Private ruling: Employee share scheme
Date of advice: 20 February 2019
Published: May 2019
Ruling period: Income tax years: | 1 July 20XX to 30 June 20XX

Ruling: Q1: Will irretrievable cash contributions made by the Company to the Trustee an Employee Share Trust (the Trustee) in accordance with the Employee Share Scheme Plans Rules (the Plan Rules) and the Employee Share Trust Deed (the Trust Deed) to either fund the subscription for, or acquisition on-market of, the Company’s Shares be assessable income of the Employee Share Trust (the Trust) pursuant to section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) or Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | Q2: Will any capital gain or capital loss made by the Trustee as a result of either CGT event E5 or CGT event E7 happening in respect of the shares allocated to a Participant to satisfy the Options issued under the Plans be disregarded under section 130-90 of the ITAA 1997? | A2: Yes. | Q3: Will dividends received and distributed by the Trustee in respect of Allocated Shares held in the Trust by the Trustee on behalf of the Participants be included in the net income of the Trust under section 95 of the ITAA 1936? | A3: Yes. | Q4: Will dividends and other income received by the Trustee in respect of Unallocated Shares held in the Trust by the Trustee be included in the net income of the Trust under section 95 of the ITAA 1936? | A4: Yes. | Q5: Is a dividend paid by the Company to the Trustee in respect of an Unallocated Share held by the Trustee to which no beneficiary is presently entitled assessed to the Trustee under section 99A of the ITAA 1936? | A5: Yes. | Q6: Will the Trustee be entitled to a tax offset for any franking credits attached to dividends in respect of Unallocated Shares under section 207-45 of the ITAA 1997? | A6: Yes.

Relevant facts and circumstances: Background The Company is an Australian resident company that is listed on the Australian Stock Exchange. The Company operates an employee share scheme (the Plans) as part of its remuneration strategy. The Plans The Company has established the Plans as part of its long term strategy of creating shareholder wealth and as a means of rewarding and incentivising its employees to share in the ownership of the Company. Under the Plans, employees are invited to apply for ESS interests subject to conditions imposed by the Board. The Plans aim to: ● assist in the reward, retention and motivation of employees ● align the interests of employees with the interest of the Company’s Shareholders ● promote the long-term success of the Company and provide greater incentive for employees to focus on the Company’s long term goals ● link the reward of employees to the performance of the Company and the creation of Shareholder value, and ● provide employees with the opportunity to share in any future growth in value of the Company. The Company’s remuneration strategy is designed to attract, motivate and retain high performing individuals. The Plans seek to reward high performance and achievement of shareholder value growth. The Trust The Company established the Trust for the purpose of obtaining the Company’s Shares for the benefit of participating employees under the Plans. This includes subscribing for and/or acquiring Shares on market, allocating, holding and delivering shares in the Company under the Plans. Rationale for utilising the Trust to administer the Plans The reasons for administering the Plans via the Trust include: ● the Trust provides employees with the knowledge that the Shares, and any incidental divided income or associated rights, are held independently of the Company and the Trustee has a fiduciary obligation to act in the interests of its beneficiaries ● the Trust can enable the Shares to be acquired progressively over time either on-market or via subscription ● The Company can manage its costs and share capital position by having the Trust acquire Shares to hold on behalf of Participants for a period of time, before the employees meet the vesting criteria or otherwise become entitled to Shares ● the Trust provides the opportunity to improve cash flow planning as the Company can make contributions to the Trust periodically throughout the vesting period, thus giving the Company the flexibility to determine the most appropriate time to make contributions, and ● the Trust is the most appropriate vehicle to be used to acquire Shares and accumulate dividend income during the vesting period or restriction period for the purpose of acquiring further Shares and meeting the cost of the Plans.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6 | Income Tax Assessment Act 1936 Subsection 44(1) | 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 Former Division 1A of Part III | 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 Subsection 83A-20(1) | Income Tax Assessment Act 1997 Subdivision 83A-C | 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 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 Subdivision 207-B | Income Tax Assessment Act 1997 Section 207-25 | Income Tax Assessment Act 1997 Section 207-35 | Income Tax Assessment Act 1997 Subsection 207-35(1) | Income Tax Assessment Act 1997 Section 207-45 | Income Tax Assessment Act 1997 Section 207-50

Reasons for decision: Summary: The irretrievable cash contributions made by the Company to the Trustee of the Trust in accordance with the Plan Rules and the Trust Deed to fund the subscription for, or acquisition on-market of, the Company’s Shares will not be assessable income of the Trust under sections 6-5 or 6-10 or Division 6 of Part III. | Detailed Reasoning - Detailed reasoning: Net income of a trust estate Section 95 defines net income in relation to a trust estate as follows, in so far 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 … Ordinary income Section 6-5 provides that a taxpayer’s assessable income includes income according to ordinary concepts, which is called ordinary income. The definition of ‘income’ was considered by Jordan CJ in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219; 3 ATD 142 at 144-145 where his Honour said: The word “income” is not a term of art, and 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 such receipts… The leading case on ordinary income is the United States Supreme Court decision in Eisner v Macomber 252 US 189 (1919) where Justice Pitney explained that: 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 G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (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. Brennan, Dawson, Toohey, Gaudron and McHugh JJ 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. Periodicity, recurrence and regularity are regarded the most visible indicators of ordinary income. As a more general rule, amounts received as a result of carrying of a business should also represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not received in carrying on business. Statutory income Section 6-10 provides that a taxpayer’s assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 lists the provisions about assessable income. The listed provisions include amounts in assessable income that are not ordinary income. Application to the facts Ordinary income Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not received in the course of carrying on a business. The irretrievable cash contributions made by the Company to the Trustee of the Trust under the terms of the Plan Rules and the Trust Deed will constitute Accretions to the corpus of the Trust and are to be used for the sole purpose of acquiring or subscribing Shares in the Company for the benefit of Participants. In ATO Interpretive Decision ATO ID 2002/965 Income Tax – Trustee not assessable on employer contributions made to it under the employer’s employee share scheme , the view is expressed that the Trustee of the employee share scheme trust will not be assessed under section 6-5 or 6-10 on contributions made to it by an employer for the sole purpose of and under the employer’s employee share scheme. The irretrievable contributions made by the Company to the Trustee of the Trust will not be received as ordinary income but rather in the nature of capital receipts forming the corpus of the Trust. Therefore, the irretrievable contributions will not be assessable as ordinary income under section 6- 5. Statutory income None of the provisions listed in section 10-5 are applicable to the receipt of irretrievable contributions in the present circumstances. Therefore, the irretrievable contributions made by the Company to the Trustee will not be assessable as statutory income under section 6-10. Net income of a trust estate As the irretrievable cash contributions made by the Company to the Trustee of the Trust are neither ordinary income nor statutory income, they will not be included in the net income of the Trust and hence will not be assessed to the Trustee under Division 6 of Part III. | Summary: A capital gain or capital loss that arises for the Trustee at the time when a Participant becomes absolutely entitled to the Company’s Shares (CGT event E5), or when the Trustee disposes of the Shares to the Participant (CGT event E7) will be disregarded under section 130-90 if the Participant acquires the Shares for the same or less than the cost base of the Shares in the hands of the Trustee. | Detailed Reasoning - Detailed reasoning: Where a Participant becomes absolutely entitled to the Shares as against the Trustee, CGT event E5 will occur and therefore under section 104-75, the Trustee will make a capital gain or loss. However, section 130-90 operates to disregard that gain or loss where specified conditions are satisfied. Shares held to satisfy the future exercise of rights acquired under employee share schemes Subsection 130-90(1) applies to disregard any capital gain or capital loss made by an employee share trust, or a beneficiary of the trust 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. Subsection 130-90(2) states that 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. In determining whether subsection 130-90(1) applies to the Trust, it is necessary to consider whether the Trust is an ‘employee share trust’ as defined under subsection 130-85(4). Employee share trust An ‘employee share trust’ referred to in section 130-90 is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4). Subsection 130-85(4) provides that an employee share trust for an ‘employee share scheme’ (as having the meaning given by subsection 83A-10(2)) is defined 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 interest in those shares or rights are provided under the employee share scheme to employees, or 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 ‘employee share scheme’ is defined in subsection 83A-10(2) 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. Each of the Plans will constitute an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which the right to acquire Shares in the Company is provided to Participants in relation to their employment with the Company. An ‘ESS interest’ in a company is defined in subsection 83A-10(1) as a beneficial interest in a share in the Company or a right to acquire a beneficial interest in the Company. An Option granted to an employee will be an ‘ESS interest’ as it is a beneficial interest in a right to acquire a beneficial interest in a Share. Under the terms of the Trust Deed, the Trust was established by the Company for the sole purpose acquiring and holding Shares under the Plans for the benefit of the Participants. The Trust satisfies the sole activity test as the activities of the Trustee are limited to: ● acquiring shares in the Company, and ● ensuring that the ESS interests as defined in subsection 83A-10(1), being beneficial interests in those Shares, are provided under an employee share scheme, as defined in subsection 83A-10(2), by allocating those Shares to the employees in accordance with the Plan Rules. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) will require the Trustee to undertaken incidental activities that are a function of managing the employee share scheme and administering the Trust. For the purposes of paragraph 130-85(4)(c), activities which are merely incidental, as set out in ATO ID 2010/108 Income Tax Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engaged in other activities 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 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 ● receiving and immediately distributing shares under a demerger. Under the terms of the Trust Deed, the powers of the Trustee are limited to ensure that the Trust will be managed and administered so that it satisfies the definition of ‘employee share trust’ for the purposes of subsection 130-85(4). Accordingly, the Trustee can only use the contributions received exclusively for the acquisition of Shares in accordance with the Plan Rules. To this end, all other duties/general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the shares for the sole benefit of Participants in accordance with the Plan Rules. Therefore, the Trust is an employee share trust as the activities of the Trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and (b) as concluded above, and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). CGT event E5 Subsection 104-75(1) provides that 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. Subsection 104-75(3) provides that the trustee will make a capital gain if the market value of the asset (at the time of the event) is more than its cost base, but will make a capital loss if the market value is less than the asset’s cost base. Subdivision 130-D treats an employee who acquired an ESS interest through an employee share scheme to be ‘absolutely entitled’ to the share or right to which the ESS interests relates, from the time that they acquire the ESS interest (subsections 130-85(1) and 130-85(2)). Under the Plans where a Participant becomes absolutely entitled to Shares as against the Trustee, CGT event E5 will occur, and pursuant to subsection 104-75(3), the Trustee will make a capital gain or loss. CGT event E5 will happen under the terms of the Plans at the time when the Participant becomes absolutely entitled to Shares as against the Trustee of the Trust. CGT even 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, in part of it, in the trust capital. Under section 106-50 from just after the time that a beneficiary becomes absolutely entitled to a CGT asset as against the trustee of a trust, the asset is treated as being the beneficiary’s asset (instead of being an asset of the trust) and an act done in relation to the asset by the trustee is treated (for CGT purposes) as if the act had been done by the beneficiary (instead of the trustee). The Participants, on allocation of Shares by the Trustee, becomes absolutely entitled to those Shares. Each Participant is absolutely entitled to any Allocated Shares held by the Trustee on their behalf, and is entitled to the same rights in those Shares as they were the legal owner of the Shares. Once the Participants are absolutely entitled to the Shares held on their behalf by the Trustee, section 106-50 will deem the disposal of those Shares by the Trustee to be done by the Participants. Therefore, section 106-50 will apply, such that if the Trustee disposes of the Shares under the Plan (by way of transfer to Participants), the Trustee will not make a capital gain or capital loss under CGT event E7. CGT event happens in relation to a share Subsection 995-1 defines a share in a company to mean a share in the capital of a company. A Share in the Company held by the Trustee and to which a Participant is entitled upon exercise of an Option is a Share in the capital of the 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. The beneficiary had acquired a beneficial interest in the share by exercising a right Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a Share in the Company by exercising a right (Option) under the Plans. Beneficiary’s beneficial interest in the right was an ESS interest to which Subdivision 83A-B or 83A-C (about employee share schemes) applied Subsection 83A-20(1) of Subdivision 83A-B states: This Subdivision applies to an *ESS interest if you acquire the interest under an *employee share scheme at a discount. The term ‘employee share scheme’ is defined in subsection 83A-10(2) as follows: 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) … in relation to the employees’ employment. For the purposes of subsection 83A-10(2), section 995-1 defines the term ‘scheme’ as follows: Scheme means: (a) any *arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. Each of the Plans is an employee share scheme for the purposes of Division 83A as each Plan is a scheme under which an ESS interest, that is, a beneficial interest in a right to acquire a beneficial interest in a Share of the Company, is provided to Participants in relation to their employment by the Company. The Options are acquired under the Plans at no cost and will vest into Shares subject to satisfaction of certain conditions. Accordingly, prima facie , subdivision 83A-B will apply to rights acquired under the Plans because pursuant to subsection 83A-20(1) the ESS interests (i.e. the Options issued under the Plans) will be acquired under an employee share scheme at a discount. It should be noted however that whether a Participant is ultimately taxed upfront on some or all of any discounts received (under Subdivision 83A-B) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C), will depend on which of the additional requirements in Subdivision 83A-B or Subdivision 83A-C have been satisfied. Under either circumstances paragraph 130-90(1)(d) will be satisfied. Provided a Participant does not acquire the beneficial interest in a Share for more than its cost base in the hands of the Trustee of the Trust at the time that CGT event E5 happens subsection 130-90(2) will also have been satisfied. Under these circumstances, section 130-90 operates to disregard any capital gain or capital loss made by the Trustee on any Share when a Participant becomes absolutely entitled to that Share. | Summary: Dividends received and distributed by the Trustee in respect of Allocated Shares will be included in the net income of the trust estate under section 95. | Detailed Reasoning - Detailed reasoning: Section 95 defines net income in relation to a trust estate to mean the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income and were resident, less allowable deductions. Subsection 44(1) states that 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. If dividends and other income are received by the Trustee of the Trust, those amounts are included in the Trustee’s calculation of its net income for a year of income under section 95. Accordingly, dividends assessable under subsection 44(1) in relation to Allocated Shares (i.e. Shares held on trust that have been allocated to a specified Participant) will be included in the net income of the Trust under section 95. It should be noted that to the extent that a divided is received by the Trustee as a shareholder and included by the Trustee in its calculation of net income for the purposes of Division 6 of Part III, a Participant’s proportionate share of the section 95 net income of the trust estate for the purposes of section 97 will be proportionate share of the income of the trust estate to which the Participant is presently entitled in the relevant income year. Taxation Determination TD 2012/22 Income tax: for the purposes of paragraph 97(1)(a) of the Income Tax Assessment Act 1936 is a beneficiary’s share of the net income of a trust estate worked out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled? determines the way a beneficiary’s share of net income of a trust estate is worked out. TD 2012/22 specifies the ‘proportionate approach’ to the assessment of trust net income. | Summary: Dividends and other income received by the Trustee in respect of Unallocated Shares will be included in the net income of the trust estate under section 95. | Detailed Reasoning - Detailed reasoning: As outlined above in Question 3, section 95 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 Trust under section 95. | Summary: Where no beneficiary is presently entitled to the income of the Trust, the Trustee of the Trust will be assessable and liable to pay tax under section 99A. Accordingly, the Trustee will be assessed and liable to pay tax under section 99A on the part of net income of the trust estate that relates to the Unallocated Shares. | Detailed Reasoning - Detailed reasoning: Section 99A 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) determines the assessable, exempt and non-assessable non-exempt 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. Section 97 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 hand of the trustee under either section 99 or 99A. 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 the trustee will be assessed and liable to pay tax on the net income of the trust estate. Accordingly, the Trustee will be assessed and liable to pay tax under section 99A on that part of the net income of the trust estate to the extent that the income relates to Unallocated Shares that is not included in the assessable income of a Participant. | Summary: Where a franked distribution is paid in respect of an Unallocated Share, the Trustee will include an amount equal to the franking credit on a franked distribution in its assessable income under section 207-35. Provided that the Trustee does not make a related payment in relation to a franked dividend paid on an Unallocated Share and holds the Unallocated Share at risk for a continuous period of not less than 45 days (excluding the day the Share was acquired and if the Share was disposed of, the day the disposal occurred) during the period beginning the day after the Trustee acquires the Unallocated Share and ending of the 45th day after the Unallocated Share becomes ex dividend , then the Trustee will be a qualified person in respect of the dividend 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 offset is not refundable pursuant to section 67-25. | Detailed Reasoning - Detailed reasoning: 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 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) provides that if the franked distribution is made to a trustee of a trust, the assessable income of the trust for the year includes the amount of 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. Section 207-50 sets out the circumstances in which 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 99 or 99A ● the trustee’s share of the distribution under section 207-55 is a positive amount, whether or not the trustee actually receives any of the that share. Consequently, where the Trustee 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 in relation to dividends on Unallocated 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. Qualified person Former section 160APHO 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 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 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 45th 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 45th day before and ending on the 45th 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 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. 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 distribution received in respect of Unallocated Shares under section 99A. Therefore, the tax offset available to the Trustee is limited to the amount of tax payable and any excess franking tax offset is not refundable. 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 45th day after the Unallocated Shares become ex dividend , than 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: Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.