12 Oct 09 Employee share scheme beneficiary not entitled to franking credits - Soubra
The AAT has held that the Commissioner was correct in ruling that a beneficiary of an employee share acquisition scheme trust would not be entitled to her share of the franking credits on franked distributions received by the trust because she was not a qualified person within the meaning of Division 1A of Part IIIAA of ITAA 1936.
Under the scheme, loans were made to eligible employees to enable them to apply to the trustee for the issue of units in the trust. The trustee used the moneys received and accepted exclusively to acquire investments, which werre allocated to units in the trust. However, the issue of a unit and the specifying of approved investments referrable to a unit did not confer any interest in any particular part of the trust fund, nor in any moneys, investments or property forming part of the trust fund, except in the case of cancellation of entitlements and distribution of income of the fund. Units entitled the holder to receive a distribution in respect of each accounting period in accordance with the trust deed.
To be a qualified person, the taxpayer was required to have held an interest in the shares contained in the trust for a continuous period of not less than 45 days; and in calculating the number of days for which the taxpayer continuously held the interest, any days on which the taxpayer had materially diminished risks of loss or opportunities for gain in respect of the interest were to be excluded. Amongst other things, the question was whether the taxpayer had a fixed interest in the trust, that is, whether the taxpayer's interest was constituted by a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding.
The AAT summarised its findings at para 56 as follows:
"The problem for Ms Soubra is that under the trust deed as currently drafted, there exists a three-year vesting period. That, by itself, is sufficient to render Ms Soubra’s interest defeasible. On that basis alone, she cannot satisfy the requirement that her interest constitutes a fixed interest for the purposes of the 1936 Act. However, in addition to that, the exercise of the trustee’s powers in relation to investments; the cancellation of entitlements of unit holders under the trust deed; and the reduction of the value of the interest which may occur on redemption, all render Ms Soubra’s interest defeasible. Finally, having regard to the matters set out in s 160APHL(14)(c)(i)-(iv) of the 1936 Act, I do not consider it appropriate to exercise the Commissioner’s discretion to regard Ms Soubra’s interest as vested and indefeasible."
Soubra and FCT  AATA 775 (AAT, Fice M, 8 October 2009).
For a copy of the decision, go here