Private ruling: Part IVA - Employee share scheme - Private company - Dividends
Published: September 2014
Ruling period: 2013-14 income year | 2014-15 income year | 2015-16 income year
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the Commissioner of Taxation apply Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to cancel the tax benefit received by the you from the receipt of 'whole of company' dividends by the nominee under the Employee Share Plan? | A1: No. | Q2: Will the Commissioner of Taxation apply Part IVA of the ITAA 1936 to cancel the tax benefit received by you from the receipt of 'departmental' dividends by his nominee under the Employee Share Plan? | A2: No.

Relevant facts and circumstances: You are an employee of a private company (the Company). The company is divided into various departments, each employing a significant number of staff. The Company operated a Short Term Incentives ("STI") scheme by way of cash bonus to motivate employees. The Board now believe a mixture of both STI and Long Term Incentives ("LTI") are appropriate. As such, the Company will implement an Employee Share Scheme ("ESS") as the LTI while continuing with a cash bonus as a STI. The STI will continue to be based on the individual performance of the employee. Shares issued under the ESS Plan will have rights to receive dividends declared on the ESS shares. As the ESS Plan is being implemented as a LTI, determination of the dividends will be linked to the overall performance of the Company and in some instances the department to which the employee is attached. The dividends will not be linked to an individual employee's personal performance in any way and employees will not otherwise be compensated if he chooses not to participate in the ESS Plan. Employees can either hold their ESS Plan interests in their own name, in the name of their spouse or in the name of their Family Trust, all such parties being Australian residents for tax purposes. You have been invited to participate in the ESS Plan but will continue to receive STI based on your individual performance. You will elect to have your entitlement under the ESS Plan issued to your nominee rather than accept it personally. You will nominate your Family Trust as the nominee. The Family Trust was created earlier as an investment vehicle. You are aware that the rules in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) allow you to nominate another party to receive his award under an ESS plan and you acknowledge that in the first instance you will be taxed on any discount received on the acquisition of the shares. In the alternative to you nominating your Family Trust to receive the shares at the time of allocation, you would receive the shares personally and then transfer the shares to the Family Trust. The objective of the proposed ESS Plan is as follows: The main purpose of the ESS is to create a LTI aimed at retaining staff and creating congruence between the Company goals and the employee's goals. The Company hopes that by providing employees with an equity interest in the company they will be encouraged to work alongside existing shareholders to grow the Company, as financial success for the Company should ultimately lead to financial benefits for the employees. You have provided certain documents that are to be read with and form part of the scheme for the purpose of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 83A, | Income Tax Assessment Act 1997 Division 207 , | Income Tax Assessment Act 1936 Part IVA and | Income Tax Assessment Act 1936 Section 44 .

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Summary: The Commissioner of Taxation will not apply Part IVA of the ITAA 1936 to cancel the tax benefit received by you from the receipt of 'whole of company' dividends and 'departmental' dividends by his nominee under an Employee Share Plan. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances if a tax benefit is obtained in connection with a scheme, and it can be concluded that the scheme, or any part of it, was entered into for the dominant purpose of enabling a tax benefit to be obtained. The application of Part IVA of the ITAA 1936 depends on the facts of the particular case. In order for the Commissioner to exercise the discretion in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA of the ITAA 1936 must be satisfied. These requirements are that: (i) a 'tax benefit' as defined in section 177C of the ITAA 1936, was or would, but for subsection 177F(1) of the ITAA 1936 have been obtained (ii) the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A of the ITAA 1936, and (iii) having regard to section 177D of the ITAA 1936, it would be concluded that the main or dominant purpose of entering into the scheme was to obtain the tax benefit. The definition of scheme in subsection 177A(1) of the ITAA 1936 is very broad and applies to any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct. In the present case, the following steps comprise the scheme: 1. You are an employee of the Company. 2. The Company has offered you shares under an ESS. 3. These shares will be allocated to the Family Trust as your nominee. 4. You will be assessable on the market value of the shares (calculated as at the grant date) as an ESS discount. 5. The Family Trust (as owner of the shares) will receive any dividends paid by the Company and include them in its assessable income. Tax benefit is defined in subsection 177C(1) of the ITAA 1936. Paragraph 177C(1)(b) of the ITAA 1936 provides that a taxpayer may be found to have obtained a tax benefit if they entered into or carried out a scheme that reduces the amount of assessable income that would otherwise have been assessable, or might reasonably be expected not to have been assessable to the taxpayer in relation to a year of income if the scheme had not been entered into or carried out. An alternate postulate is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out, that is, what the taxpayer would have done absent the scheme. In identifying a reasonable alternate postulate, the following factors are taken into account: • the most straightforward and usual way of achieving the commercial and practical outcome of the scheme, • commercial and social norms, • behaviour of relevant parties before and after the scheme, and • the actual cash flow. A tax benefit will not arise for a particular taxpayer in connection with a scheme if: • there is a reasonable alternate postulate that shows how the taxpayer would have undertaken or might reasonably be expected to have undertaken a particular arrangement absent the scheme, and • the alternate postulate would or might reasonably be expected to have resulted in the same kind of reduction in the assessable income of the taxpayer under the scheme. In this case, the scheme results in an ESS discount being included in your assessable income under Division 83A of the ITAA 1997 in relation to the grant of the shares with subsequent dividends being received by and assessable to the Family Trust and available to be distributed to other family members. Had you not entered into or carried out this scheme, you have stated that you would have immediately transferred the shares to the Family Trust. Under this alternate postulate, the dividend income would still be received by and assessable to the Family Trust as owner of the shares. The alternate postulate is a plausible alternate transaction which does not raise doubt as to what you would have done in the absence of the identified scheme. In these circumstances, it is a comparable way of achieving the practical outcome, is considered to be within commercial and social norms and it is reasonable to conclude that the reduction in assessable income would have been obtained absent the scheme. The fact that you are dealing with a related party under the scheme does not of itself deny the sought after result or compel the application of Part IVA of the ITAA 1936. The Commissioner accepts that there are a number of ways of completing a transaction or organising your affairs. In this matter, the Commissioner accepts that there is no tax benefit as defined in section 177C of the ITAA 1936, having regard to the alternate postulate and the manner in which the scheme is implemented. Therefore, Part IVA of the ITAA 1936 will not apply to include additional income in your assessable income in the arrangement that is the subject of this Ruling Application.