Private ruling: Assessable Income
Date of advice: 14 February 2018
Published: June 2018
Ruling period: Income Tax year ending 30 June 2018 | Income Tax year ending 30 June 2019 | Income Tax year ending 30 June 2020 | Income Tax year ending 30 June 2021 | Income Tax year ending 30 June 2022
Date scheme commenced: The scheme commences in the income year ended 30 June 2018.

Ruling: Q1: Will amounts contributed to the trustee by employees for the acquisition of additional employee units constitute assessable income of the Trust? | A1: No. | Q2: Will amounts contributed by the employer to the Trust for the benefit of employees constitute assessable income of the Trust? | A2: No. | Q3: Will the general anti-avoidance provisions under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the scheme described? | A3: No.

Relevant facts and circumstances: This scheme description incorporates and should be read with the draft Employee Share Plan Trust Deed (Trust Deed) provided. You are an Australian based company group providing services to a broad range of clients. You were founded in the 1990s and currently have over 100 employees nationally. The group consists of a holding company and three wholly owned subsidiary companies, one of which operates as trustee for the Group’s wholly owned unit trust. You have decided to introduce the Share Plan (the Plan) as a mechanism for rewarding, retaining and motivating its employees. You have the following reasons for introducing the Plan: ● provide a mechanism for rewarding staff for their loyalty and effort in a structured, equitable and transparent manner ● provide benefits for existing employees and attract new employees, and ● assist to engender responsibility for the performance of our business throughout our employees and provide a mechanism that rewards staff for our collective and individual contributions. You will operate the Plan through a trust which will have a company as trustee for the Share Plan Trust (the Trust). The Trustee Company is owned by two of the current owners and directors of the Group. They also act as directors of the Trustee Company. It is intended that the Trust will be used to acquire fully paid ordinary shares in the capital of the Employer (Shares) for your employees pursuant to the Plan. The Trust provides an arm’s-length vehicle through which Shares can be acquired and held on behalf of employees providing the liquidity of employee held Shares in a simple flexible manner compared to the Employer buying back Shares from employees. In effect, this aspect allows the Employer to satisfy corporate law requirements relating to companies dealing in their own shares. The Trust provides the following benefits to the Employer: ● Allows key shareholders to keep control over company ownership. ● Registration of shares in the Trustee’s name provides control over identity of shareholders, preventing a sale to unrelated persons. ● If the Employer is sold, it is easier to “mop-up” employee shareholders. ● Enables the disqualification event and disqualification discount provisions to be enforced in a simple manner through the Trust. An initial contribution to the Trust consisting of 10% of the Employer has been made by the directors of the Group. Further, annual contributions will be made to the Trust by the Employer in accordance with a formula established by the Employer. For the initial year the formula is: Contribution = (Net Profit – Benchmark Net Profit) x Benchmark Profit % The Trustee will at the direction of the Employer use any money contributed by the Employer and any residual amounts to purchase Shares from the existing shareholders of the Employer, although a small amount will be retained to provide for the administration of the Plan. The Trust Deed allows for the Employer to direct the Trustee to subscribe for Shares, but it is not the Employer’s current intention for the Trustee to use this method to acquire Shares. Shares will be held by the Trustee as Unallocated Shares until such Shares are allocated to Eligible Employees who become Participants in the Plan. The Employer will be entitled under the Trust Deed to nominate and invite Eligible Employees to participate in the Plan; however, it will not have any right to the income or capital of the trust. Eligibility to participate in the Plan is based upon two independently assessed set of criteria. Initial eligibility applies only during the first year of operation of the Plan and entitles Eligible Employees to benefit from both the initial contribution and the annual contributions (including any residual amounts of capital after the application of disqualify events or disqualifying discounts). To be eligible to benefit from the initial contribution an employee must have been continuously employed as a permanent employee of the Employer for three years excluding any breaks in employment (e.g. leave without pay). This includes full time and part time permanent employees. To be eligible to benefit from any subsequent contributions (and any residual amounts of capital after the application of disqualifying events or disqualifying discounts) an employee must have been continuously employed as a permanent employee of the Employer for two years excluding any breaks in employment (e.g. leave without pay). This includes full time and part time permanent employees. The beneficial interest of the Shares in the Trust Fund shall be divided into Units. Subject to a demonstrated commitment to the Employer (determined by the exercise of the Directors discretion) and meeting the expectations of their current role (demonstrated by having no significant performance issues), the Employer will invite Eligible Employees to participate in the Plan by owning Employee Units. The invitation will include the terms and conditions upon which the Units will be issued. Following receipt of an invitation, an Eligible Employee who wishes to participate in the Plan will return the completed application form. Upon acceptance of the application by the Employer, Eligible Employees become Participants in the Plan. The Employer will then instruct the Trustee to allocate a specific number of Units to the Eligible Employee and to designate one Share to each Unit (Allocated Share). The Trustee shall ensure such designation is recorded in the books and records of the Trust. Eligible Employees may make a contribution toward the acquisition of an Employee Unit. The Employee Units provided to the Participants are substantially the same rights in respect of the Shares which are allocated to the Units as if the Participants were the legal owners of the Shares. Subject to the provisions of the Trust Deed, a Unit entitles the Participants to: ● receive the income deriving from the Allocated Shares including dividends declared by the Directors at their discretion in respect of the Shares ● to the extent that voting rights are attached to the Shares, direct the Trustee on how it should be exercised ● receive the Redemption Entitlement on redemption, and ● to request the Trustee to pass a resolution allowing for the redemption of Units. The Units may be issued to an associate of an Eligible Employee (and the associate will be a Participant under the Plan). The number of Employee Units issued to a Participant will be determined by the Trustee with reference to the following factors: ● length of Service (pro rata for permanent part time) ( 20-40 % ) and excludes any breaks in employment (i.e. leave without pay) but includes all paid leave periods in accordance with standard leave entitlements for employees ● role/responsibility ( 20-40 % ) – reflected by consideration of current role, with key metric including current base salary level (FTE), and ● performance ( 20-40 % ). No Eligible Employee may acquire Units, by way of an Invitation or otherwise, if, immediately after the acquisition of those Units, the Eligible Employee would directly or indirectly hold or control a legal or beneficial interest in 10% or more of the issued capital of the Employer (including the voting rights that relate to those shares). The Trustee shall keep and maintain an up-to-date register of all Unit Holders. Subject to receiving written consent from the Employer a Participant may transfer his or her Units to an Associate, otherwise Units cannot be transferred or assigned or otherwise dealt with in favour of any person nor can any equitable, contingent, future or partial interest or other security interest be created in a Unit. Where the Shares are allocated to a particular Participant, any dividends that the Trustee receives as the result of holding those Shares in the Trust will flow-through to the relevant Participant. Where Shares remain unallocated in the Trust any dividends that the Trustee receives as the result of holding those Shares in the Trust will be retained as part of the capital of the Trust. If a Disqualifying Event occurs, the relevant Participant will forfeit any right or interest in the Units acquired for the benefit of the Participant under the Plan. “Disqualifying Event” includes (but is not limited to) the employment of the relevant Participant ceasing because of Termination or Termination for Cause. ‘Termination’ means termination of employment of the relevant employee by the Company other than in Special Circumstances, Resignation and Termination for Cause’. ‘Termination for Cause’ means termination of the relevant Eligible Employee without notice by the Employer due to fraud or gross misconduct; fraud and other similarly serious events. The Trustee may by resolution redeem all or a specified number of Units registered in a Participant’s name on the happening of any of the following events: ● upon the Trustee’s determination to redeem any or all at the Trustee’s absolute unfettered discretion ● notification by the Employer to the Trustee that the employment of the Participant (or the relevant Eligible Employee) has ceased because of Resignation or Special Circumstances, and ● receipt by the Trustee of a request in writing from the Participant to cancel one or more Units provided that request is: ● made while the Participant (or their associate) is an Employee, and ● made with the written approval of the Board. Subject to the terms of the Trust Deed the relevant Disqualification Discounts (if any) as set out below will apply to the Units redeemed, rounded up to the nearest whole number. The Participant will be entitled to the rights and interests in the Remaining Units (i.e. the interest in the Allocated Shares referable to those Remaining Units), and will forfeit any rights or interests in the Units that the Participant would, but for the application of the Disqualification Discounts, have been entitled to, but provided that no Disqualification Discounts shall be applicable to any Unit whose issue has been funded by the Participant (or the relevant Eligible Employee) entirely by the contribution of funds to the Trustee by the Eligible Employee, or upon the occurrence of Special Circumstances; and “Disqualification Discounts” means the percentage of Units a Participant is entitled to redeem as set out in Item 2 of the table below, determined by reference to the duration each individual Unit is held for, but provided that if the relevant Eligible Employee has completed 10 years of service when they (or their associate) first become a Participant, then Item 3 of the table will apply as the Disqualification Discounts: “Special Circumstance” means the cessation of employment due to Redundancy, where the Eligible Employee dies, or where the employment relationship ends because of Retirement, including for reasons of trauma or total and permanent disability; Held individual Units for Entitlement Percentage (Item 2) Entitlement Percentage (Item 3) 1 Year 10% 30% 2 Years 20% 35% 3 Years 30% 40% 4 Years 40% 45% 5 Years 50% 50% 6 Years 60% 60% 7 Years 70% 70% 8 Years 80% 80% 9 Years 90% 90% 10 Years or more 100% 100% The Participant who holds Remaining Units shall be entitled to direct the Trustee to sell the Allocated Shares and receive from the Trustee the cash value of the Shares sold net of any selling costs or to transfer to them the Allocated Shares.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 95 | Income Tax Assessment Act 1936 Subsection 177D(2) | Income Tax Assessment Act 1936 Section 95

Reasons for decision: Detailed Reasoning - Question 1: Will amounts contributed to the trustee by employees for the acquisition of additional employee units constitute assessable income of the Trust? | Detailed Reasoning - Detailed reasoning: Contributions of monies by employees subscribing for additional units in the trust to the trustee pursuant to the trust deed represent corpus of the trust. The contributions constitute capital receipts to the trustee, and are not included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936. | Detailed Reasoning - Question 2: Will amounts contributed by the employer to the Trust for the benefit of employees constitute assessable income of the Trust? | Detailed Reasoning - Detailed reasoning: Contributions of monies by the employer to the trustee pursuant to the trust deed represent corpus of the trust. The contributions constitute capital receipts to the trustee, and are not included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936. | Detailed Reasoning - Question 3: Will the general anti-avoidance provisions under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the scheme described? | Summary: Provided that the scheme is implemented as described in this ruling the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any tax benefit derived by the trustee as a result of his participation in the Plan as described. | Detailed Reasoning - Detailed reasoning: A consideration of all the factors referred to in subsection 177D(2) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to participants in a form that promotes the Employer’s business objectives, rather than to obtain a tax benefit. Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any tax benefit derived by any of the participants including the trustee as a result of their participation in the Plan as described.