Taxation Determination TD 2010/10
Date of effect: 31 March 2010

What this ruling is about: This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. Ruling 1. Yes. The application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) [1] to any particular arrangement depends on a careful weighing of all the relevant circumstances of the arrangement and the relative weight that should be attached to each of those circumstances. Therefore, in the absence of all relevant information, it is not possible to state definitively whether Part IVA will apply to a particular scheme. However, it is the Commissioner's view that Part IVA is likely to apply to the employee savings plan arrangement as described in paragraph 5 of this Determination. 2. The Commissioner is likely to exercise his powers under subsection 177F(1) of the ITAA 1936 to cancel the tax benefit obtained by the employee and determine that the whole or part of the amounts contributed by the employer to the employee benefits trust was derived by the employee under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as salary or wages or bonus income in the income year in which they were contributed. 3. Where the Commissioner has determined that the contributed amounts were derived by the employee at the contribution time he may, if in his opinion it is fair and reasonable, make another determination under subsection 177F(3) adjusting the taxation situation of the employee. This determination is known as a 'compensating adjustment'. Whether a compensating adjustment will be made in respect of an employee savings plan arrangement needs to be considered on the facts of each case, and the requirements of subsection 177F(3) must be satisfied. The Commissioner will only be in a position to determine whether it is fair and reasonable that such an adjustment be made when the application of Part IVA is established. 4. Taxpayer Alert TA 2008/13 issued on 25 June 2008. It describes an employee savings plan remuneration arrangement entered into by an employee and employer whereby the employer agrees to contribute what would otherwise be salary or wages or bonus income of the employee to an employee benefits trust. The employee later receives bonus units from the trustee at the request of the employer. The bonus units have a value approximately equal to the amount contributed by the employer to the employee benefits trust in respect of the employee. 5. The arrangement exhibits the following features: 6. Whether assessable income is derived by the employee when the employer makes a contribution to the trust depends on the operation of the particular arrangement. If assessable income is not derived when a contribution is made, there is a tax benefit for the purposes of Part IVA. This Determination does not consider whether Part IVA can apply to an effective salary sacrifice arrangement as described in Taxation Ruling TR 2001/10. 7. The flow of funds is as follows: Date of effect 8. This Determination applies to years of income commencing both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 75 to 77 of Taxation Ruling TR 2006/10). Commissioner of Taxation 31 March 2010




Appendix: 9. Part IVA gives the Commissioner the discretion to cancel all or part of a tax benefit that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. Part IVA applies if: 10. The scheme under section 177A would consist of the steps taken to establish and conduct the employee savings plan. It is considered that the scheme would give rise to a tax benefit under paragraph 177C(1)(a). The objective circumstances of the scheme indicate that if the scheme had not been entered into it might reasonably be expected that the contributed sums would have been received by the employee as salary or wages or bonus income during the income year in which the employer contributed them to the employee benefits trust. The tax benefit is the amount of salary or wages or bonus income not included in the assessable income of the employee in the income year in which the contributions were made. 11. Section 177D provides that Part IVA applies to a scheme in connection with which the taxpayer has obtained a tax benefit if, after having regard to eight specified matters, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling the taxpayer to obtain the tax benefit. 12. Whether the section 177D purpose test is satisfied depends on all the facts and circumstances. However it would be reasonable to conclude, having regard to the matters set out in section 177D, that the sole or dominant purpose of the employee (and/or the promoter and/or the employer) in entering into or carrying out the scheme was for the employee to obtain a tax benefit. In this context the following general observations can be made: 13. The Commissioner is therefore likely in these circumstances to exercise his powers under subsection 177F(1) of the ITAA 1936 to cancel the tax benefit and determine that the whole or part of the contributed amounts was derived by the employee under section 6-5 of the ITAA 1997 as salary or wages or bonus income during the income year in which they were contributed. | Compensating adjustment: 14. Where payments received by the employee on the redemption of bonus units received by the employee are assessable as: the Commissioner acknowledges that the same income will be taxed twice where Part IVA of the ITAA 1936 applies to the employee at the contribution time. 15. Where Part IVA applies as described in paragraphs 9 to 13 of this Determination, the Commissioner may make a determination under paragraph 177F(1)(a) in relation to the contributed amounts so that they are assessable to the employee. 16. Where such a determination is made, the following consequences arise: 17. A determination for a compensating adjustment can be made where, in the opinion of the Commissioner, had the scheme not been entered into or carried out, an amount would not have been or would not be included in assessable income. The Commissioner must also be of the opinion that it is fair and reasonable that the compensating adjustment be made. 18. The existence of a tax benefit to which Part IVA applies entitles the Commissioner to make a Part IVA determination, to make a compensating adjustment, and to take action to give effect to either. It does not disturb the application of the income tax law unless, and only to the extent that, the Commissioner makes a Part IVA determination, and acts to give effect to it, or to give effect to a compensating adjustment that the Commissioner may also have made. The scheme of the anti-avoidance provisions is that in the absence of a determination by the Commissioner the law continues to apply on the basis that the scheme has been carried out, and not as if it were not carried out. 19. Whether a compensating adjustment will be made in respect of the inclusion of the redemption proceeds for the bonus units in the assessable income of the employee needs to be considered on the facts of each case, and the requirements of subsection 177F(3) must be satisfied. In general terms, where Part IVA applies to assess an employee on an amount contributed to an employee benefits trust in a particular year of income and where that amount also constitutes assessable income of the employee of a later year of income, the Commissioner would ordinarily conclude that it would be fair and reasonable to determine that the amount should not be included in the assessable income of the employee in the later year of income. This would also cover a case where an employee has included the redemption proceeds in assessable income in a later year of income as part of a net capital gain. Previously released in draft form as TD 2009/D5




Related rulings: TR 2001/10 TR 2006/10
Legislative references: ITAA 1936 ITAA 1936 Pt IVA ITAA 1936 177A ITAA 1936 177C ITAA 1936 177C(1)(a) ITAA 1936 177D ITAA 1936 177D(b)(i) ITAA 1936 177D(b)(ii) ITAA 1936 177D(b)(iii) ITAA 1936 177D(b)(iv) ITAA 1936 177D(b)(v) ITAA 1936 177D(b)(vi) ITAA 1936 177D(b)(vii) ITAA 1936 177D(b)(viii) ITAA 1936 177F ITAA 1936 177F(1) ITAA 1936 177F(1)(a) ITAA 1936 177F(3) ITAA 1997 6-5 ITAA 1997 15-2 TAA 1953
Other references: Taxpayer Alert TA 2008/13