost base in the hands of the Trustee of the EST at the time that CGT event E5 happens, any capital gain or capital loss will be disregarded (see, subsection 130-90(2)). CGT Event E7 Subsection 104-85(1) provides that 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. However, section 106-50 provides that if a beneficiary is absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), Parts 3-1 and 3-3 apply to an act done by the trustee in relation to the asset as if the beneficiary had done it. When the Trustee allocates shares to the Participant (employee), the Participant becomes absolutely entitled to the shares as against the Trustee as provided by the Deed. When the Participants become absolutely entitled to shares held on their behalf by the EST, section 106-50 will deem the disposal of such shares by the Trustee to be done by the Participant. Accordingly, if the Trustee disposes of the shares under the Plan by way of transfer to a Participant, the Trustee will not make a capital gain or capital loss under CGT event E7 (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 shares that have been allocated to a Participant will be included in the net income of the Trust for a year of income under section 95 of the ITAA 1936. | Detailed Reasoning - Question 5: As outlined above in Question 4, 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. Accordingly, dividends and other income received by the Trustee in relation to unallocated shares (i.e. shares held on trust and not yet allocated to a specified Participant) will be included in the net income of the EST for a year of income under section 95 of the ITAA 1936. | Detailed Reasoning - Question 6: 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 section 99A of the ITAA 1936. Section 99A of the ITAA 1936 will apply unless one of the exclusions from its operation contained in subsection 99A(2) of the ITAA 1936 applies. These exclusions cover trusts arising from wills or codicils, intestacy and bankruptcy amongst other things. In the present case, none of these exclusions would be applicable to the Trust. 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 under section 97 of the ITAA 1936 or the trustee is not assessed under section 98 of the ITAA 1936, the trustee will be assessed and is liable to pay tax on the net income of the trust estate (see subsection 99A(4) of the ITAA 1936). A Participant is entitled to receive dividends paid in respect of their allocated shares and the Trustee of the EST must pay the dividends to the Participant according to the Deed. As such, a Participant is presently entitled to the dividend paid in respect of allocated shares and will need to include that amount in their assessable income. Therefore, the Trustee of the EST 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. Subsection 207-5(3) provides that if a franked distribution is made to a member that is a trustee of a trust, an amount equal to the franking credit on the distribution is included in the member's assessable income. Subsection 207-5(4) provides: However, a tax offset in relation to that distribution is only available to an entity (who may be a partner, beneficiary or 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 provides: 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) provides that if a franked distribution is made in an income year to an entity that is a trustee of a trust, the assessable income of the trust for the income year includes the amount of the franking credit on the distribution if the following conditions are met at the time the distribution is made: - the entity is not a corporate tax entity; and - in the case of a trustee of a trust, the trust is not a complying superannuation entity. Under subsection 207-50(4), a franked distribution will be taken to flow indirectly to the trustee of a trust relevantly 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 of the ITAA 1936 (subparagraph 207-50(4)(b)(ii)); 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 of the EST receives a franked distribution in respect of an unallocated share, an amount equal to the franking credit attached to the distribution will be included in the assessable income of the Trustee. Tax offset Section 207-45 relevantly states: 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; The Trustee will be liable to be assessed under section 99A of the ITAA 1936 in relation to dividends on unallocated shares. However, where a franked dividend is paid to an entity, subsection 207-145(1) denies a gross-up and tax offset where that entity is not a qualified person for the purposes of Division 1A of the former Part IIIAA of the ITAA 1936. 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 defines: primary qualification period , in relation to a taxpayer in relation to shares or an interest in shares, means the period beginning on the day after the day on which the taxpayer acquired the shares or interest and ending: (a) if the shares are not preference shares - on the 45th day after the day on which the shares or interest became ex dividend ; secondary qualification period , in relation to a taxpayer in relation to shares or an interest in shares, means: (a) if the shares are not preference shares - the period beginning on the 45th day before, and ending on the 45th day after, the day on which the shares or interest became ex dividend ; The term 'related payment' is defined in former section 160APHN of the ITAA 1936 to relevantly mean: (2) The taxpayer or associate is taken, for the purposes of this Division, to have made, to be under an obligation to make, or to be likely to make, a related payment in respect of the dividend or distribution if, under an arrangement, the taxpayer or associate has done, is under an obligation to do, or may reasonably be expected to do, as the case may be, anything having the effect of passing the benefit of the dividend or distribution to one or more other persons. Where the Trustee does not make a related payment in respect of the dividend paid on the shares, the Trustee will be a qualified person in respect of the dividend if the Trustee held the shares at risk for a continuous period of not less than 45 days (excluding the day the shares were acquired and if the shares have been disposed of, the day the disposal occurred) during the period beginning on the day after the day on which the Trustee acquired the shares and ending on the 45 th day after the day on which the shares became ex dividend (primary qualification period). However, where the Trustee makes a related payment in respect of the dividend on the shares, the Trustee will be a qualified person in respect of the dividend if the Trustee held the shares at risk for a continuous period of not less than 45 days (excluding the day shares were acquired and if the shares have been disposed of, the day the disposal occurred) during the period beginning on the 45 th day before and ending on the 45 th day after the day on which the shares become ex dividend (secondary qualification period). A share, in respect of which a dividend is paid, becomes ex dividend on the day after the last day on which the acquisition by a person of the share will entitle that person to receive the dividend. The refundable tax offsets in Division 67 may apply to the tax offset available to the Trustee of the EST under Division 207. 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 of the EST, the Trustee is entitled to a franking tax offset under section 207-45. However, the Trustee is assessed on the distributions received in respect of unallocated shares under section 99A of the ITAA 1936. Therefore, the tax offsets available to the Trustee are limited to the amount of tax payable and any excess franking tax offset is not refundable. | Detailed Reasoning - Conclusion: Where a franked distribution is paid in respect of unallocated shares, the Trustee will include an amount equal to the franking credit on the distribution in its assessable income under section 207-35. In this case, provided that the Trustee does not make a related payment in relation to the dividend paid on the unallocated shares and holds the unallocated shares at risk for a continuous period of not less than 45 days during the period beginning the day after the Trustee acquires the unallocated shares and ending on the 45 th day after the unallocated shares become ex dividend , then the Trustee will be a qualified person in respect of the distribution and be entitled to the benefit of the franking credits attached to franked distributions on unallocated shares to the extent of tax payable. Any excess franking tax offset is not refundable pursuant to section 67-25.

Reasons for decision: Unless otherwise indicated, all legislative references are to the Income Tax Assessment Act 1997 .