Taxation Determination TD 2017/26
Date of effect: 1 January 2018

What this ruling is about: 1. This Determination sets out when a dividend equivalent payment is assessable as remuneration, and therefore ordinary income, under section 6-5 of the Income Tax Assessment Act 1997 [1] (ITAA 1997) to an employee [2] (you) as an Australian resident participant of an employee share scheme (ESS) and beneficiary of a trust. [3] 2. A 'dividend equivalent payment' is a cash payment paid by a trustee of a trust to you. That cash payment is funded from dividends (or income from other sources) on which the trustee has been assessed [4] in previous income years because no beneficiary of the trust was presently entitled to the income. The amount of the dividend equivalent payment is ordinarily calculated by reference to the amount of the dividends (or other income) received by the trustee during a specified period, less the amount of tax paid by the trustee on that income.



Examples: Example 1: dividend equivalent payment for, or in respect of, services provided 4. A Co is an Australian resident company that carries on a business. 5. A Co establishes a trust for the purpose of providing shares (ESS interests) under an ESS to eligible Australian resident employees. 6. A Co makes a contribution to the trustee of the trust so the trustee can purchase and hold shares in A Co under the terms of the trust deed, plan handbook and invitation to the employees (together ESS agreement). 7. Under the terms of the ESS agreement an eligible employee is a beneficiary of the trust and has an interest in the trust that is a right to acquire the shares being held by the trustee. This interest does not entitle the employee to any income generated by the shares over the course of the ESS until such time as the employee satisfies certain conditions set by A Co that are specific to the employee's performance and their continuous employment with A Co being three years (performance conditions). [5] 8. Upon satisfying the performance conditions the employee is entitled to own the shares held by the trustee of the trust. In addition, the employee is entitled to receive from the trustee an amount reflecting the dividends (post-tax) the employee would have earned had the employee owned the shares from the day the employee received their interest in the trust. The trustee funds this payment from trust capital. According to the ESS agreement, this payment can be made by the trustee or the employer. 9. As the dividend equivalent payment will be made to the employee because the employee has satisfied certain performance conditions, these payments are made to the employee for, or in respect of, services provided by the employee (they are, in substance, a reward for performance). They are assessable to the employee under section 6-5. While the quantum of the payment reflects a dividend equivalent that may have been received had the employee acquired the shares at the outset of the arrangement, this is merely a calculation mechanism and does not reflect the character of the payment in the recipient's hands. The character of the payment in the employee's hands is remuneration. | Example 2: dividend equivalent payment not for, or in respect of, services provided 10. Assume the same facts as Example 1. However, separate to the terms and conditions in the ESS agreement, the trust deed also confers an absolute power on the trustee to make a dividend equivalent payment to a beneficiary at the trustee's discretion. The trustee takes no recommendation from A Co and has no regard to the continuing service of an employee, or the satisfaction of any performance conditions, before it makes such a payment. However, the trustee is only able to make such a payment once certain vesting conditions are satisfied. A beneficiary can receive the payment even if they are no longer an employee. The payment can only be made by the trustee. 11. If the trustee makes a dividend equivalent payment in exercising its discretionary power under the trust deed [5A] , the payment will not be assessable to an employee as remuneration under section 6-5. This is because the payment is received in their capacity as a beneficiary of the trust. The payment would have only a distant causal connection to an employee's employment and, therefore, would not be remuneration. Date of effect 12. This Determination applies to dividend equivalent payments where they are paid under the terms and conditions attached to ESS interests [6] granted on or after 1 January 2018. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). 13. If you are granted an ESS interest (including a right that later becomes a right to acquire a beneficial interest in a share for the purposes of section 83A-340 [7] ) prior to 1 January 2018, and the terms and conditions attached to your ESS interest include eligibility to receive a dividend equivalent payment, the Commissioner's general administrative practice will be to treat any such dividend equivalent payments paid to you as not assessable to you as ordinary or statutory income. This is conditional on the dividends or other income (that the dividend equivalent payment is calculated on) being assessed to the trustee under section 99A of the ITAA 1936 in the income year the dividends (or other income) were received. Commissioner of Taxation 20 December 2017 When will a dividend equivalent payment paid to you have the character of remuneration? 14. A dividend equivalent payment made to you by a trustee out of an amount assessed to the trustee in an earlier income year is not an amount subject to tax under the trust assessing provisions. 15. Trust distributions which are not dealt with by the trust assessing provisions can be assessed as ordinary income to you if they bear that character in your hands. Division 6 of Part III of the ITAA 1936 is not an exclusive code in assessing distributions from a trust. [8] 16. Benefits (in the form of money or money's worth) that you receive for, or in respect of, services you provide as an employee, or, similarly, payments which have a sufficient connection with your employment, will be characterised as remuneration and therefore ordinary income. [9] 17. The character of the benefit must be determined in the hands of the recipient. [10] It is irrelevant whether: When is a dividend equivalent payment for, or in respect of, services you provide as an employee, or when does the payment have a sufficient connection with your employment? 18. It is not necessarily the case that a dividend equivalent payment will have the necessary connection with your employment just because you are an employee at the time you receive it. For instance, if you receive the payment other than in your capacity as an employee, the payment is unlikely to be for, or in respect of, services provided as an employee, as the consideration for the dividend equivalent payment is not your services. [15] 19. Factors that indicate a dividend equivalent payment is for, or in respect of, your services as an employee include the following: 20. Factors that indicate a dividend equivalent payment is not for, or in respect of, services you provide as an employee include the following: 21. The Commissioner will accept that a dividend equivalent payment is not for, or in respect of, services provided as an employee, and therefore is not assessable to you as remuneration under section 6-5, if all of the following are satisfied in relation to the payment: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Previously released in draft form as TD 2017/D2 Previously released in draft form as PCG 2017/D9

Appendix: When will a dividend equivalent payment paid to you have the character of remuneration?: 14. A dividend equivalent payment made to you by a trustee out of an amount assessed to the trustee in an earlier income year is not an amount subject to tax under the trust assessing provisions. 15. Trust distributions which are not dealt with by the trust assessing provisions can be assessed as ordinary income to you if they bear that character in your hands. Division 6 of Part III of the ITAA 1936 is not an exclusive code in assessing distributions from a trust. [8] 16. Benefits (in the form of money or money's worth) that you receive for, or in respect of, services you provide as an employee, or, similarly, payments which have a sufficient connection with your employment, will be characterised as remuneration and therefore ordinary income. [9] 17. The character of the benefit must be determined in the hands of the recipient. [10] It is irrelevant whether: | When is a dividend equivalent payment for, or in respect of, services you provide as an employee, or when does the payment have a sufficient connection with your employment?: 18. It is not necessarily the case that a dividend equivalent payment will have the necessary connection with your employment just because you are an employee at the time you receive it. For instance, if you receive the payment other than in your capacity as an employee, the payment is unlikely to be for, or in respect of, services provided as an employee, as the consideration for the dividend equivalent payment is not your services. [15] 19. Factors that indicate a dividend equivalent payment is for, or in respect of, your services as an employee include the following: 20. Factors that indicate a dividend equivalent payment is not for, or in respect of, services you provide as an employee include the following:


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. | [ Note: This is a consolidated version of this document. Refer to the ATO Legal Database ( ato.gov.au/law ) to check its currency and to view the details of all changes.] | 3. A dividend equivalent payment is assessable to you as remuneration (and therefore ordinary income) under section 6-5 when you receive such a payment for, or in respect of, services you provide as an employee, or similarly, where the payment has a sufficient connection with your employment. | Appendix 2 - Compliance approach: This Appendix sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow the advice in this appendix in good faith and consistently with the ruling section, the Commissioner will administer the law in accordance with this approach.


Related rulings: TR 2006/10 TD 2016/17 TD 2019/13
Legislative references: ITAA 1936 ITAA 1936 Div 6 Pt III ITAA 1936 99A ITAA 1936 99B(1) ITAA 1936 99B(2)(c)(ii) ITAA 1936 318 ITAA 1997 ITAA 1997 6-5 ITAA 1997 83A-10 ITAA 1997 83A-325 ITAA 1997 83A-340 ITAA 1997 83A-340(1)
Case references: Blank v. Federal Commissioner of Taxation (2016) 258 CLR 439 [2016] HCA 42 (2016) 104 ATR 41 2016 ATC 20-587