Private ruling: Employee and Contractor Option Share Trust
Published: August 2011
Ruling period: Income Tax Year ended 30 June 2012 | Income Tax Year ended 30 June 2013 | Income Tax Year ended 30 June 2014

Ruling: Q31: If the trustee, pursuant to the trust deed, decides to make cash payments to the contractor on behalf of the contracting entity, will the amounts paid to the contractor be included as assessable income of the contractor under section 6-5 of the ITAA 1997? Answer : Yes

Relevant facts and circumstances: The contracting entity intends to implement a contractor option share trust for the purpose of providing an incentive structure to deliver benefits to the contractor and other contractors selected by the board of the contracting entity.


Reasons for decision: Summary: Will the contributions of monies by the contracting entity to the trustee pursuant to the trust deed be included as assessable income of the contractor under section 6-5 of the ITAA 1997? Answer : No The contractor will not derive assessable income in respect of contributions of monies by the contracting entity to the trustee pursuant to the trust deed under section 6-5 of the ITAA 1997 as the amounts contributed to the trustee are not actually received by the contractor or taken to have been received by the contractor. Will the contributions of monies by the contracting entity to the trustee pursuant to the trust deed be included as assessable income of the contractor under section 15-2 of the ITAA 1997? Answer: No The contributions of monies by the contracting entity to the trustee pursuant to the trust deed do not constitute statutory income of the contractor under section 15-2 of the ITAA 1997 as the contributions do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums provided to the contractor or applied or dealt with in any way on the contractor's behalf or as the contractor directs. Will the contributions of monies by the contractor to the trustee pursuant to the trust deed be included as assessable income of the contractor under section 21A of the ITAA 36? Answer: No Subsection 21A(2) of the ITAA 1936 brings to account all non-cash business benefits, whether or not convertible to cash, that are income derived by a taxpayer in carrying on a business for the purpose of gaining or producing assessable income. Contributions of monies by the contractor to the trustee pursuant to the trust deed are not non-cash business benefits. Therefore, they are not assessable to the contractor under section 21A of the ITAA 1936. Will the loans of monies by the contracting entity to the trustee pursuant to the trust deed be included as assessable income of the contractor under section 6-5 of the ITAA 1997? Answer : No The contractor will not derive assessable income in respect of loans of monies by aa to the trustee pursuant to the trust deed under section 6-5 of the ITAA 1997 as the amounts loaned to the trustee are not income according to ordinary concepts and are not actually received by the contractor or taken to have been received by them. Will the loans of monies by the contracting entity to the trustee pursuant to the trust deed be included as assessable income of the contractor under section 15-2 of the ITAA 1997? Answer : No Loans of monies by the contracting entity to the trustee pursuant to the trust deed do not constitute statutory income of the contractor under section 15-2 of the ITAA 1997 as the loans do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums provided to the contractor or applied or dealt with in any way on the contractor or as the contractor directs. Will the loans of monies by the contractor to the trustee pursuant to the trust deed be included as assessable income of the contractor under section 21A of the ITAA 1936? Answer : No Subsection 21A(2) of the ITAA 1936 brings to account all non-cash business benefits, whether or not convertible to cash, that are income derived by a taxpayer in carrying on a business for the purpose of gaining or producing assessable income. Loans of monies by the contracting entity to the trustee pursuant to the trust deed are not non-cash business benefits. They are therefore not assessable to the contractor under section 21A of the ITAA 1936. Will the acquisition of share units by the contractor in return for payment of market value consideration be included as assessable income of the contractor under subsection 83A -25 of the ITAA 1997? Answer: No Section 83A-25 of the ITAA 1997 assesses the discount given in relation to an ESS interest that has been acquired under an employee share scheme. As the payment for the share units are made by the contractor and the application moneys are used by the trustee to pay full market value for the shares, then any interest the contractor acquires in the shares is not acquired at a discount, thus section 83A-25 of the ITAA 1997 will not apply. Will the issue of the share units to the contractor in return for payment of market value consideration, give rise to any assessable income under section 6-5 of the ITAA 1997 for the contractor? Answer : No Where the contractor pays market value consideration for share units in the trust, the receipt of the share units by the contractor does not constitute income received or taken to have been received by the contractor for the purposes of section 6-5 of the ITAA 1997. Will the issue of the share units to the contractor in return for payment of market value consideration, give rise to any assessable income under section 15-2 of the ITAA 1997 for the contractor? Answer : No Where the contractor pays market value consideration for share units in the trust, the share units provided to the contractor do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums provided to the contractor or applied or dealt with in any way on the contractor's behalf or as they direct for the purposes of section 15-2 of the ITAA 1997. Will the issue of the share units to the contractor in return of payment of market value consideration, give rise to any assessable income under section 21A of the ITAA 1936 for the contractor? Answer: No Share units issued to the contractor may be non-cash business benefits for the purposes of section 21A of the ITAA 1936, i.e. property provided in relation to a business relationship between them and the contracting entity. Where such benefits are income derived in carrying on a business for the purpose of gaining or producing assessable income, the amount assessable under subsection 21A(2) of the ITAA 1936 is the arm's length value of the benefit, reduced by any amount of consideration paid to the provider by the recipient in respect of the provision of the benefit (the recipient's contribution). Where the recipient's contribution is equal to or greater than the arm's length value of the non-cash business benefit, no amount is assessed under subsection 21A of the ITAA 1936. Therefore, where the contractor pays market value consideration for the share units, the receipt of the share units by the contractor is not assessable to them under section 21A. Will the interest free loan provided by the trustee to the contractor for the purpose of acquiring the share units constitute assessable income under section 6-5 of the ITAA 1997? Answer : No The contractor will not derive assessable income under section 6-5 of the ITAA 1997 in respect of the interest free loan by the trustee as the amount loaned to the contractor is not income according to ordinary concepts. Will the interest free loan provided by the trustee to the contractor for the purpose of acquiring the share units constitute assessable income under section 15-2 of the ITAA 1997? Answer : No The interest free loan provided by the trustee to the contractor does not constitute a benefit for the purposes of section 15-2 of the ITAA 1997. Will the interest free loan provided by the trustee to the contractor for the purpose of acquiring the share units constitute assessable income under section 21A of the ITAA 1936? Answer: Yes. An interest free loan provided to the contractor is a non-cash business benefit for the purposes of section 21A of the ITAA 1936, i.e. property and/or services provided in relation to a business relationship between the contractor and the contracting entity. Where such benefits are income derived in carrying on a business for the purpose of gaining or producing assessable income, the amount assessable under subsection 21A(2) of the ITAA 1936 is the arm's length value of the benefit, reduced by any amount of consideration paid to the provider by the recipient in respect of the provision of the benefit (the recipient's contribution). The value of the non-cash business benefit constituted by the interest free loan will be brought to account as assessable income of the Contractor. The amount to be brought into account is the difference between the amount of interest the Contractor could reasonably be expected to pay on the loan if the arrangement was at arm's length, and the amount of interest which has actually been paid. Will the taxable value of a non-cash business benefit constituted by the interest free loan be reduced to nil due to the application of the "otherwise deductible rule" under section 21A (3) of the ITAA 36? Answer: Yes An income amount calculated under subsection 21A(2) of the ITAA 1936 may be reduced if, had the recipient incurred and paid an amount in respect of the provision of the benefit, the recipient would have been entitled to a 'once-only deduction' for the expenditure. The reduced amount will be the difference between the amount calculated under subsection 21A(2) and the otherwise deductible amount of the expenditure had it been incurred by the taxpayer. The value of the non-cash business benefit constituted by the interest free loan brought to account as assessable income of the contractor under subsection 21A(2) of the ITAA 1936 will be reduced to nil by virtue of the otherwise deductible rule in subsection 21A(3) of the ITAA 1936 as all of the loan funds will be applied to an income producing purpose. Will the first element of the CGT cost base of the share units acquired by the contractor, in accordance with section 110-25 of the ITAA 1997, equal the amount paid for those share units? Answer : Yes The cost base of a CGT asset has five elements (section 110-25 of the ITAA 1997). The first element includes the acquisition costs of the CGT asset which is the total of the money paid, or required to be paid and the market value of any other property given or required to be given in respect of the CGT asset (subsection 110-25(2) of the ITAA 1997). Will the distribution of dividends included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936 by the trustee to the contractor, to which the contractor is presently entitled, be included as assessable income of the contractor under section 97 of the ITAA 1936? Answer: Yes Where the contractor is a beneficiary presently entitled to a share of the income of the trust estate, that share of the net income of the trust estate for the purposes of section 95 of the ITAA 1936 is included in the contractor's assessable income under section 97 of the ITAA 1936. The trustee will include in its calculation of net income, as defined in section 95 of the ITAA 1936, the total assessable income of the trust estate calculated under Division 6 of the ITAA 1936 as if the trustee were a taxpayer in respect of that income less all allowable deductions. Under subsection 44(1) of the ITAA 1936, 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. Therefore, to the extent that a dividend 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 the ITAA 1936, the contractor's proportionate share of the section 95 net income of the trust estate for the purposes of section 97 of the ITAA 1936 will be the proportionate share of the income of the trust estate to which the contractor is presently entitled in the relevant income year. Will the proceeds received by the contractor upon redemption of the share units constitute assessable income under section 6-5 of the ITAA 1997? Answer: No The disposal of share units acquired by the contractor is a realisation of a capital asset and the disposal proceeds do not constitute income according to ordinary concepts assessable under section 6-5 of the ITAA 1997. Will the proceeds received by the contractor upon redemption of the share units constitute assessable income under section 15-2 of the ITAA 1997? Answer : No The disposal of share units acquired by the contractor is a realisation of a capital asset and the disposal proceeds do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums assessable under section 15-2 of the ITAA 1997. Will the proceeds received by the contractor upon redemption of the share units constitute assessable income under section 21A of the ITAA 1936? Answer: No Subsection 21A(2) of the ITAA 1936 brings to account all non-cash business benefits, whether or not convertible to cash, that are income derived by a taxpayer in carrying on a business for the purpose of gaining or producing assessable income. The proceeds from the disposal of share units are not non-cash business benefits. Therefore, they are not assessable to the contractor under section 21A of the ITAA 1936. To the extent that any proceeds received on the redemption of the share units constitute assessable income for the contractor under the provisions of section 6-5 or section 15-2 of the ITAA 1997 or section 21A of the ITAA 1936, will the net proceeds (i.e. gross proceeds less the cost of the share units) be assessable, rather than the gross proceeds? Answer : Yes To the extent that any proceeds received on the redemption of the share units constitute assessable income for the contractor under section 6-5 or section 15-2 of the ITAA 1997 or section 21A of the ITAA 1936, the net proceeds (gross proceeds from the sale of the share units less the amount of the loan used to acquire the share units) will be included in the assessable income of the contractor. To the extent that the proceeds received on the redemption of the share units do not constitute assessable income under section 6-5 or 15-2 of the ITAA 97 or section 21A of the ITAA 36 for the contractor: (a) will the redemption of the share units constitute a CGT event as set out in Division 104 of the ITAA 1997? Answer : Yes The redemption of share units by the contractor will represent a disposal of those share units and each disposal will constitute a CGT event C2 under section 104-25 of the ITAA 1997. (a) will the proceeds received by the contractor upon the redemption of the share units be taken into account in calculating his/her net capital gain under Division 102 of the ITAA 1997? Answer: Yes The contractor's assessable income for an income year includes any net capital gain upon the share units redeemed during that income year (section 102-5 of the ITAA 1997). (a) will the CGT discount provisions in Division 115 of the ITAA 1997 apply where the share units were acquired at least 12 months before the CGT event? Answer : Yes The capital gain will be a discount capital gain under Division 115 of the ITAA 1997 as the capital gain made by the contractor is as a result from a CGT event C2 happening to the share units held by the contractor for at least 12 months. To the extent that the proceeds from any given redemption of bonus share units are included in assessable income under section 6-5 or section 15-2 of the ITAA 1997 or section 21A of the ITAA 1936 and are taken into account in calculating a net capital gain, will the anti-overlap provisions of section 118-20 of the ITAA 1997 operate to reduce the capital gain by the amount included in assessable income or to zero in accordance with subsections 118-20(2) and 118-20(3) of the ITAA 1997? Answer : Yes To the extent that the proceeds from the redemption of bonus share units give rise to assessable income (other than a capital gain) and a capital gain, the amount of the income is included in assessable income and the capital gain is reduced by that amount or to zero in accordance with subsections 118-20(2) and 118-20(3) of the ITAA 1997. Will bonus share units issued to the contractor out of the corpus of the trust and in relation to his/her holding of share units, constitute assessable income under section 6-5 ITAA 1997? Answer : No The issue of the bonus share units creates an entitlement or right to money by way of a bonus. As a mere entitlement or right to receive salary or wages or bonus income, the receipt of bonus share units isn't a derivation of that income for the purposes of section 6-5 of the ITAA 1997. Will the bonus share units issued to the contractor out of the corpus of the trust and in relation to his/her holding of share units, constitute assessable income under section 15-2 of the ITAA 1997? Answer : No The bonus share units do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums for the purposes of section 15-2 of the ITAA 1997. Will the bonus share units issued to the contractor out of the corpus of the trust and in relation to his/her holding of share units, constitute assessable income under section 21A of the ITAA 1936? Answer : No Bonus share units issued to the contractor may be non-cash business benefits for the purposes of section 21A of the ITAA 1936, i.e. property provided in relation to a business relationship between the contractor and the contracting entity. The issue of the bonus share units creates an entitlement or right to money by way of a bonus. as a mere entitlement or right to receive bonus income, the contractor will not derive income for the purposes of section 21A of the ITAA 1936 upon the issue of bonus share units. Their issue will therefore not be assessable to the contractor under section 21A. To the extent that the issue of the bonus share units do not constitute assessable income under section 6-5 or section 15-2 of the ITAA 1997 or section 21A of the ITAA 1936 for the contractor: (a) will the provisions of subsection 130-20(3) of the ITAA 1997 apply to deem the bonus share units to have been acquired when the share units were acquired and will the cost base be apportioned over both the share units and the bonus share units? Answer : No. A bonus share unit is not a unit to which Division 130 of the ITAA 1997 applies because a unit in a unit trust must give the unit holder an equitable interest in the assets of the trust (see Charles v Federal Commissioner of Taxation (1954) 90 CLR 598). The bonus share units entitle the contractor as unit holder, to a cash payment only and do not confer any equitable interest in the trust. (a) will the redemption of the bonus share units constitute a CGT event as set out in section 104-5 of the ITAA 1997? Answer: No The payment of the redemption distribution to the contractor upon redemption of the bonus share units is considered to be made to the contractor as a reward for services provided by the contractor to the contracting entity. It is therefore a derivation of bonus income, and ordinary income for the purposes of section 6-5 of the ITAA 1997. (a) will the proceeds received by the contractor upon the redemption of the bonus share units be taken into account in calculating his/her net capital gain under Division 102 of the ITAA 1997? Answer: No The redemption of the bonus share units does not constitute a CGT event for the purposes of Division 104 of the ITAA 1997. (a) will the CGT discount provisions in Division 115 of the ITAA 1997 apply to the capital gain made by the contractor in respect of that redemption of the bonus share units where the bonus share units were acquired at least 12 months before the CGT event? Answer : No The redemption of the bonus share units does not give rise to a capital gain under Division 102 of the ITAA 1997. Will the proceeds received by the contractor upon redemption of the bonus share units issued and in relation to his/her holdings of share units constitute assessable income under section 6-5 of the ITAA 1997? Answer: Yes The payment of the redemption distribution to the contractor upon redemption of the bonus share units is considered to be made to the contractor as a reward for services provided by the contractor to the contracting entity. It is therefore a derivation of bonus income, and ordinary income for the purposes of section 6-5 of the ITAA 1997. An amount must be withheld from the payment of the redemption distribution by the trustee in accordance with section 12-60 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). Will the proceeds received by the contractor upon redemption of the bonus share units issued and in relation to his/her holdings of share units constitute assessable income under section 15-2 of the ITAA 1997? Answer: Yes, to the extent that the proceeds received by the contractor upon redemption of the bonus share units do not constitute assessable income under section 6-5 of the ITAA 1997. The payment of the redemption distribution to the contractor upon redemption of the bonus share units is considered to be made to the contractor in respect of employment or services rendered to the contracting entity. It therefore constitutes compensation, benefits or bonuses for the purposes of section 15-2 of the ITAA 1997. An amount must be withheld from the payment of the redemption distribution by the trustee in accordance with section 12-60 of Schedule 1 to the TAA 1953. Will the proceeds received by the contractor upon redemption of the bonus share units issued and in relation to his/her holdings of share units constitute assessable income under section 21A of the ITAA 1936? Answer : No Subsection 21A(2) of the ITAA 1936 brings to account all non-cash business benefits, whether or not convertible to cash, that are income derived by a taxpayer in carrying on a business for the purpose of gaining or producing assessable income. The proceeds from the redemption of bonus share units are not non-cash business benefits. therefore, they are not assessable to the contractor under section 21A of the ITAA 1936. To the extent that the proceeds from any given redemption of share units are included in assessable income under section 6-5 or 15-2 of the ITAA 1997 or section 21A of the ITAA 1936 and are taken into account in calculating a net capital gain, will the anti-overlap provisions of section 118-20 of the ITAA 1997 operate to reduce the capital gain by the amount included in assessable income or to zero in accordance with subsections 118-20(2) and 118-20(3) of the ITAA 1997? Answer : Yes Where the disposal of an asset gives rise to assessable income (other than a capital gain) and a capital gain, the amount of the income is included in assessable income and the capital gain is reduced by that amount or to zero in accordance with subsections 118-20(2) and 118-20(3) of the ITAA 1997. If the trustee, pursuant to the trust deed, decides to make cash payments to the contractor on behalf of the contracting entity will the amounts paid to the contractor be included as assessable income of the contractor under section 6-5 of the ITAA 1997? Answer : Yes Where the trustee, pursuant to the trust deed, pays amounts to the contractor on behalf of the contracting entity from repayments of a loan pursuant to the trust deed as fees minus amounts withheld as Pay As You Go tax instalments, such amounts (including the amounts of Pay As You Go instalments withheld) will constitute income according to ordinary concepts assessable under section 6-5 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Question 1: Will the contributions of monies by the contracting entity to the trustee pursuant to the trust deed be included as assessable income of the contractor under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Question 3: Will the contributions of monies by the contracting entity to the trustee pursuant to the trust deed be included as assessable income of the contractor under section 21A of the Income Tax Assessment Act 1936 (ITAA 1936)? | Question 6: Will the loans of monies by the contracting entity to the trustee pursuant to the trust deed be included as assessable income of the contractor under section 21A of the ITAA 1936? | Question 14: Will the taxable value of a non-cash business benefit constituted by the interest free loan be reduced to nil due to the application of the "otherwise deductible rule" under section 21A (3) of the ITAA 1936? | Question 16: Will the distribution of dividends included in the calculation of the net income of the trust estate under section 95 of the ITAA 36 by the trustee to the contractor, to which the contractor is presently entitled, be included as assessable income of the contractor under section 97 of the ITAA 1936? | Question 21: To the extent that the proceeds received on the redemption of the share units do not constitute assessable income under section 6-5 or 15-2 of the ITAA 1997 or section 21A of the ITAA 1936 for the contractor: | (a) will the proceeds received by Ms Hughes upon the redemption of the share units be taken into account in calculating her net capital gain under Division 102 of the ITAA 1997? | Question 22: To the extent that the proceeds from any given redemption of bonus share units are included in assessable income under section 6-5 or section 15-2 of the ITAA 1997 or section 21A of the ITAA 36 and are taken into account in calculating a net capital gain, will the anti-overlap provisions of section 118-20 of the ITAA 1997 operate to reduce the capital gain by the amount included in assessable income or to zero in accordance with subsections 118-20(2) and 118-20(3) of the ITAA 1997? | Question 26: To the extent that the issue of the bonus share units do not constitute assessable income under section 6-5 or section 15-2 of the ITAA 97 or section 21A of the ITAA 1936 for the contractor: | Reasons for decision: These reasons for decision accompany the Notice of private ruling for the Contractor.