Private ruling: Assessable income - director profit share plan
Date of advice: 11 March 2016
Published: May 2016
Ruling period: 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019

Ruling: Questions and answers | 1. Under the Profit Share (PS) Plan, are the retained PS amounts included in your assessable income at the time of allocation? | No. | 2. Are you considered to be presently entitled to and subsequently liable to be assessed under section 97 of the Income Tax Assessment Act 19 36 on unvested retained profit share amounts as a trust beneficiary? | No. | 3. Are supplementary amounts arising under the PS Plan included your assessable income at the time of receipt? | Yes.

Relevant facts and circumstances: You are an Australian resident and Employee who participates in the Company's Profit Share (PS) Scheme. The Company together with its subsidiaries operates an incentive scheme for the remuneration and retention of its Employees. The PS is governed by a set of rules (the Rules). The Rules sets out the terms on which the PS will operate, including terms relating to allocation, retention, vesting and release of PS (PS Terms) and how the PS Terms may be amended, varied or replaced from time to time. For each period (Profit Share Year) a profit share pool is determined by the Committee and the Board. A profit share pool determination may be altered at any time. The annual allocations under the PS are awarded to Employees at the discretion of the Committee. Recommendations may be made regarding Employees whose performance has met or exceeded the Company's objectives and expectations. The Company is under no obligation to award a PS allocation to an Employee and an Employee has no right or entitlement to be awarded a PS allocation. PS allocations are entirely discretionary and neither a PS allocation in any one year, nor allocations across a number of years, imply or guarantee a PS allocation in any subsequent year. An Employee whose employment with the Company terminates for any reason during a Profit Share Year or between the end of a Profit Share Year and the relevant crystallisation date, will not be eligible for a PS allocation for that, or any subsequent Profit Share Year. In any year a percentage of an Employee's annual gross PS allocation, if any, will be withheld by the Company (Retained PS) and will only be released to the Employee under the PS Terms. The remainder of the PS allocation (non-retained PS) will be available for remuneration purposes in the year of allocation. If an Employee's employment continues to the end of the relevant retention release period (Retention Release Periods), the relevant Retained PS will vest and be released to the Employee on the respective vesting and release dates for that year. Retained PS will be; • notionally invested in the Company-managed fund equity as determined by the Committee and or Executive Committee in its absolute discretion from time to time (PS Plan); • invested in shares or rights in respect of the shares through the Company Group; • in limited circumstances, and only with the approval of the Committee, invested in other than The Company managed fund equity or shares or rights in respect of the shares through the Company Group where there is a need to directly align the interests of the Employees with those of their clients. The Committee and the Company Executive Committee have absolute discretion to decide at any time whether an individual Employee's retained PS will be invested in shares through the Company Group, notionally invested in the PS Plan (or a combination of both), or otherwise. No investments are made in the name of the Employee. Employees will not have the opportunity to select or influence the selection of the notional investments in the PS Plan, nor will they have any interest, legal or beneficial, in any property owned by the Company in connection with the PS Plan. The notional return that is referrable to an Employee's retained PS is calculated using a total shareholder return. The Committee and or Executive Committee may determine in its absolute discretion whether this notional return will be released to the Employee as additional remuneration (the Supplementary Amount). In order for the retained PS to be released the Employee must remain in employment of the Company until the end of the relevant retention period. If an Employee's employment continues to the end of the relevant retention period, the relevant retained PS will vest and be available for remuneration purposes to the Employee. If an Employee's employment terminates prior to the end of the relevant retention period, the unvested retained PS is forfeited. In limited circumstances the retained PS may be conditionally released to the Employee where the Employee's employment is terminated prior to the end of the relevant termination period. These circumstances include death, serious incapacitation, genuine retirement and redundancy. In these cases the PS is subject to disqualifying events where an Employee may still forfeit their PS if a disqualifying event occurs. These provisions apply for between 6 and 24 months.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Section 6-10, | Income Tax Assessment Act 1997 Section 10-5

Reasons for decision: Summary: Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). The legislation does not provide specific guidance on the meaning of income according to ordinary concepts. However, a substantial body of case law exists which identifies likely characteristics. In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation , the Full High Court stated: 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. Amounts that are periodical, regular or recurrent, relied upon and expected on a periodic basis by the recipient for their regular expenditure and paid to them for that purpose are likely to be ordinary income, as are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient. Amounts paid in substitution for salary or wages foregone or lost may also be ordinary income. Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. The whole of the circumstances must be considered and the motive of the payer may be relevant to this consideration. Any amounts received by you under the PS Plan form part of your overall remuneration package. As such, they will be assessable to you as ordinary income under section 6-5(1) of the ITAA 1997. Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes the ordinary income derived by the taxpayer directly or indirectly from all sources, whether in or out of Australia, during the income year. Income from employment is normally assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period. Subsection 6-5(4) of the ITAA 1997 provides that, in working out whether, and when, an amount of ordinary income is derived, the amount is taken to have been received as soon as it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs. For instance, if an amount is credited to an employee in the books of his employer and can be drawn by the employee at any time, it is derived at the time it was so credited and made available to the employee (that is, constructive receipt). The PS allocations are determined annually subject at the discretion of the Committee. In accordance with the Rules, a fixed percentage of the PS allocation is available for remuneration in the year of allocation. The remaining percentage is deferred (retained PS). If your employment continues to the end of the relevant retention release period as set out in the tables in the Rules, the relevant retained PS will vest and be released to you at the end of the respective vesting and release period for that particular PS allocation. You do not have any right to any retained PS, nor does the Company have an obligation to pay a retained PS amount to you until it is released: • pursuant to the relevant Retention Release Period table in the Rules; • in circumstances where you are seriously incapacitated, genuinely retiring, made redundant, disabled, seriously ill or you die and subject to the disqualifying events; or • pursuant to limited exceptional which will be determine by the Board in its absolute discretion under the PS Terms. In all other circumstances unvested retained PS will be forfeited on termination of employment. Accordingly, until the retained PS vests in you, you only have a contingent and unascertainable right to the retained PS. Until specified conditions are satisfied, the retained PS is not available to you to call upon. Consequently, you cannot be deemed to have derived a retained PS amount until you have actually received it or otherwise have it applied on your behalf or as you direct. Therefore, the retained PS is included in your assessable income under section 6-5 of the ITAA 1997 at the time of receipt of the income or when the income is otherwise applied for your benefit and not at the time of allocation. Section 97 of the ITAA 1936 applies where a beneficiary is presently entitled to a share of the income of a trust estate. Therefore it is necessary to determine whether an implied (resulting) or express trust has been created over the amount of retained PS with the Company as trustee and you the beneficiary. A description of the nature of a trust is provided in Jacobs' Law of Trusts in Australia : A trust exists when the holder of a legal or equitable interest in certain property is bound by an equitable obligation to hold his interest in that property not for his own benefit, but for benefit, as to the whole or part of such interest, of another person or persons or for some object or purposes permitted by law. In Underhill, Law of Trusts and Trustees the following description is provided: A trust is an equitable obligation binding a person (who is called a trustee to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called beneficiaries...) of whom he may himself be one, and any one of whom may enforce the obligation. Trust property is defined in Underhill, Law of Trusts and Trustees (p.122) as: All property real or personal, legal or equitable, at home or abroad and whether vested in possession or action, remainder or reversion, and whether vested or contingent, may be made the subject of a trust unless: (a) the policy of the law or some other statutory enactment has made it inalienable ... It is a condition of trust law that for a trust to be effective the trust property must be known and identified with certainty. It is not possible to create a binding trust over a future expectancy. It is therefore necessary to consider whether there is any 'property' which can constitute trust property. At the time that your PS allocation is determined by the Executive Committee/the Committee, you do not obtain a beneficial right to receive the retained amount, but rather an expectation of receiving this amount in the future. Also, you are not guaranteed a portion of the retained PS therefore the amount is considered unvested until the retention period is over. You become entitled to receive a portion of the retained PS amount if you continue in employment with the Company to the end of the relevant retention release period specified in the Rules, and provided there have been no disqualifying events occurring. Except in certain specified circumstances, any unvested retained PS will be forfeited on termination of employment. Therefore, there is no amount which can be readily identified as trust property, and it is considered that the relationship is not one of a trust. If no trust exists for the purposes of trust law, there is no present entitlement to which you can be assessed under section 97 of the ITAA 1936. During the retention period of the retained PS amounts, the Committee may determine that a supplementary amount be paid to you. This supplementary amount represents a notional return on the retained amounts held in the PS plan. Until your supplementary amount has been determined and available to you to call upon, you cannot be deemed to have derived the amount. Therefore a supplementary amount will be included in your assessable income at the time of receipt or when the income is otherwise applied for your benefit under section 6-5 of the ITAA 1997.