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

Ruling: Q1: Will the dividend streaming provisions in Subdivision 204-D of the Income Tax Assessment Act 1997 (ITAA 1997) apply to deny an imputation benefit to you as the Employee's associate? | A1: No.

Relevant facts and circumstances: The trust was created recently and is an associate of the Employee. The trust was created as an investment vehicle for the Employee. The Employee is an employee of the Company, a private company limited by shares. The shares in the Company are owned by the original owners of the business, who are unrelated to the Employee. There are currently a smaller number of employees in the Employee's Department. At this stage, at least one other member of the Employee's Department will be participating in the ESS. The Employee's role in the Company was specified in the private ruling application. Previously the Company operated a Short Term Incentives ("STI") scheme by way of cash bonus to motivate employees. The Board now believe a mixture of both STI and Long Term Incentives ("LTI") are appropriate. As such, the Company wishes to implement an Employee Share Scheme ("ESS") as the LTI while continuing with a cash bonus as a STI. The STI will continue to be based on the individual performance of the Employee. Shares issued under the ESS Plan will have rights to receive dividends declared on the ESS shares. As the Plan is being implemented as a LTI, determination of the dividends will be linked to the overall performance of the Company and in some instances the department to which the Employee is attached. The payment of future dividends on the ESS shares will be linked to the overall performance of the Company and the Department in which the Employee works. The dividends will not be linked to the Employee's personal performance in any way and the Employee will not otherwise be compensated if the Employee chooses not to participate in the ESS Plan. All other employees will either hold their ESS interests in their own name, in the name of their spouse or in the name of their Family Trusts; all such parties are Australian residents for tax purposes. The Employee has been invited to participate in the ESS and also expects to continue receiving STI based on the Employee's individual performance. The Employee wishes to elect to have the entitlement under the ESS issued to you as a nominee rather than accept it personally. The objective of the proposed plan is as follows: The main purpose of the ESS is to create a LTI aimed at retaining staff and creating congruence between the Company goals and the employee's goals. The Company hopes that by providing employees with an equity interest in the company they will be encouraged to work alongside existing shareholders to grow the Company, as financial success for the Company should ultimately lead to financial benefits for the employees. You have provided certain documents that are to be read with and form part of the scheme for the purpose of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 204 | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1936 Section 44

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. The dividend streaming provisions in Subdivision 204-D of the Income Tax Assessment Act 1997 (ITAA 1997) will not apply to deny an imputation benefit to you as the Employee's associate? | Detailed Reasoning - Detailed reasoning: Section 204-30 of the ITAA1997 was introduced as a specific anti-avoidance provision to apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most, in preference to other shareholders. As a resident recipient of a franked distribution from the Company, you will be required to gross-up the distribution under section 207-20(1) of the ITAA 1997 and be entitled to a tax offset under section 207-20(2). Consequently, upon receipt of the distribution, you will be taken to have received an imputation benefit under paragraph 204-30(6)(a) of the ITAA 1997. Subsections 204-30(8) and 204-30(9) of the ITAA 1997 list instances in which a member of an entity will be taken to derive a greater benefit from franking credits than another member of the entity. Of the factors listed in section 204-30(8) of the ITAA 1997 only those listed in paragraphs (a), (b) and (c) will be of relevance in the context of distributions to shareholders that are discretionary trusts or natural persons. As all of the current shareholders are also discretionary trusts and Australian residents, their residential status will not in itself confer greater benefits upon one to the exclusion of the other. Furthermore, as they will both be entitled to tax offsets in the event of receiving a franked distribution, one will not secure a greater benefit than the other from franking, on account of their entitlement to an offset. Consequently paragraphs (a) and (b) will not distinguish between the shareholders insofar as the ability of one to secure a greater benefit from franking than the other is concerned. Paragraph (c) of section 204-30(8) of the ITAA 1997 examines whether a distribution is being directed towards one member in preference to another based upon the member's ability to derive a greater benefit from the associated tax offset. As an example, the Explanatory Memorandum for the New Business Tax System (Imputation) Bill 2002 cites a corporate tax entity that is not entitled to a refund of excess imputation credits. While the introduction of the loss wastage measures reduces the circumstances in which excess franking credits are wasted, the focus of paragraph (c) is on instances where one member's tax profile limits the value of a tax offset to them. However, all shareholders are entitled to refunds of excess imputation credits and consequently are able to utilize tax offsets associated with distributions to the same extent. To the extent that the amount of tax payable as a result of the distribution is less than the tax offset associated with the distribution, they will all be entitled to a refund equal to the excess. Accordingly, it cannot be said that the entity has directed distributions in such a manner as to confer greater benefits from franking upon a member that is able to derive a greater benefit from franking credits to the exclusion of a member that is unable to do so. Consequently, the Commissioner will not make a determination under paragraph 204-30(3)(c)of the ITAA 1997 where the Company pays franked dividends to you. Note: if the trust is a family trust and is a discretionary trust, tax offsets for the imputation credits will not always flow through to beneficiaries where neither the trustee nor the beneficiary satisfies the qualified person rules.