TD 2017/D2 was released on Thur 8.6.2017 and in it, the Commissioner proposes to rule that so called ‘dividend equivalent payments’, paid from a trustee of a ’employee share scheme’, can be assessed, to an employee beneficiary, as ordinary income’ under s6-5 of the ITAA 1997. [Here an ’employee share scheme’ is assumed to be one, under which the issue of ‘ESS Interests’ are assessed, under subdivision 83A-B or 83A-C of the ITAA 1997.]
On the face of it, any benefit (other than a capital benefit), that rewards to an employee’s services, is income according to ‘ordinary concepts’ and has the potential to be assessed as such.
On the other hand, there may be other provisions that say this ordinary income is not assessable (for instance, s6-25 which says that an amount will only be assessed once and that other non-Div 6 provisions have precedence over Division 6 of the ITAA 1997 itself).
Dividend equivalent payments
Having said this much, I will revert to the subject matter of this Draft Determination. It is about so called ‘dividend equivalent payments’ which are payments made, by the ESS trustee, to the employee/beneficiary, out of dividends, or other income, that the trustee derived, in a previous year and has been assessed to the trustee under s99A of the ITAA 1936 (because no beneficiary was presently entitled).
Beneficiaries exempted from tax on amounts already taxed to the trustee (s99B(2)(c)(ii))
Related to s99A, however, is 99B of the ITAA 1936, which deals with the degree to which a beneficiary will be assessed out of trust income that has already been assessed, to the trustee, under s99A. The effect of this section is to shield a beneficiary from being assessed, again, on an amount that the trustee has already been assessed on, under s99A. (Section 99B(1) will assess any resident beneficiary on the amount of trust property paid to them, but s99B(2) will reduce this by the amount that ‘represents’ an amount on which the trustee has already been assessed under s99A – s99B(2)(c)(ii).)
The Commissioner seems to miss the mark here, in para 27, where he says that it is the nature of the payment in the employee’s hands that matters. He no doubt means the remuneration nature of the payment, when bravely states that it it is irrelevant “whether it is paid from an amount previously assessed to the trustee under the trust assessing provisions in that earlier year”. In the employee’s hands, the nature of the payment is a receipt from a trustee that ‘represents’ tax paid income of the trust. Further, the Commissioner’s footnote 14 (supposedly supporting this claim) appears wrong to me. It says that s99B doesn’t apply unless the trust ‘is or was a non-resident trust’. I can see no such requirement in s99B(1). It seems to me that s99B(1) applies to all trusts, and so the s99B(2)(c)(ii) ‘carve-out’, for income already assessed to the trustee, is highly relevant.
So, can ‘dividend equivalent payments’ be assessed again as ordinary income?
The question, then, becomes, whether these ‘dividend equivalent payments’, that come from trust interests, issued ‘in relation to’ the employee’s employment, are ordinary income, and if so, can they still be assessed, as such, under s6-5 of the ITAA 1997?
Characterise as ‘remuneration’ or dividend return on interest in shares
It does not follow that, just because the trust ESS interest was issued ‘in relation to’ the employee’s employment, that the income coming from the shares is properly characterised as income from providing services (and is assessable, as such, under s8-1 of the ITAA 1997). Rather, I think it more likely that such payments would be characterised as income from the employee’s beneficial interest in those shares (and assessed, as such, under s44 of the ITAA 1936). If the ESS interest were a more obvious direct interest in shares, it seems likely to me that any dividends, paid to the employee, would be taxed as dividends (under s44). Certainly, that would be the result of s6-25, which gives non-core assessing provisions priority over s6-5 assessment of ‘ordinary income’. I would have thought that the result would be the same, if the ESS interest were a trust interest in particular shares, and the employee/beneficiary had an immediate beneficial right to any dividends declared and paid. to the trustee, on those shares. And so, I would be very surprised if the result would be different, just because the trustee pays these dividend equivalent amounts out of an after tax amount, that it received in a previous year.
Does s6-25 allow s6-5 override s99B(2)(c)(ii)?
The Commissioner is right to say, as he does in para 28, that the trust assessing provisions (in Div 6 of Part III of the ITAA 1936) are not an exclusive code for assessing trust receipts (not at least for beneficiaries; c/f for trustees under s96). But this does not leave assessment, under s6-5 (as ordinary income), wide open.
(a) First, the payments may not be characterised as remuneration for employment services (see above for possible characterisation as beneficial entitlements to after tax dividends).
(b) Second, the mere fact that an amount is ‘ordinary income’ doesn’t mean it can be assessed, as such, under s6-5. Section 6-25(2) says:
“Unless the contrary intention appears, the provisions of this Act [1] (outside this Part [2]) prevail over the rules about ordinary income.“
[1] – both the 1936 and 1997 Assessing Acts;
[2] – Part 1-3: ‘Core Provisions’ housing both Div 6 relating to ‘ordinary income’ and Div 8 ‘general deductions’
In my opinion, it is far from clear that s6-25, actually requires another provision to actually assess, before it can have precedence. In my opinion, it is open, and probable, that a provision, such as 99B(2)(c)(ii), would have precedence over s6-5, so the dividend income is not double taxed. This is a provision that expressly exempts a particular type of amount, from a wider class of amounts that it does assess. There is a clear legislative intention to not assess this ‘sub-type’ amount, which is for the compelling reason that this sub-type amount has already been subject to Australian income tax.
Date of intended effect (if finalised)
DATE OF EFFECT: When the final Determination is issued, it will apply to dividend equivalent payments where they are paid under the terms and conditions attached to ESS interests issued on or after 1 October 2017.
The ATO is taking ‘comments’ until 7 July 2017
If, like me, you have concerns about the correctness of this Draft Determination, the Commissioner is taking comments until 7 July 2017. They can be addressed to Michelle Maffia at michelle.maffia@ato.gov.au or +61 3 8601 9251.
[TD 2017/D2; FJM; LTN 107, 8/6/17]