Private ruling: Employee Share Scheme
Date of advice: 3 October 2016
Published: November 2016
Ruling period: Income tax year ending 30 June 2015 | Income tax year ending 30 June 2016 | Income tax year ending 30 June 2017 | Income tax year ending 30 June 2018 | Income tax year ending 30 June 2019

Ruling: Q1: Will the irretrievable contributions made by Company A Limited (Company A) or a subsidiary member of the Company A income tax consolidated group to Company B Pty Ltd (the Trustee), to fund the subscription for, or acquisition on-market of, ordinary Company A shares by Company A Limited Employee Share Trust (the EST) be assessable income of the EST within the meaning of section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will a capital gain or capital loss incurred by the Trustee of the EST, at the time shares held by the EST are delivered to employees, be disregarded under section 130-90 of the ITAA 1997? | A2: Yes. | Q3: If the Trustee of the EST holds, for the requisite period, Company A shares acquired by subscribing for new shares or purchasing shares on-market, will the Trustee of the EST be a qualified person within the meaning of section 207-145(1)(a) of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: Company A is an Australian company. As part of its remuneration strategy, Company A has established a long term incentive plan, under which Participants are granted rights to acquire Company A ordinary shares (Performance Rights) or an equivalent cash payment in lieu. Performance Rights are granted for nil consideration. Company A also operates a Deferred Short Term Incentive (STI) scheme. Equity Incentive Plan Company A Equity Incentive Plan (EIP) operates as follows: • At the discretion of the Board, eligible employees are invited to participate in the EIP. • Performance Rights or Deferred STI Rights (collectively Awards) are issued in accordance with the guidelines established by Company A's Board. • Performance Rights may vest subject to a specific performance period, with both employee service requirements and performance conditions attached to the vesting of Performance Rights. • Deferred STI Rights must first meet a "gateway" condition prior to any rights being granted. Following the grant, the Deferred STI Rights may vest subject to a specific vesting period, with employee service requirements attaching to the vesting of Deferred STI Rights. • Upon vesting, Participants will acquire one ordinary Company A share for each vested Performance Right and Deferred STI Right, with no amount being payable to acquire the shares. • Where the Company A Board has the discretion to make a payment to a Participant in lieu of an allocation of Share upon vesting of Performance Rights and Deferred STI Rights, the Performance Rights and Deferred STI Rights will be "indeterminate rights" for the purposes of Division 83A of the ITAA 1997. Employee Share Trust Establishment of the Employee Share Trust An Employee Share Trust (EST) was established as a separate vehicle for the sole purpose of acquiring or subscribing for, delivering, allocating and holding shares in Company A for employees participating in the EIP. Reasons for establishing the EST The reasons for using a trust include: • A company is unable to hold its own shares. The EST is a vehicle which will enable Company A to effectively acquire and hold its own shares for the purposes of fulfilling is obligations resulting from existing grants under the EIP. • The EST will facilitate the acquisition of shares either on-market or by a new issue of shares by Company A. • The EST provides an arm's length vehicle for acquiring and holding shares in Company A, either by way of new issue or acquiring on-market, i.e., providing flexibility relating to capital management. • The EST will be an efficient structure for giving effect to disposal restrictions and vesting conditions. As the Trustee of the EST is the legal owner, employees have no ability to deal in the shares whilst they are held in the Trust subject to restrictions/conditions. • Contribution to the EST to acquire shares before Awards vest may enable Company A to hedge against a potential increase in costs to satisfy Awards due to share price growth. • The EST provides the flexibility to acquire and hold shares that will be allocated to employees under the EIP. When vesting conditions are not met, Awards are forfeited and the EST enables shares held for such forfeited Awards to be 'recycled' to satisfy other grants of Awards. • The EST establishes independent records and accounts for participating employees. Obligations of the Trustee The sole activities of the Trustee will be acquiring shares for the purpose of providing them to participants on vesting of their Awards under the EIP and the administration of the EST. The Trustee will acquire shares at market value and will have the discretion to acquire them on-market or by subscribing for new shares. The EST is managed and administered so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997. Allocating shares to the EST Under the terms of the EST Deed, Company A will instruct the Trustee to subscribe for, purchase or allocate a number of shares specified in the notice. This instruction may occur at the time Awards are granted or at a later time depending on Company A's capital management strategy. The Trustee will, in accordance with instructions received and pursuant to the EIP rules, acquire deliver and allocate shares to participants provided that the Trustee receives sufficient payment to subscribe for or purchase shares and/or has sufficient unallocated shares available in the EST. Shares will not be allocated to employees under the EST and no interest in the shares will arise until the relevant vesting conditions are met and a Performance Right has vested. Company A may make irretrievable contributions to the EST as required, noting that contributions to the EST will only be made if the Awards are settled in shares via the EST (i.e. not by a cash payment in lieu). The amount of the contributions made by Company A will depend on: • the number of Awards granted to employees under the EIP • the number of shares held at the time by the Trustee, and • the likelihood of Awards vesting. Company A contribution to the EST All funds received by the Trustee from Company A will constitute accretions to the corpus of the EST and no participant will be entitled to receive a distribution of or from such funds. The funds will not be returned or repayable to Company A except where they are used for subscribing for shares in Company A. The Trustee will not be permitted to acquire any share or deliver any share to any participant, if to do so would contravene any applicable law. It will not be permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the EST in accordance with the EIP rules. It will not be permitted to carry out activities which result in the participants being provided with additional benefits other than the benefits that arise under the relevant plan rules. Company A is not a beneficiary under the EST Deed and any funds it contributes to the EST, other than specifically in the form of a loan, cannot be refunded, repaid or returned to Company A other than by way of the Trustee paying the issue price where it subscribes for shares in Company A. Company A will have no interest in the shares held by EST.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1936 Division 1A of Part IIIAA | Income Tax Assessment Act 1936 section 160APHN (repealed) | Income Tax Assessment Act 1936 subsection 160APHN(1) (repealed) | Income Tax Assessment Act 1936 subsection 160APHN(5) (repealed) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 6-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 subsection 104-85(1) | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 section 130-90 | Income Tax Assessment Act 1997 subsections 130-90(1) | Income Tax Assessment Act 1997 subsections 130-90(2) | Income Tax Assessment Act 1997 subsection 130-90(1A) | Income Tax Assessment Act 1997 section 207-145 | Income Tax Assessment Act 1997 section 207-150 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The irretrievable contributions by Company A Limited (Company A) or any subsidiary member of the Company A income tax consolidated group to Company B Pty Ltd (the Trustee), to fund the subscription for, or acquisition on-market of, ordinary Company A shares by Company A Limited Employee Share Trust (the EST) will not be assessable income of the EST under section 6-5 or 6-10. | Detailed Reasoning - Detailed reasoning: Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) defines net income in relation to a trust as follows, insofar as it is relevant: net income , in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions… Subsection 6-5(1) states: Your assessable income includes income according to ordinary concepts, which is called ordinary income. Further, subsection 6-10(1) states: Your assessable income also includes some amounts that are not ordinary income. Note: These are included by provisions about assessable income. For a summary of these provisions, see section 10-5. Section 6-5 provides that your assessable income includes income according to ordinary concepts which is also called ordinary income. The classic definition in Australian law was given by Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215. Chief Justice Jordan considered that: The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts. The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that: The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description. In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. ATO ID 2002/965 Income Tax -Trustee not assessable on employer contributions made to it under the employer's employee share scheme provides that the trustee of an employee share scheme (ESS) trust will not be assessed under section 6-5 on contributions made to the trust by an employer for the purpose of, and under, the employer's employee share scheme as the contributions constitute capital receipts to the trustee. The Company A EST Deed states that all funds received by the Trustee from Company A will constitute accretions to the corpus of the EST and no participant will be entitled to receive a distribution of or from such funds. The funds will not be returned or repayable to Company A except where they are used for subscribing for shares in Company A. Further, pursuant to the terms of the Company A EST Deed, the Trustee will, in accordance with instructions received from Company A subscribe for or acquire Company A shares on behalf of Participants and use the contributions made by Company A to do so. The general powers granted to the Trustee of the EST pursuant to the Company A EST Deed must be exercised only for the purposes of the Trust and only to give effect to the EIP which the EST supports. The contributions by Company A to the EST will be to procure shares to satisfy Awards made to the employees of Company A under the EIP. Accordingly, the irretrievable and non-refundable contributions made by Company A to the Trustee to subscribe for or acquire Company A shares will not be included in the assessable income of the EST under section 6-5, but will constitute capital receipts to the trustee. None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, the irretrievable and non-refundable contributions made by Company A to the Trustee of the EST to fund the subscription for, or acquisition on-market of, Company A shares under the EIP will not be included in the assessable income of the EST under section 6-10. | Summary: Capital gain tax (CGT) that arises for the Trustee at the time when the employees become absolutely entitled to Company A shares (CGT event E5), or when the Trustee disposes of the shares to the employees (CGT event E7) will be disregarded under section 130-90 provided the employees acquire the shares for the same or less than the cost base of the shares in the hand of the Trustee. | Detailed Reasoning - Detailed reasoning: Section 130-90 applies to disregard any capital gain or capital loss made by an employee share trust where certain criteria are met. Subsections 130-90(1) and (2) state: | Detailed Reasoning - 130-90(1): Disregard any capital gain or capital loss made by an employee share trust, or a beneficiary of the trust, to the extent that it results from a CGT event, if: (a) the CGT event is CGT event E5 or E7; and (b) the CGT event happens in relation to a share; and (c) the beneficiary had acquired a beneficial interest in the share by exercising a right; and (d) the beneficiary's beneficial interest in the right was an ESS interest to which Subdivision 83A-B or 83A-C (about employee share schemes) applied. | Detailed Reasoning - 130-90(2): Subsection (1A) or (1) does not apply if the beneficiary acquired the beneficial interest in the share for more than its cost base in the hands of the employee share trust at the time the CGT event happens. Employee share trust Subsection 130-85(4) states: An employee share trust , for an employee share scheme, is a trust whose sole activities are: (a) obtaining shares or rights in a company; and (b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of: (i) the company; or (ii) a subsidiary of the company; and (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). Paragraphs 130-85(4)(a) and (b) The beneficial interest in a share received by a Participant when an ordinary share in Company A is granted to them under the terms of the Company A EST Deed is an employee share scheme (ESS) interest within the meaning of subsection 83A-10(1). Subsection 83A-10(2) defines an ESS as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. The EIP is an ESS within the meaning of subsection 83A-10(2) because it is a scheme under which rights to acquire beneficial interests in ordinary shares in Company A are provided to employees in relation to the employees' employment. Company A has established the EST to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests acquired by those employees under the EIP. The beneficial interest in Company A share is itself provided under an ESS because it is provided under the same scheme under which the Awards are provided to the Participant in relation to the Participant's employment, being an ESS as defined in subsection 83A-10(2). Under the terms of the Company A EST Deed, Company A will instruct the Trustee to subscribe for, purchase or allocate a number of shares specified in the notice to be held by the Trustee in respect of an identified Participant or Participants. The Trustee must hold Shares on behalf of a Participant under the terms of the Trust Deed, the relevant EIP Rules and the Participant's relevant Terms of Participation. The Trustee will, in accordance with the instructions received by Company A and pursuant to EIP Rules, acquire, subscribe for and allocate Company A shares for the benefit of a Participant provided the Trustee receives sufficient funds to subscribe for or purchase shares and/or has sufficient unallocated shares available in the EST. Paragraphs 130-85(4)(a) and (b) are therefore satisfied because: • the Trust acquires shares in a company, namely Company A, and • the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in shares of Company A), are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Company A EST Deed and the EIP. Paragraph 130-85(4)(c) Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the EIP. ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c) • the opening and operation of a bank account to facilitate the receipt and payment of money; • the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee; • the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; • dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme; • the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares; • the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and • receiving and immediately distributing shares under a demerger. Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental. The Company A EST Deed states some specific things that the Trustee has the power to do but they are subject to the terms of the Company A EST Deed and all would be considered incidental for the purposes of paragraph 130-85(4)(c). The Company A EST Deed states that Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of an employee share trust (EST) for the purposes of section 130-85(4). Paragraph 130-85(4)(c) is satisfied as any activities undertaken by the Trustee other than the acquisition of Company A shares and the allocation of those shares to the employees in accordance with the Company A EST Deed, the EIP and the EIP Rules are merely incidental to operation of the EIP. The EST satisfies the definition of an EST in subsection 130-85(4) as: • the EST acquires shares in a company (being Company A) • the EST ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in shares of Company A), are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Company A EST Deed, the EIP and the EIP Rules, and • the Company A EST Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to a function of administering the Trust. Paragraph 130-90(1)(a) CGT event E5 is the CGT event that will apply under the terms of the EIP at the time the Participants become absolutely entitled to the Company A shares as against the Trustee. Therefore, paragraph 130-90(1)(a) will be satisfied. Paragraph 130-90(1)(b) Subsection 995-1(1) defines a share in a company to mean a share in the capital of a company. An ordinary share in Company A held by the Trustee and to which a Participant is entitled upon exercise of an Award is a share in the capital of a company (i.e. Company A). Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph. Paragraph 130-90(1)(c) Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a share (in Company A) by exercising a right (Award) under the EIP. Paragraph 130-90(1)(d) Subsection 83A-20(1) of Subdivision 83A-B states: This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount. Subsection 83A-10(2) defines an ESS as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. The EIP is an ESS within the meaning of subsection 83A-10(2) because it is a scheme under which rights to acquire beneficial interests in ordinary shares in Company A are provided to employees in relation to the employees' employment. Each Award is acquired for no cost. Subdivision 83A-B will apply to Awards acquired under the EIP as pursuant to subsection 83A-20(1) the ESS interests (i.e. Awards issued under the EIP) will be acquired under an ESS (for the reasons stated in the immediately preceding paragraph) at a discount. It should be noted however that whether a Participant is ultimately taxed upfront on some or all of any discount received (under Subdivision 83A-B) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C), will depend on which of the additional requirements in Subdivision 83A-B or Subdivision 83A-C have been satisfied. Under either circumstance paragraph 130-90(1)(d) will be satisfied. Accordingly, all the conditions in subsection 130-90(1) have been satisfied. Provided a Participant does not acquire the beneficial interest in the Company A share for more than its cost base in the hands of the Trust at the time that CGT event E5 happens, subsection 130-90(1) will apply. Subsection 130-90(1A) Subsections 130-90(1A) and 130-90(2) state: | Detailed Reasoning - 130-90(1A): Disregard any capital gain or capital loss made by an employee share trust to the extent that it results from a CGT event, if: (a) immediately before the event happens, an ESS interest is a CGT asset of the trust; and (b) either of the following subparagraphs applies: (i) the event is CGT event E5, and the event happens because a beneficiary of the trust becomes absolutely entitled to the ESS interest as against the trustee; (ii) the event is CGT event E7, and the event happens because the trustee disposes of the ESS interest to a beneficiary of the trust; and View history reference (c) Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest. | Detailed Reasoning - 130-90(2): Subsection (1A) or (1) does not apply if the beneficiary acquired the beneficial interest in the share for more than its cost base in the hands of the employee share trust at the time the CGT event happens. Under the EIP, Participants are invited to acquire shares in Company A, which will make contributions to the Trustee in order to allow it to either subscribe for shares from Company A or acquire them on-market to satisfy the offers made to the eligible employees under the EIP. Subsection 130-90(1A) provides that any capital gain or loss made by an EST is disregarded where it results from a CGT event if immediately before the event happens an ESS interest is a CGT asset of the trust and a beneficiary of the trust becomes absolutely entitled to the ESS interest (CGT event E5), or the trustee disposes of the ESS interest to a beneficiary of the trust (CGT event E7). For the reasons discussed above the Trust satisfies the definition of an EST in subsection 130-85(4). Paragraph 130-90(1A)(a) is satisfied as the shares held by the Trustee are ESS interests which are CGT assets of the Trust. CGT event E5 is the CGT event that will apply under the terms of the EIP at the time the Participant becomes absolutely entitled to the Company A shares as against the Trustee. Therefore paragraph 130-90(1A)(b) is satisfied. The EIP is an ESS for the purposes of Division 83A as it is an arrangement under which an ESS interest is provided to a Participant in relation to their employment in Company A in accordance with the Company A EST Deed. Subdivision 83A-C will apply to Company A shares acquired under the EIP (refer section 83A-105). Accordingly, paragraph 130-90(1A)(c) will be satisfied. Accordingly, all the conditions in subsection 130-90(1A) have been satisfied. Provided a Participant does not acquire the beneficial interest in the Company A share for more than its cost base in the hands of the Trust at the time that CGT event E5 happens, subsection 130-90(1A) will apply. Conclusion Under the circumstances of either subsection 130-90(1) or 130-90(1A) applying, section 130-90 operates to disregard any capital gain or loss made by the Trustee on any Company A share when a Participant becomes absolutely entitled to that share. CGT Event E7 Subsection 104-85(1) provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. However, section 106-50 provides that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it. A Participant, on allocation of the Company A shares by the Trustee, becomes absolutely entitled to those shares. In accordance with the Company A EST Deed each Participant is absolutely entitled to their Allocated Shares held by the Trustee on their behalf, and is entitled to all other benefits and privileges attached to, or resulting from holding, those Allocated Shares. Once a Participant is absolutely entitled to the Company A share held on their behalf by the Trust, section 106-50 will deem the disposal of the Company A share by the Trustee to be done by the Participant. Therefore, section 106-50 will apply, such that if the Trustee disposes of the Company A shares under the EIP (by way of transfer to a Participant), the Trustee will not make a capital gain or capital loss under CGT Event E7. | Summary: If the Shares are held for the requisite period the Trustee is a qualified person. | Detailed Reasoning - Detailed reasoning: The wording of sections 207-145 and 207-150 makes it clear that the rules in Division 1A of former Part IIIAA of the ITAA 1936 must be applied in determining whether a person is a 'qualified person' for the purposes of these provisions in respect of a franked distribution. Former subsection 160APHU(1) of the ITAA 1936 provides that where the trustee is not a qualified person in relation to a dividend, the beneficiary will also not be a qualified person in relation to that dividend. Therefore, a gross-up and tax credit entitlement for franked distributions received indirectly through a trust requires a trustee receiving the franked distribution to be a qualified person in relation to the distribution for the purposes of former Division 1A of Part IIIAA of the ITAA 1936. (Paragraph 207-145(1)(a)). Former Division 1A of Part IIIAA of the ITAA 1936 introduces two rules which must be satisfied before a taxpayer is entitled to a franked distribution. A taxpayer who satisfies both rules is a 'qualified person' in relation to the dividend. The first rule is the 'holding period rule' under which the taxpayer must hold shares at risk for a continuous period of more than 45 days. Former section 160APHL of the ITAA 1936 sets out when a beneficiary of a trust to whom dividend income has been distributed has an 'at-risk' position in the shares held by the trust. However, that section does not apply when determining whether the trustee itself has an 'at-risk' position. The Trust Deed and the EIP rules do not of themselves amount to any position taken by the Trustee, long or short, for the purposes of former section 160APHJ of the ITAA 1936. The conditional rights of participants to shares that arise from the EIP restrictions do not constitute positions of the Trustee. As the trust beneficiaries commonly have at least a conditional right to trust property, the legislation could not have intended that the rights of the beneficiaries would constitute the position of the trustee. The net position of a person with respect to shares is determined in accordance with the former subsection 160APHJ(5) of the ITAA 1936. However, former subsection 160APHJ(2) of the ITAA 1936, in defining the meaning of position provides: ....if a share, or an interest in a share, is an employee share scheme security, a condition attached to the share or interest, or a term of the document that created the interest, that prevents the holder of the share or interest from disposing of it or could result in the share or interest being forfeited is not a position in relation to the share or interest The Shares acquired by a Participant or the Trustee will be employee share scheme securities, as defined in former section 160APHD of the ITAA 1936, as they will be qualifying shares for the purposes of former Division 13A of Part III of the ITAA 1936. Although the definition refers to Division 13A of Part III of the ITAA 1936, which only applies to ESS interest awarded before 1 July 2009 (i.e. it has not been legislatively updated to refer to Division 83A of the ITAA 1997), the awards under the EIP should meet the conditions set out in that definition. As the terms of the EIP do not give rise to a position that may affect the calculation of the net position with respect to the shares, the operation of the EIP itself will not consequently result in a material diminution of risks or opportunities for gain with respect to the shares. The EIP will not prevent a participant or the trustee from being a qualified person for the purposes of section 207-145 with respect to dividends received by them on shares acquired under the plan, provided the shares are held for the requisite period of time during the relevant qualification period. The second rule that has to be satisfied is the 'related payments rule'. In order to be a qualified person in relation to a dividend (or distribution), the shareholder was at risk in respect of the shares for the relevant period or the taxpayer or an associate must not make a related payment in respect of the dividend (or distribution). Former section 160APHN of the ITAA 1936 explained a 'related payment'. Former subsection 160APHN(5) of the ITAA 1936 provided that the distribution by a trustee of a dividend to a beneficiary did not constitute the making of a related payment in respect of the dividend, which in the circumstances of this ruling means that the second rule is satisfied. Therefore, if the Shares are held for the requisite period the Trustee is a qualified person for the purposes of paragraph 207-145(1)(a).

Reasons for decision: All references are to the Income Tax Assessment Act 1997 unless otherwise stated.