Class Ruling CR 2007/112
Date of effect: 1 July 2006

What this ruling is about: 1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates. Relevant provision(s) 2. The relevant provisions dealt with in this Ruling are: All subsequent references in this Ruling are to the ITAA 1936, unless stated otherwise. Class of entities 3. The class of entities to which this Ruling applies is all persons who are authorised representatives of Consultum Financial Advisers Pty Ltd (Consultum) and who receive an award under the IOOF Equity Participation Program (the Plan). In this Ruling, a person belonging to this class of entities is referred to as a 'participant'. Qualifications 4. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 12 to 24 of this Ruling. 5. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 6. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Class of entities or scheme: 3. The class of entities to which this Ruling applies is all persons who are authorised representatives of Consultum Financial Advisers Pty Ltd (Consultum) and who receive an award under the IOOF Equity Participation Program (the Plan). In this Ruling, a person belonging to this class of entities is referred to as a 'participant'. | Qualifications: 4. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 12 to 24 of this Ruling. 5. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 6. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: 7. This Ruling applies from 1 July 2006. The Ruling applies to all entities within the specified class who enter into the specified scheme, subject to there being no change in the scheme or in the entities involved in the scheme. 8. The Ruling does 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 Ruling. Furthermore, the Ruling only applies to the extent that: 9. If this Ruling is inconsistent with a later public or private ruling, the relevant class of entities may rely on either ruling which applies to them (item 1 of subsection 357-75(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)). 10. If this Ruling is inconsistent with an earlier private ruling, the private ruling is taken not to have been made if, when the Ruling is made, the following two conditions are met: 11. If the above two conditions do not apply, the relevant class of entities may rely on either ruling which applies to them (item 3 of subsection 357-75(1) of Schedule 1 to the TAA). 12. The following description of the scheme is based on information provided by KPMG (the applicant). The following documents, or relevant parts of them form part of and are to be read with the description: 13. IOOF Holdings Limited (IOOF) is an Australian resident company listed on the Australian Securities Exchange (ASX) and conducts a financial services business through its various subsidiary companies, which includes Consultum. 14. The authorised representatives (individual advisers) of Consultum provide financial advice to clients of Consultum under agreements entered into with Consultum. Each individual adviser is a party to a contract with Consultum, either: 15. The applicant has advised that: 16. IOOF has introduced the Plan to provide an incentive for individual advisers to maintain their relationship with the IOOF group. Under the Plan, and at the discretion of the IOOF board (the board), certain eligible individual advisers who are identified as key contributors to the business of the IOOF group will be offered an award based on their financial performance. Such offers, which are proposed to be made annually, will constitute an offer to participate in the Plan. 17. Participants in the Plan, who are eligible individual advisers who accept an offer, will be granted an award. An award, which is subject to vesting conditions, will entitle a participant to either acquire fully paid ordinary shares in IOOF (shares) or receive an equivalent amount in cash. An award does not confer any legal or equitable right or interest in shares. 18. The board has the absolute discretion to determine whether an award, granted to a participant that has met the vesting conditions, will be satisfied by the issue of shares or the payment of cash. 19. For an award to vest, a participant must, during the period of three years after the award is granted: 20. Where an award meets the vesting conditions, a vesting notice will issue to a participant advising them of: 21. The issue or transfer of shares or a cash payment to a participant will be made after the issue of a vesting notice. 22. If an award does not meet the vesting conditions, the participant will not receive a vesting notice and, accordingly, will not be entitled to shares or cash in relation to that award. 23. The allocation of shares or cash in relation to an award that vests is calculated using a formula based on brokerage/fees produced by a participant over the financial year prior to the granting of an award. 24. Participants do not pay any consideration for an award at the time of the grant of the award, or at the time the award is converted to shares or cash. | Where an award is granted: 25. Where a participant is granted an award under the Plan: | Where a share is issued or transferred: 26. Where a share is issued or transferred to a participant as a consequence of the vesting of an award granted to the participant under the Plan, the participant will acquire a share under an employee share scheme for the purposes of Division 13A. 27. Where a participant acquires a share under the Plan, any discount given on the share is included in the assessable income of the participant in the year of income in which the share is acquired, pursuant to subsection 139B(2). | Where cash is paid: 28. Where a participant is paid an amount of cash as a consequence of the vesting of an award granted to the participant under the Plan, the amount of cash paid is ordinary income and is included in the assessable income of the participant in the year of income in which it is derived (pursuant to section 6-5 of the ITAA 1997). 29. Where a participant uses the receipts method of accounting for income, the amount of the cash payment is derived when it is actually paid to the participant or if not paid directly, when it is dealt with on their behalf or as they direct. 30. Where a participant uses the earnings method of accounting for income, the amount of the cash payment is derived when the vesting notice is issued to the participant. Commissioner of Taxation 5 December 2007 | A right for the purposes of Division 13A: 31. The expression 'right' as used in Division 13A is not defined. However, as 'right' and 'right to acquire a share' are used interchangeably throughout Division 13A, the Commissioner considers that a 'right' should be taken to mean a 'right to acquire a share'. 32. Where, at the time a right is granted to a taxpayer: the Commissioner considers the 'right' to be a right for the purposes of Division 13A. 33. However, where a taxpayer acquires a right under a scheme that purports to be a right to acquire a share, and the scheme operates so that it is not the taxpayer who makes the ultimate decision as to whether they actually receive a share (or cash in lieu of a share), the right granted will not be considered to be a right to acquire a share for the purposes of Division 13A. 34. Under the Plan rules, the board may, at its discretion, satisfy a participant's vested rights by either the payment of cash or the issue or transfer of shares. 35. Thus, the Commissioner considers that a participant will not acquire a right for the purposes of Division 13A at the time a right, in the form of an award, is granted to a participant under the Plan. | Fringe benefit: 36. The definition of 'benefit' in subsection 136(1) of the FBTAA includes any right, privilege, service or facility. 37. Therefore, the grant of an award to a participant under the Plan, which is a right (albeit not a right to acquire shares for the purposes of Division 13A of the ITAA 1936), comes within the definition of a 'benefit' for the purposes of the FBTAA. However, for such a benefit to be considered a 'fringe benefit' for the purposes of the FBTAA, the primary criterion is that it must be provided 'in respect of employment' of an employee. 38. The expression 'in respect of' is defined in subsection 136(1) of the FBTAA as 'in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to that employment'. The term 'in respect of employment' has been considered by the courts on numerous occasions. In J & G Knowles & Associates Pty Limited v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22; it was noted that the term 'in respect of employment' includes benefits where: 39. The applicant has advised that neither IOOF nor Consultum have a PAYG withholding obligation under Part 2-5 of Schedule 1 of the TAA in relation to any payments to participants (individual advisers) for services provided. As a consequence, it can be concluded that in relation to such payments by IOOF or Consultum, they do not have a sufficient or material connection with the employment of a participant. 40. Therefore, such a payment would not be considered to be made in respect of the employment of a participant within the meaning of the FBTAA. 41. Further, where an award is granted to a participant under the Plan that, on vesting, may give rise to a payment of the kind mentioned above, the grant of the award will also not have the necessary connection with employment and, therefore, will not be a fringe benefit for the purposes of the FBTAA. 42. Accordingly, the grant of an award to a participant under the Plan will not at the time of grant, or any other time, give rise to a reportable fringe benefits amount for the participant, for the purposes of Part XIB of the FBTAA. | Non-cash business benefit: 43. The definition of 'services' for the purposes of the non-cash business benefit provisions (subsection 21A(5) of the ITAA 1936) is virtually identical to the definition of 'benefit' for the purposes of the FBTAA. 44. Therefore, where a participant is granted an award under the Plan which, as described in paragraph 37 of this Ruling, is a benefit for the purposes of the FBTAA, it will also come within the definition of 'services' for the purposes of section 21A of the ITAA 1936. 45. Where an individual contractor is granted a right or rights to remuneration (pre-existing remuneration rights) that are an intrinsic part of a contract for services that ultimately results in the receipt by the contractor of remuneration which is subject to tax under the relevant tax laws as: the pre-existing remuneration rights, whilst it is accepted that they come within the definition of 'services' for the purposes of section 21A, are not treated as non-cash business benefits for the purposes of section 21A. 46. Thus, where a participant is granted an award under the Plan they will not receive a non-cash business benefit for the purposes of section 21A. | Acquiring a share under an employee share scheme: 47. Section 139C effectively provides that a taxpayer acquires a share under an employee share scheme if the share is: 48. A person will acquire a share when, amongst other things, the share is issued or transferred to them. Therefore, where the award vesting conditions have been met and the board decides to satisfy the award by the issue or transfer of shares to the participant, such shares will be acquired by the participant within the meaning of section 139G. 49. Further, where such shares are acquired by a participant as a consequence of an award vesting, it is accepted that the shares are acquired directly or indirectly in relation to (financial advisory) services provided (within the meaning of subsection 139C(2)) by the participant to Consultum. 50. The applicant has advised that where an award is converted to shares and the shares are issued or transferred to a participant under the Plan, the participant does not provide any consideration. Therefore, where a participant acquires a share under the Plan, they will acquire it for less than market value for the purposes of subsection 139C(3). 51. As the requirements specified in paragraph 47 of this Ruling are satisfied, the Commissioner accepts that where a participant acquires a share under the Plan, they will acquire a share under an employee share scheme for the purposes of Division 13A. | Inclusion of the discount on a share in assessable income: 52. Where a taxpayer acquires a share under an employee share scheme, any discount given in relation to the share will be included in the assessable income of the taxpayer, pursuant to subsection 139B(1). 53. As a participant who acquires a share under the Plan will acquire the share under an employee share scheme, subsection 139B(2) will determine when the discount is to be included in the assessable income of the participant, unless the share is a 'qualifying share' in respect of which the participant has not made an election under section 139E. 54. In accordance with subsection 139CD(3), to be a 'qualifying share' a share must be in a company that is the employer of the taxpayer or a holding company of the employer. As shares acquired by participants under the Plan are shares in IOOF, which is not the employer of participants or a holding company of the employer of participants, the shares will not be qualifying shares. 55. Therefore, subsection 139B(2) applies such that the discount on a share is included in the participant's assessable income in the year of income in which the share is acquired by the participant under the Plan. 56. The amount of the discount to be included in a participant's assessable income is determined by subsection 139CC(2), and is the market value of the share (worked out under Subdivision F of Division 13A) at the time it was acquired (as no consideration is provided by the participant). | Inclusion of cash in assessable income: 57. Under subsection 6-5(1) of the ITAA 1997, an amount is assessable income if it is income according to ordinary concepts (ordinary income). 58. In determining whether an amount is ordinary income, the courts have established the following principles: 59. Relevant factors in determining whether an amount is ordinary income include: 60. In consideration of the above factors, where a participant is paid a cash amount under the Plan, the cash amount is paid by Consultum either directly or indirectly in relation to services rendered by the participant and is contingent on the participant meeting the award vesting conditions which relate to the provision of those services. Therefore, cash received by a participant under the Plan is assessable as ordinary income for the purposes of section 6-5 of the ITAA 1997. 61. Under subsections 6-5(2) and (3) of the ITAA 1997, taxpayers must include in their assessable income the ordinary income derived during the income year. 62. The question of when ordinary income is derived by a taxpayer is determined by reference to the method of accounting that, in the circumstances, is appropriate for the taxpayer. Receipts method 63. Under the receipts method (or cash received basis), income is derived when it is actually received, or when it is received constructively, for the purposes of subsection 6-5(4) of the ITAA 1997. The effect of that subsection is that income is taken to be derived by a person, even if it is not actually paid over, when it is dealt with on their behalf or as they direct. 64. Therefore, where a participant accounts for income using the receipts method, they will derive the cash amount when it is actually paid to the participant or if not paid directly, when it is dealt with on their behalf or as they direct. Earnings method 65. Under the earnings method (or accruals method), income is derived when it is earned. The point of derivation occurs when a recoverable debt is created. 66. The applicant has advised that for the purposes of the earnings method, where an award granted to a participant is to be satisfied by a cash payment, a recoverable debt will arise at the time of the issue of a vesting notice to a participant. 67. Therefore, under these circumstances, a participant will derive ordinary income for the purposes of section 6-5 of the ITAA 1997 at the time that a vesting notice is issued to them and such amount will be included in their assessable income in the year of income in which the vesting notice is issued. 68. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: Where an award is granted: 25. Where a participant is granted an award under the Plan: | Where a share is issued or transferred: 26. Where a share is issued or transferred to a participant as a consequence of the vesting of an award granted to the participant under the Plan, the participant will acquire a share under an employee share scheme for the purposes of Division 13A. 27. Where a participant acquires a share under the Plan, any discount given on the share is included in the assessable income of the participant in the year of income in which the share is acquired, pursuant to subsection 139B(2). | Where cash is paid: 28. Where a participant is paid an amount of cash as a consequence of the vesting of an award granted to the participant under the Plan, the amount of cash paid is ordinary income and is included in the assessable income of the participant in the year of income in which it is derived (pursuant to section 6-5 of the ITAA 1997). 29. Where a participant uses the receipts method of accounting for income, the amount of the cash payment is derived when it is actually paid to the participant or if not paid directly, when it is dealt with on their behalf or as they direct. 30. Where a participant uses the earnings method of accounting for income, the amount of the cash payment is derived when the vesting notice is issued to the participant. Commissioner of Taxation 5 December 2007


Appendix: A right for the purposes of Division 13A: 31. The expression 'right' as used in Division 13A is not defined. However, as 'right' and 'right to acquire a share' are used interchangeably throughout Division 13A, the Commissioner considers that a 'right' should be taken to mean a 'right to acquire a share'. 32. Where, at the time a right is granted to a taxpayer: the Commissioner considers the 'right' to be a right for the purposes of Division 13A. 33. However, where a taxpayer acquires a right under a scheme that purports to be a right to acquire a share, and the scheme operates so that it is not the taxpayer who makes the ultimate decision as to whether they actually receive a share (or cash in lieu of a share), the right granted will not be considered to be a right to acquire a share for the purposes of Division 13A. 34. Under the Plan rules, the board may, at its discretion, satisfy a participant's vested rights by either the payment of cash or the issue or transfer of shares. 35. Thus, the Commissioner considers that a participant will not acquire a right for the purposes of Division 13A at the time a right, in the form of an award, is granted to a participant under the Plan. | Fringe benefit: 36. The definition of 'benefit' in subsection 136(1) of the FBTAA includes any right, privilege, service or facility. 37. Therefore, the grant of an award to a participant under the Plan, which is a right (albeit not a right to acquire shares for the purposes of Division 13A of the ITAA 1936), comes within the definition of a 'benefit' for the purposes of the FBTAA. However, for such a benefit to be considered a 'fringe benefit' for the purposes of the FBTAA, the primary criterion is that it must be provided 'in respect of employment' of an employee. 38. The expression 'in respect of' is defined in subsection 136(1) of the FBTAA as 'in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to that employment'. The term 'in respect of employment' has been considered by the courts on numerous occasions. In J & G Knowles & Associates Pty Limited v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22; it was noted that the term 'in respect of employment' includes benefits where: 39. The applicant has advised that neither IOOF nor Consultum have a PAYG withholding obligation under Part 2-5 of Schedule 1 of the TAA in relation to any payments to participants (individual advisers) for services provided. As a consequence, it can be concluded that in relation to such payments by IOOF or Consultum, they do not have a sufficient or material connection with the employment of a participant. 40. Therefore, such a payment would not be considered to be made in respect of the employment of a participant within the meaning of the FBTAA. 41. Further, where an award is granted to a participant under the Plan that, on vesting, may give rise to a payment of the kind mentioned above, the grant of the award will also not have the necessary connection with employment and, therefore, will not be a fringe benefit for the purposes of the FBTAA. 42. Accordingly, the grant of an award to a participant under the Plan will not at the time of grant, or any other time, give rise to a reportable fringe benefits amount for the participant, for the purposes of Part XIB of the FBTAA. | Non-cash business benefit: 43. The definition of 'services' for the purposes of the non-cash business benefit provisions (subsection 21A(5) of the ITAA 1936) is virtually identical to the definition of 'benefit' for the purposes of the FBTAA. 44. Therefore, where a participant is granted an award under the Plan which, as described in paragraph 37 of this Ruling, is a benefit for the purposes of the FBTAA, it will also come within the definition of 'services' for the purposes of section 21A of the ITAA 1936. 45. Where an individual contractor is granted a right or rights to remuneration (pre-existing remuneration rights) that are an intrinsic part of a contract for services that ultimately results in the receipt by the contractor of remuneration which is subject to tax under the relevant tax laws as: the pre-existing remuneration rights, whilst it is accepted that they come within the definition of 'services' for the purposes of section 21A, are not treated as non-cash business benefits for the purposes of section 21A. 46. Thus, where a participant is granted an award under the Plan they will not receive a non-cash business benefit for the purposes of section 21A. | Acquiring a share under an employee share scheme: 47. Section 139C effectively provides that a taxpayer acquires a share under an employee share scheme if the share is: 48. A person will acquire a share when, amongst other things, the share is issued or transferred to them. Therefore, where the award vesting conditions have been met and the board decides to satisfy the award by the issue or transfer of shares to the participant, such shares will be acquired by the participant within the meaning of section 139G. 49. Further, where such shares are acquired by a participant as a consequence of an award vesting, it is accepted that the shares are acquired directly or indirectly in relation to (financial advisory) services provided (within the meaning of subsection 139C(2)) by the participant to Consultum. 50. The applicant has advised that where an award is converted to shares and the shares are issued or transferred to a participant under the Plan, the participant does not provide any consideration. Therefore, where a participant acquires a share under the Plan, they will acquire it for less than market value for the purposes of subsection 139C(3). 51. As the requirements specified in paragraph 47 of this Ruling are satisfied, the Commissioner accepts that where a participant acquires a share under the Plan, they will acquire a share under an employee share scheme for the purposes of Division 13A. | Inclusion of the discount on a share in assessable income: 52. Where a taxpayer acquires a share under an employee share scheme, any discount given in relation to the share will be included in the assessable income of the taxpayer, pursuant to subsection 139B(1). 53. As a participant who acquires a share under the Plan will acquire the share under an employee share scheme, subsection 139B(2) will determine when the discount is to be included in the assessable income of the participant, unless the share is a 'qualifying share' in respect of which the participant has not made an election under section 139E. 54. In accordance with subsection 139CD(3), to be a 'qualifying share' a share must be in a company that is the employer of the taxpayer or a holding company of the employer. As shares acquired by participants under the Plan are shares in IOOF, which is not the employer of participants or a holding company of the employer of participants, the shares will not be qualifying shares. 55. Therefore, subsection 139B(2) applies such that the discount on a share is included in the participant's assessable income in the year of income in which the share is acquired by the participant under the Plan. 56. The amount of the discount to be included in a participant's assessable income is determined by subsection 139CC(2), and is the market value of the share (worked out under Subdivision F of Division 13A) at the time it was acquired (as no consideration is provided by the participant). | Inclusion of cash in assessable income: 57. Under subsection 6-5(1) of the ITAA 1997, an amount is assessable income if it is income according to ordinary concepts (ordinary income). 58. In determining whether an amount is ordinary income, the courts have established the following principles: 59. Relevant factors in determining whether an amount is ordinary income include: 60. In consideration of the above factors, where a participant is paid a cash amount under the Plan, the cash amount is paid by Consultum either directly or indirectly in relation to services rendered by the participant and is contingent on the participant meeting the award vesting conditions which relate to the provision of those services. Therefore, cash received by a participant under the Plan is assessable as ordinary income for the purposes of section 6-5 of the ITAA 1997. 61. Under subsections 6-5(2) and (3) of the ITAA 1997, taxpayers must include in their assessable income the ordinary income derived during the income year. 62. The question of when ordinary income is derived by a taxpayer is determined by reference to the method of accounting that, in the circumstances, is appropriate for the taxpayer. Receipts method 63. Under the receipts method (or cash received basis), income is derived when it is actually received, or when it is received constructively, for the purposes of subsection 6-5(4) of the ITAA 1997. The effect of that subsection is that income is taken to be derived by a person, even if it is not actually paid over, when it is dealt with on their behalf or as they direct. 64. Therefore, where a participant accounts for income using the receipts method, they will derive the cash amount when it is actually paid to the participant or if not paid directly, when it is dealt with on their behalf or as they direct. Earnings method 65. Under the earnings method (or accruals method), income is derived when it is earned. The point of derivation occurs when a recoverable debt is created. 66. The applicant has advised that for the purposes of the earnings method, where an award granted to a participant is to be satisfied by a cash payment, a recoverable debt will arise at the time of the issue of a vesting notice to a participant. 67. Therefore, under these circumstances, a participant will derive ordinary income for the purposes of section 6-5 of the ITAA 1997 at the time that a vesting notice is issued to them and such amount will be included in their assessable income in the year of income in which the vesting notice is issued.


What this Ruling is about | NOT LEGALLY BINDING SECTION: | 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, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are 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. | ...there is a sufficient or material, rather than a causal connection or relationship between the benefit and the employment... | Appendix 2 - Detailed contents list


Legislative references: ITAA 1936 21A ITAA 1936 21A(5) ITAA 1936 Pt III Div 13A ITAA 1936 139B ITAA 1936 139B(1) ITAA 1936 139B(2) ITAA 1936 139C ITAA 1936 139C(1) ITAA 1936 139C(2) ITAA 1936 139C(3) ITAA 1936 139CC(2) ITAA 1936 139CD(3) ITAA 1936 139E ITAA 1936 Pt III Div 13A Subdiv F ITAA 1936 139G ITAA 1997 6-5 ITAA 1997 6-5(1) ITAA 1997 6-5(2) ITAA 1997 6-5(3) ITAA 1997 6-5(4) FBTAA 1986 FBTAA 1986 Part XIB FBTAA 1986 136(1) TAA 1953 TAA 1953 Sch 1 Pt 2-5 TAA 1953 Sch 1 357-75(1) Copyright Act 1968
Case references: J & G Knowles & Associates Pty Limited v. Federal Commissioner of Taxation (2000) 96 FCR 402 2000 ATC 4151 (2000) 44 ATR 22 [2000] FCA 196
Subject references: employee share scheme fringe benefit income derived non-cash business benefit rights