Private ruling: Employee share trust
Date of advice: 8 April 2021
Published: June 2021
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX

Ruling: Q1: Will the irretrievable cash contributions made by Company A as head company of the Company A income tax consolidated group (TCG) to the Trustee for the Company A Employee Security Plans Trust (the Trust) to fund the subscription for, or acquisition on-market of Company A Shares in respect of the Plans be assessable income of the Trust pursuant to either section 6-5 or section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will a capital gain or capital loss that arises for the Trustee of the Trust at the time when either CGT Event E5 or E7 happens in relation to Company A Shares held by the Trustee 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? | A2: Yes. | Q3: Will the 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 Income Tax Assessment Act 1936 (ITAA 1936) and will the Trustee be entitled to a tax offset for any franking credits under Subdivision 207- B of the ITAA 1997 attached to franked distributions on unallocated shares? | A3: Yes.

Relevant facts and circumstances: The remuneration of CCG employees includes the following elements: (a) Fixed remuneration; and (b) Variable remuneration, which includes: • Long term incentive plan (LTIP), and • Short term incentive plan (STIP) The variable remuneration paid to employees (Participants) under the arrangements above are collectively referred to as being paid under the Plans. The Plans are administered in accordance with the Plan Rules and in accordance with the Company Employee Security Plans Trust Deed (the Trust Deed). The Company incurs on-ongoing administration costs for operating the Plans such as: • employee plan record keeping • brokerage costs for acquisition of shares on market • preparing the annual audit of the financial statements • preparing the tax returns or obtaining tax advice for the Trust, and • Trustee fees. LTIP The LTIP is a plan to which Subdivision 83A-C of ITAA 1997 applies. The LTIP must be operated in accordance with the LTIP Rules. The purpose of the LTIP is to provide Eligible Employees with the opportunity to acquire Rights to receive Shares and to share in the growth in values of the Company and to encourage them to improve the longer-term performance of the Company and its returns to shareholders. LTIP is also intended to assist the Company to attract and retain experienced senior employees and provide them with an incentive to have a greater involvement and focus on the longer-term goals of the Company. Broadly, the LTIP operates as follows: a) Participants are invited to apply for and participate in the LTIP through the issue of offer letter (LTIP Letter), which outlines the following: • the number of Rights offered and the consideration (if any) for the grant of Rights • the exercise price (if any) of the Rights or the method of determining such Exercise Price • any Vesting Conditions (including any applicable Performance Hurdles) • expiry date of right(s), and • restrictions on disposal of the shares once granted b) Once the Participant has received the Offer Letter, the Participant may apply to be issued with Rights by completing and returning the Application Form within the specified acceptance period c) Unless otherwise determined by the Board, no payment is required for the grant of Rights under the LTIP The Company has advised that the Rights issued under the PRP to date have no acquisition price and no exercise price d) The Rights are subject to the following Vesting Conditions: • Performance-related Vesting Conditions (Performance Hurdle), and • Time-related Vesting Conditions (Time Hurdle). These Vesting Conditions must be satisfied before the Rights vest and can be exercised by the Participants e) Participants may choose to exercise vested Rights at any time prior to their expiry date, subject to the Company Share Trading Policy f) Subject to the PRP Rules, a right lapses or expires at the earliest of the times specified under the following rules: • End of exercise period • Good leaver • Bad leaver, or • End of period otherwise determined by the Board g) Participants can choose to exercise their vested rights by notifying the Company and by paying any relevant exercise price to the Company The Company has advised that the Rights issued under the PRP to date have no acquisition price and no exercise price h) Following exercise of a Right, the Company must instruct the Trustee to subscribe for, acquire, allocate Participant Shares in respect of which the Right has been exercised i) Shares that are issued on the exercise of a Right will rank equally with other ordinary shares in the Company from the date of issue. Participants will be entitled to dividends from the date of allocation to the Participant j) The Board may in its absolute discretion determine that any or all Shares to be issued, allotted or allocated following the exercise of a Right will be held in a Trust on behalf of Participants, for transfer to future Participants or otherwise for the purposes of the LTIP, and k) The Company will provide funds to the Trustee of the Trust in order to allow the Trustee to subscribe for, and/or acquire the Company Shares to be held on behalf of the Participants under the LTIP. STIP The STIP is a plan to which Subdivision 83A-B of ITAA 1997 applies. The STIP must be operated in accordance with STIP Rules. The purpose of STIP is to provide eligible employees with the opportunity to receive fully paid ordinary shares in the Company at no consideration. The STIP is also intended to assist the Company to attract and retain skilled and experienced employees. The Board may in its absolute discretion from time to time invite Participants to apply for shares under the STIP on the terms set out in the STIP Rules and any other terms the Board considers appropriate. The Board may nominate the Trust for the purposes of the STIP. Any shares acquired by the Trust for this purpose will be held under the Trust on behalf of the Participant subject to conditions as specified in the STIP Rules. Once those conditions are satisfied, the Participant can withdraw the shares from the Trust. Broadly, the STIP operates as follows: a) Participants are invited to apply and participate in the STIP through the issue of an Application Form together with an Offer, which outlines the following: • the date of the invitation • the date of issue of the Shares • the number of Shares to be issued, using the determined formula to calculate number of shares that will be received on date of grant • the specified $AUD value of shares offered • the market price of each Share • expiry date of the offer, and • restrictions on disposal of the shares once granted under the Holding Lock period, which is the period from the Issue Date until the earlier of: - the date that is three years after the issue date - the date the Participant ceases to be an employee of the Company or one of its subsidiaries, or - such other date as determined by the Board in its absolute discretion. b) By completing and returning the Application Form within the Acceptance Period, a Participant applies for Shares under the STIP on the terms of the STIP Letter and agrees to be bound by the terms of the Application Form, the STIP Letter, the STIP Rules c) Subject to the satisfaction of any terms and conditions set out in the STIP Letter and the Application Form...the Company will as soon as practicable after the Acceptance Period, allot or issue to the Participant the number of Shares applied for by the Participant d) Unless otherwise determined by the Board, no payment is required for the issue of Shares under the STIP e) The STIP will be managed by the Board which will have power to delegate to any one or more persons (for such period and on such conditions as it may determine) the exercise of any of its powers or discretions arising under the STIP f) Subject to the satisfaction of any terms or conditions set out in the Offer Letter and Application Form, following receipt of a completed and signed Application Form and the acceptance by the Board of the Application Form, the Company will, or direct the Trustee (if one is nominated) as soon as practicable after the end of the Acceptance Period, acquire, allot or issue to the Participant, on the terms of the Offer Letter, the number of Shares applied for by the Participant in the Application Form; and complete a register of Shares in accordance with the Applicable Law g) Unless determined by the Board, no payment is required for the issue of Shares under the STIP h) A Holding Lock will be applied to all Shares granted to a Participant under the STIP for the duration of the Holding Lock Period (from the issue date to the earlier of (a) the date that is three years after the Acquisition Date of the Shares; (b) the day after the date of the Eligible Employee's cessation of employment or office or contract (including as a result of Permanent Incapacity or Retirement); or (c) such other date as determined by the Board in its sole and absolute discretion; applicable to the relevant Shares i) All ordinary shares that are allocated to Participants will rank equally with other ordinary shares in the Company from the date of issue. Participants will be entitled to dividends from the date of allocation. In the past, the invitation to participate in the STIP has been made by way of a physical Offer Letter (STIP Letter). In future, the equivalent information will be communicated to Participants electronically. The Trust The Trust was established under the Trust Deed between the Company and the Trustee. The purpose of the Trust is to hold Plan Securities on behalf of Participants and their Associates who acquire Plan Securities under Plans from time to time. The Trust must be managed and administered so that it satisfies the Sole Activities Test at all times. Without limiting the foregoing, any contribution the Trust receives from the Group from time to time must be applied by the Trustee in accordance with the Plans to acquire Shares for allocation and transfer to Participants under the Plans as applicable. Broadly the Trust operates as follows: a) The Trust is to be funded by irretrievable cash contributions from the Company or a member of the CCG. The Trustee is not required to acquire Shares if it does not receive sufficient payment from the CCG or if it does not have sufficient funds to do so b) The funds are to be used by the Trustee to acquire shares in the Company either on-market, off-market, or via a subscription for new shares in the Company, based upon written instructions from the Company c) Shares acquired by the Trustee must be allocated to the relevant Participant and held on their behalf. Each Participant is the beneficial owner of the shares held by the Trustee on their behalf and is absolutely entitled to all other benefits and privileges (dividends, voting rights, bonus shares) attached to those shares d) The Trustee must transfer Plan Shares to Participants as directed by the Company. When Participants exercise their Rights, the Board may direct the Trustee to transfer all or some of those Shares to which Participants are entitled upon exercise of their Rights e) the Company or any member of the CCG does not have any charge, lien or other proprietary right or interest in the shares acquired by the Trustee according to the Trust Deed. No member of the CCG or the Trustee are entitled to obtain any beneficial interest in the Trust Assets. f) Upon termination of the Trust, the Trustee must not pay any Trust Assets to the Company or any member of the CCG g) Neither the Company nor any of its subsidiaries is a beneficiary of the Trust h) 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) of the ITAA 1997, and i) The Trust may acquire shares that are not allocated to Participants (unallocated shares) to satisfy future obligations under the Plans to the extent that there are rights granted to Participants that have not yet vested, or vested rights that have not yet been exercised. Contributions to the Trust Whilst the Company intends to wait until the Rights have vested and exercised, before providing the Trust with the cash necessary to acquire Shares, the Company may make irretrievable cash contributions to the Trust prior to the Rights being exercised by the Participants to allow the Trustee to have enough Shares in the Trust ahead of the time they need to be allocated to Participants, and avoid delays in times such as blackout trading periods and to take advantage of any reductions in the Company Share price from time to time.


Reasons for decision: Summary: The irretrievable cash contributions made by Company A as head company of the TCG to the Trustee for the Company A Employee Security Plans Trust (the Trust) to fund the subscription for, or acquisition on-market of Company A Shares in respect of the Plans will not be assessable income of the Trust pursuant to either section 6-5 or section 6-10. | Detailed Reasoning - Detailed reasoning: Section 95 defines net income in relation to a trust as follows, 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. Further, 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. Therefore, irretrievable cash contributions made by Company A to the Trustee for the Company A shares will not be assessable income under section 6-10. They will only be included in the calculation of the net income of the Trust under section 95 if they are assessable as income according to ordinary concepts under section 6-5. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. The contributions made by Company A to the Trustee are irretrievable and non-refundable to Company A in accordance with the Trust Deed as Company A and subsidiary members of the TCG do not have any beneficial interest in any Company A Shares subscribed or acquired by the Trustee. The irretrievable cash contributions made by Company A to the Trustee of the Trust under the terms of the Plans and the Trust Deed are to be used for the sole purpose of obtaining shares in Company A for the benefit of Participants. Accordingly, the irretrievable cash contributions constitute capital receipts to the Trustee of the Trust. In ATO Interpretative Decision ATOID 2002/965, Income Tax - Trustee not assessable on employer contributions made to it under the employee share scheme, the Commissioner has expressed a view that the funds provided to the trustee of the employee share scheme trust constitute capital receipts to the trustee, and not assessable under sections 6-5 or 6-10. Therefore, the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of Company A Shares by the Trust in accordance with the Plans and the Trust Deed will not be assessable income of the Trustee pursuant to section 6-5 or 6-10.The contributions constitute receipts of a capital nature to the Trustee and will not be assessable as ordinary income under section 6-5. Given that the irretrievable cash contributions made by Company A to the Trustee are neither ordinary nor statutory income, they will not be included in the net income of the Trust, and hence cannot be assessed to the Trustee pursuant to section 95. | Summary: Any capital gain or loss that arises to the Trustee at the time when either CGT Event E5 or E7 happens in relation to Company A shares held by the Trustee 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: Generally, CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee, subject to some exceptions (subsection 104-75(1)). The time of CGT event E5 is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)). As no exceptions apply in this case, if CGT event E5 happens, the trustee makes a capital gain or capital loss if the market value of the asset (at the time of the event) is more than its cost base or less than the asset's reduced cost base, respectively. In this case, when a Participant becomes absolutely entitled to the Share (a CGT asset of the Trust) as against the Trustee, and CGT event E5 happens (Draft Taxation Ruling TR 2004/D25 Income tax : capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997) . Similarly, when a Participant becomes absolutely entitled against the Trustee to a Company A Share after the restriction period or holding lock period in the Plans, CGT event E5 happens. However, section 130-90 provides that any capital gain or loss made by an employee share trust is disregarded where it results from a CGT event under certain circumstances. The meaning of an employee share trust is defined in subsection 130-85(4), which examines the activities of the trustee. The present Trust is an employee share trust because: • the Trust acquires shares in a company, namely Company A • the Trust ensures that ESS interests as defined in subsection 83A-10(1) (being Rights or Shares in the Plans) 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 Trust Deed and the Plans, and • the objects of the Trust are for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under subsection 130-85(4). The powers and activities allowed to be undertaken by the Trustee according to the Trust Deed are in line with the types of activities that are merely incidental as set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'? Subsection 130-90(1A) applies to shares held for future acquisition under employee share schemes while subsection 130-90(1) applies in respect of shares held to satisfy the future exercise of rights or options acquired under employee share schemes. | Detailed Reasoning - Subsection 130-90(1): Subsections 130-90(1) applies to disregard any capital gain or loss made by an employee share trust if: (a) the CGT event is CGT event E5 or E7; (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. | Detailed Reasoning - Paragraph 130-90(1)(a): CGT event E5 is the CGT event that will apply under the terms of the Plans at the time the Participants becomes absolutely entitled to the shares in Company A as against the Trustee. Therefore paragraph 130-90(1)(a) will be satisfied. | Detailed Reasoning - Paragraph 130-90(1)(b): Subsection 995-1(1) defines a share to mean a share in the capital of a company. A share in Company A held by the Trustee and to which a Participant is entitled upon vesting of rights or allocation of share in the capital of Company A. Accordingly, paragraph 130-90(1)(b) is satisfied. | Detailed Reasoning - Paragraph 130-90(1)(c): Paragraph 130-90(1)(c) is satisfied as a Participants will have acquired a beneficial interest in a share in Company A upon vesting of rights or allocation of shares under the Plans. | Detailed Reasoning - Paragraph 130-90(1)(d): Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) 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. The Plans are employee share schemes for the purposes of Division 83A as they are arrangements under which an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in Company A Share or a share in Company A), is provided to eligible employees in relation to their employment with Company A in accordance with the Trust Deed. The rights and shares issued under the Plans have no acquisition price and nil exercise price. Accordingly, prima facie, Subdivision 83A-B will apply to the rights and shares acquired under the Plans as pursuant to subsection 83A-20(1), the ESS interests will be acquired under an employee share scheme at a discount. Whether a Participant is ultimately taxed upfront on some or all of any discount 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 circumstance, subparagraph 130-90(1)(d) will be satisfied. Accordingly, all the conditions in subsection 130-90(1) have been satisfied. | Detailed Reasoning - Subsection 130-90(2): As the Participant does not acquire the beneficial interest in a Company A Share for more than its cost base in the hands of the Trustee at the time that CGT event E5 happens, subsection 130-90(2) will also have been satisfied. | Detailed Reasoning - Subsection 130-90(1A): Subsections 130-90(1A) and 130-90(2) state: | 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 View history reference (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. | Detailed Reasoning - Paragraph 130-90(1A)(a): Paragraph 130-90(1A)(a) is satisfied as the shares held by the Trustee are ESS interests which are CGT assets of the Trust. | Detailed Reasoning - Paragraph 130-90(1A)(b): CGT event E5 is the CGT event that will apply under the terms of the Plans at the time the Participant becomes absolutely entitled to the Company A Shares as against the Trustee. Therefore paragraph 130-90(1A)(b) is satisfied. | Detailed Reasoning - Paragraph 130-90(1A)(c): The Plans are employee share schemes for the purposes of Division 83A as they are arrangements under which ESS interests are provided to a Participant in relation to their employment in Company A in accordance with the Trust Deed. Therefore, Subdivision 83A-B or 83A-C can apply to Company A Shares acquired under the Plans and paragraph 130-90(1A)(c) will be satisfied. Accordingly, all the conditions in subsection 130-90(1A) have been satisfied. Provided a Participant does not acquire the beneficial interest in the Company A Share for more than its cost base in the hands of the Trust at the time that CGT event E5 happens, subsection 130-90(1A) will apply to disregard the capital gain or loss made by the Trustee on any Company A Share when a Participant becomes absolutely entitled to that Share. | Detailed Reasoning - Conclusion: Under the circumstances of either subsection 130-90(1) or 130-90(1A) applying, section 130-90 operates to disregard any capital gain or loss made by the Trustee on any Company A Share when a Participant becomes absolutely entitled to that share. | Detailed Reasoning - 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. The timing of the event is when the disposal occurs (104-85(2)). If CGT event E7 happens, the trustee may make a capital gain if the market value of the asset, at the time of the disposal, is more than its costs base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base (subsection 104-85(3)). When the Trustee transfers a share to a Participant at the end of the vesting period in satisfaction of its obligation, CGT event E7 will occur pursuant to section 104-85 and any capital gain or loss will generally be assessed for CGT purposes to the Trustee. However, section 130-90 applies to disregard any capital gain or loss arising as result of the shares being disposed of by the Trustee to the Participant under CGT event E7 if the Trust is an employee share trust and the shares are an ESS interest. As discussed above, these two conditions are met in the present circumstances. Consequently, section 130-90 will apply to disregard a capital gain or capital loss that arises for the Trustee at the time CGT event E7 happens if the Participants acquire the Company A Shares for the same or less than the cost base of the shares in the hands of the Trustee. | Summary: The dividends and other income received by the Trustee on unallocated shares will be included in the net income of the Trust under section 95 and 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 to the extent of tax payable. Any excess franking tax offset is not refundable pursuant to section 67-25. | Detailed Reasoning - Detailed reasoning: Section 95 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) 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. Under subsection 44(1), 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. Accordingly, dividends 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 for a year of income under section 95. 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. Subsection 207-35(5) states: Subsection (6) applies if: (a) a * franked distribution is made, or * flows indirectly, to the trustee of a trust in an income year; and (b) the assessable income of the trust for that year includes an amount (the franking credit amount) that is all or a part of the additional amount of assessable income included under subsection (1) in relation to the distribution; and (c) disregarding Division 6E of Part III of the Income Tax Assessment Act 1936, the trustee of the trust is liable to be assessed (and pay tax) in respect of an amount (the assessable amount) under section 98, 99 or 99A of that Act in relation to the trust. The 'franking credit amount' referred to in paragraph 207-35(5)(b) is the amount of the franking credit on the distribution (subsection 207-35(1)). 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 (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 Trust 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. | Detailed Reasoning - Tax offset: Section 207-45 provides that 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 the trustee of a trust that is liable to be assessed on a share of, or all or a part of, the trust's net income under section 99A for that income year. In the present case, the Trustee (being liable to be assessed on a part of the Trust's net income under section 99A will be entitled to a tax offset equal to its share of the franking credit on the franked distributions made to the Trustee in respect of 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. | Detailed Reasoning - 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 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 Trust 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. As franked distributions flow indirectly to the Trustee of the Trust, 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. 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 45th 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: Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.