Private ruling: Employee Share Trust
Published: December 2012

Ruling: Q1: Will the contributions of monies by the employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the contributions of monies by the employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 15-2 of the ITAA 1997? | A2: No | Q3: Will the loans of monies by the employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 6-5 of the ITAA 1997? | A3: No | Q4: Will the loans of monies by the employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 15-2 of the ITAA 1997? | A4: No | Q5: Will the acquisition of share units by the employee in return for payment of market value consideration be included as assessable income of the employee under section 83A-25 of the ITAA 1997? | A5: No | Q6: Will the issue of the share units to the employee in return for payment of market value consideration, give rise to any assessable income under section 6-5 of the ITAA 1997 for the employee? | A6: No | Q7: Will the issue of the share units to the employee in return for payment of market value consideration, give rise to any assessable income under section 15-2 of the ITAA 1997 for the employee? | A7: No | Q8: Will the first element of the CGT cost base of the share units acquired by the employee, in accordance with section 110-25 of the ITAA 1997, equal the amount paid for those share units? | A8: Yes. | Q9: Will the distribution of dividends included in the calculation of the net income of the trust estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) by the trustee to the employee, to which the employee is presently entitled, be included as assessable income of the employee under section 97 of the ITAA 1936? | A9: Yes | Q10: Will the proceeds received by the employee upon redemption of the share units constitute assessable income under section 6-5 of the ITAA 1997? | A10: No | Q11: Will the proceeds received by the employee upon redemption of the share units constitute assessable income under section 15-2 of the ITAA 1997? | A11: No | Q12: To the extent that any proceeds received on the redemption of the share units constitute assessable income for the employee under the provisions of section 6-5 or section 15-2 of the ITAA 1997, will the net proceeds (i.e. gross proceeds less the cost of the share units) be assessable, rather than the gross proceeds? | A12: Yes | Q13: To the extent that the proceeds received on the redemption of the share units do not constitute assessable income under section 6-5 or section 15-2 of the ITAA 1997 for the employee: (a) will the redemption of the share units constitute a CGT event as set out in Division 104 of the ITAA 1997? | A15: Yes | Q14: To the extent that the proceeds from any given redemption of share units are included in assessable income under section 6-5 or section 15-2 of the ITAA 1997 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? | A16: Yes | Q15: If the share units are redeemed at a time that coincides with the cessation of the employee's employment, will the proceeds on redemption be an employment termination payment under section 82-130 of Part 2-40 of the ITAA 1997? | A17: No | Q16: If the trustee, pursuant to the trust deed, decides to pay salary to the employee on behalf of the employer, will the amounts paid to the employee (including any amounts of Pay As You Go instalments withheld) be included as assessable income of the employee under section 6-5 of the ITAA 1997? | A18: Yes | Q17: If the trustee, pursuant to the trust deed, decides to provide discounted rights to shares to the employee on behalf of the employer, will the discount to the market value of the rights provided to the employee be included as assessable income of the employee under section 83A-25 of the ITAA97? | A19: Yes

Relevant facts and circumstances: The employer entity intends to implement a long-term equity plan for the purpose of providing a long-term equity incentive structure to deliver equity based benefits to employees selected by the board of the employer entity.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 44(1) | Income Tax Assessment Act 1936 Division 6 | Income Tax Assessment Act 1936 Section 95 | Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-2 | Income Tax Assessment Act 1997 Section 82-130 | Income Tax Assessment Act 1997 Section 83A-25 | Income Tax Assessment Act 1997 Division 102 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Subsection 110-25(2) | Income Tax Assessment Act 1997 Division 115 | Income Tax Assessment Act 1997 Section 118-20 | Income Tax Assessment Act 1997 Subsection 118-20(2) | Income Tax Assessment Act 1997 Subsection 118-20(3)

Reasons for decision: Summary: Will the contributions of monies by the employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? No The employee will not derive assessable income in respect of contributions of monies by the employer 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 employee or taken to have been received by him. Will the contributions of monies by the employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 15-2 of the ITAA 1997? No The contributions of monies by the employer to the trustee pursuant to the trust deed do not constitute statutory income of the employee under section 15-2 of the ITAA 1997 as the contributions do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums provided to the employee or applied or dealt with in any way on the employee's behalf or as the employee directs. Will the loans of monies by the employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 6-5 of the ITAA 1997? No The employee will not derive assessable income in respect of loans of monies by the employer 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 employee or taken to have been received by him. Will the loans of monies by the employer to the trustee pursuant to the trust deed be included as assessable income of the employee under section 15-2 of the ITAA 1997? No Loans of monies by the employer to the trustee pursuant to the trust deed do not constitute statutory income of the employee under section 15-2 of the ITAA 1997 as the loans do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums provided to the employee or applied or dealt with in any way on the employee's behalf or as the employee directs. Will the acquisition of share units by the employee in return for payment of market value consideration be included as assessable income of the employee under section 83A-25 of the ITAA 1997? No As the payment for the share units are made by the employee and the application moneys are used by the trustee to pay full market value for the shares, then any interest the employee 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 employee in return for payment of market value consideration, give rise to any assessable income under section 6-5 of the ITAA 1997 for the employee? No Where the employee pays market value consideration for share units in the trust, the receipt of the share units by the employee does not constitute income received or taken to have been received by the employee for the purposes of section 6-5 of the ITAA 1997. Will the issue of the share units to the employee in return for payment of market value consideration, give rise to any assessable income under section 15-2 of the ITAA 1997 for the employee? No Where the employee pays market value consideration for share units in the trust, the share units provided to the employee do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums provided to the employee or applied or dealt with in any way on the employee's behalf or as the employee directs for the purposes of section 15-2 of the ITAA 1997. Will the first element of the CGT cost base of the share units acquired by the employee, in accordance with section 110-25 of the ITAA 1997, equal the amount paid for those share units? 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 Income Tax Assessment Act 1936 (ITAA 1936) by the trustee to the employee, to which the employee is presently entitled, be included as assessable income of the employee under section 97 of the ITAA 1936? Yes Where the employee 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 employee'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 employee'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 employee is presently entitled in the relevant income year. Will the proceeds received by the employee upon redemption of the share units constitute assessable income under section 6-5 of the ITAA 1997? No The disposal of share units acquired by the employee 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 employee upon redemption of the share units constitute assessable income under section 15-2 of the ITAA 1997? No The disposal of share units acquired by the employee 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. To the extent that any proceeds received on the redemption of the share units constitute assessable income for the employee under the provisions of section 6-5 or section 15-2 of the ITAA 1997, will the net proceeds (i.e. gross proceeds less the cost of the share units) be assessable, rather than the gross proceeds? Yes To the extent that any proceeds received on the redemption of the share units constitute assessable income for the employee under section 6-5 of the ITAA 1997 or allowances, gratuities, compensation, benefits, bonuses or premiums assessable under section 15-2 of the ITAA 1997, 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 employee. To the extent that the proceeds received on the redemption of the share units do not constitute assessable income under section 6-5 or section 15-2 of the ITAA 1997 for the employee: (a) will the redemption of the share units constitute a CGT event as set out in Division 104 of the ITAA 1997? Yes The redemption of share units by the employee 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. (b) will the proceeds received by the employee upon the redemption of the share units be taken into account in calculating his net capital gain under Division 102 of the ITAA 1997? Yes The employee'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). (c) 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? Yes The capital gain will be a discount capital gain under Division 115 of the ITAA 1997 as the capital gain made by the employee is as a result from a CGT event C2 happening to the share units held by the employee for at least 12 months. To the extent that the proceeds from any given redemption of share units are included in assessable income under section 6-5 or section 15-2 of the ITAA 1997 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? Yes Where the disposal of an asset gives rise to assessable income 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 share units are redeemed at a time that coincides with the cessation of the employee's employment, will the proceeds on redemption be an employment termination payment under section 82-130 of Part 2-40 of the ITAA 1997? No The disposal of share units held by the employee at a time that coincides with the cessation of his employment is a realisation of a capital asset. The proceeds received do not constitute ordinary income and are therefore not an employment termination payment under section 82-130 of Part 2-40 of the ITAA 1997. If the trustee, pursuant to the trust deed, decides to pay salary to the employee on behalf of the employer, will the amounts paid to the employee (including any amounts of Pay As You Go instalments withheld) be included as assessable income of the employee under section 6-5 of the ITAA 1997? Yes Where the trustee, pursuant to the trust deed, pays amounts to the employee on behalf of the employer from repayments of a loan pursuant to the trust deed as salary 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. If the trustee, pursuant to the trust deed, decides to provide discounted rights to shares to the employee on behalf of the employer, will the discount to the market value of the rights provided to the employee be included as assessable income of the employee under section 83A-25 of the ITAA97? Yes The discounted rights to shares provided to you by the trustee on behalf of the company will constitute ESS interests, as defined under Schedule 1, item 1, subsection 83A-10(1) of the ITAA 1997. Any discount that an employee receives by acquiring an ESS interest below the market price is a benefit relating to employment, similar to salary or wages, and so would usually be considered income of the employee. The value of that discount is taxed under the provisions of Division 83A of the ITAA 1997. The discount is the market value of the ESS interests less any consideration paid or to be paid by the employee. Generally, any discount to the market value of ESS interests in shares or rights to shares provided under an employee share scheme is taxed upfront on acquisition. That means that the value of the discount must be included in an employee's assessable income for that income year. [Schedule 1, item 1, section 83A-15 and subsection 83A-25(1)].

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