Dividend equivalent payments made under an ESS

The Australian Taxation Office (ATO) has released guidance which deals with the tax treatment of ‘dividend equivalent payments’ made by a trustee under an Employee Share Scheme (ESS). For such purposes, the term ‘dividend equivalent payment’ refers to a cash payment paid by a trustee of a trust to an employee participant of an ESS (who is also a beneficiary of the trust) and that cash payment is funded from dividends (or income from other sources) that the trustee has been assessed on 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.

Draft Taxation Determination TD 2017/D2 concludes that a dividend equivalent payment is assessable as remuneration under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) when the payment made to the employee under an ESS by a trustee of a trust has a sufficient connection with the employee's employment.

Draft Practical Compliance Guideline PCG 2017/D9 sets out the safe harbour terms on which the Commissioner will accept, for income tax purposes, that a dividend equivalent payment made to an employee participant of an ESS is not connected with the employee's employment and accordingly not assessable to the employee under section 6-5 of the ITAA 1997.

When the tax determination and Guideline are finalised they will both apply to dividend equivalent payments paid under the terms and conditions attached to ESS interests issued on or after 1 October 2017.

AAT finds no entitlement to work-related deductions

In Hamilton and Commissioner of Taxation, the Administrative Appeals Tribunal (AAT) has affirmed the Commissioner's decision and held that the taxpayer was not entitled to work-related deductions in relation to tool expenses, mobile phone expenses and overtime meal expenses, as the taxpayer failed to provide any evidence substantiating his claims.