Private ruling: Share plans
Date of advice: 10 February 2016
Published: April 2016
Ruling period: Income tax year ended 30 June 2016 | Income tax year ended 30 June 2017 | Income tax year ended 30 June 2018 | Income tax year ended 30 June 2019 | Income tax year ended 30 June 2020

Ruling: Q1: Will the irretrievable contributions made pursuant to the Company A Share Plan to Company B (Trustee), as trustee of the trust (ESP Trust) established by the Company A Share Plan Trust Deed (ESP Trust Deed), to fund the acquisition of Company A shares by the Trustee in accordance with the ESP Trust Deed be assessable income of the ESP Trust under sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will a capital gain or capital loss that arises for the Trustee of the ESP Trust at the time the Participants become absolutely entitled to a Company A share under the Company A Share Plan be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Company A share for the same or less than the cost base of the Company A share in the hands of the Trustee? | A2: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Company A is listed on the Australian Securities Exchange (ASX). In 20XX the Company A Share Plan was established to reward, retain and motivate employees and to encourage participation by employees of Company A through share ownership. Company A maintains a strong focus on the attraction, retention and motivation of staff to facilitate the continued growth of the company over the short to medium term. Fundamental to this growth strategy is the trust (ESP Trust) which was established on in 20XX by the Company A Share Plan Trust Deed (ESP Trust Deed) to administer the Company A Share Plan. Company A is likely to implement other equity plans in the future which would also likely be administered by the ESP Trust. Company A Share Plan The Company A Share Plan was implemented by the Company A Board in 20XX and is governed by the Company A Share Plan Rules (Rules) which provide for the grant of a right to an Eligible Employee, which is referred to as a Share Right (SR), for no cost or at a discount. The Rules contain the following clauses of relevance: • Clause A of the Rules defines an Eligible Employee as: • a full-time or part-time employee of any member of Company A or any subsidiary of Company A; or • a director of Company A or any subsidiary of Company A who holds a salaried employment or office with Company A or any subsidiary of Company A. • Clause B of the Rules states that the purpose of the Company A Share Plan is to: • assist in the reward, retention and motivation of Eligible Employees • link the reward of Eligible Employees to shareholder value creation; and • align the interests of Eligible Employees with shareholders by providing an opportunity for Eligible Employees to receive an equity interest in Company A in the form of SRs. • Clause C of the Rules states that the Company A Board may, at their discretion, determine that an Eligible Employee may participate in the Company A Share Plan. • Clause C(a) of the Rules states that once the Company A Board has determined that an Eligible Employee may participate in the Company A Share Plan they may make an invitation to the Eligible Employee. • Clause C(b) of the Rules states that an invitation to a Eligible Employee may be made on such terms and conditions as the Company A Board decides from time to time, including as to: • the number of SRs the Eligible Employee may apply for; • the Grant Date; • the amount payable (if any) for the grant of each SR or how such amount is calculated; • the Vesting Conditions (if any); • the Performance Hurdles (if any) and/or other conditions (if any); • whether the SRs will be: v Equity Settled; v Cash Settled v A combination of Equity Settled and Cash Settled (in which case the Invitation may specific the relevant proportion); or v Settled as determined by the Company A Board on or following the Performance Qualification Date and notified to the Participant in the Vesting Notice. • disposal restrictions attaching to the Plan Shares (if any); and • any other supplementary terms and conditions. • Clause D of the Rules states that an invitation to an Eligible Employee must be accompanied by an application form and any ancillary documentation (if any). • Clause E of the Rules states that the Company A Board may accept an application from an Eligible Employee in whole or in part but must not grant a SR to an Eligible Employee unless it has received a duly signed and completed application form with all applicable ancillary documentation. The application and ancillary documentation must include only the same terms and conditions specified in the invitation. • Clause F of the Rules states that on receipt of a duly completed and signed application Company A will, to the extent that the Company A Board has accepted such application, grant the relevant number of SRs, subject to the terms and conditions that were set out in the invitation, ancillary documentation and Rules. On being granted SRs the Eligible Employee becomes a Participant. • Clause G of the Rules states that a Participant does not have an interest (legal, equitable or otherwise) in any share of Company A which is the subject of a SR and is not entitled to notice of or to vote at a meeting of shareholders or to receive dividends declared by the company prior to the SR vesting and being exercised. Clause H of the Rules states that the Company A Board will determine the Performance Hurdles and/or other conditions attaching to a SR prior to an invitation being made to an Eligible Employee. • Clause I of the Rules is about Performance Qualification: • sub-clause I(a) of the Rules states that the Company A Board may determine (acting reasonably) that the Performance Hurdles and/or other conditions attaching to a SR have been satisfied, or determine to waive the Performance Hurdles and/or other conditions. • sub-clause I(b) of the Rules states that a SR becomes Performance Qualified on the earlier of the date that: v The Company A Board determines (acting reasonably) that the relevant Performance Hurdles and/or other conditions are satisfied; v The Company A Board waives the relevant Performance Hurdles and/or other conditions; or v The Performance Hurdles and/or other conditions are deemed to have been satisfied under the Rules. • sub-clause I(c) of the Rules states that the Performance Qualification Date of a SR is the date that the SR becomes Performance Qualified under sub-clause 6.2(b) of the Rules. • Clause J of the Rules states that a SR will be deemed to have vested if both: • the Performance Hurdles and/or other conditions applicable to the SR have been determined by the Company A Board (acting reasonably) to be satisfied, are waived by the Company A Board, or are deemed to have been satisfied under the Rules; and • Company A has issued a Vesting Notice to the Participant informing him or her that some or all of his or her SRs have vested. • Clause K of the Rules states that as soon as reasonably practicable after the Performance Qualification Date Company A will arrange to give a Vesting Notice to the Participant. • Clause L of the Rules states that a Participant will be deemed to have automatically exercised all Vested SRs that are the subject of a Vesting Notice referred to in clause K on the date of the relevant Vesting Notice. • Clause M of the Rules states that administration of the Company A Share Plan is vested in the Company A Board. ESP Trust Deed The purpose of the ESP Trust established by the ESP Trust Deed is to subscribe for newly issued shares, and/or acquire shares on-market, in Company A for delivery to Company A employees under the Rules. The ESP Trust Deed contains the following clauses of relevance: • Clause A of the ESP Trust Deed states that Company A must pay all expenses of the ESP Trust. • Clause B of the ESP Trust Deed is about Trustee acknowledgement: • sub-clause B(a) of the ESP Trust Deed states that the Trustee acknowledges that each Participant is absolutely entitled to any and all Allocated Plan Shares held by the Trustee and all other benefits and privileges attached to or result from holding the Allocated Plan Shares. • Sub-clause B(b) of the ESP Trust Deed states that the Trustee acknowledges that Company A may impose a holding lock on Allocated Plan Shares to ensure the compliance of a Participant with any restrictions as to the disposal or other dealing of the Allocated Plan Shares. • Clause C of the ESP Trust Deed states that the Plan Shares and other property of the ESP Trust will be vested in the Trustee upon trust on behalf of Participants on the terms and conditions set out in the ESP Trust Deed. • Clause D of the ESP Trust Deed states that subject to the ESP Trust Deed the Trustee has all of the powers in respect of the ESP Trust it is legally possible for a Trustee to have as though it were the absolute owner of the assets of the ESP Trust and acting in its personal capacity including, without limitation, the power to: • enter into and execute all agreement, deeds and documents; • enter into and give undertakings; • delegate powers and duties; • subscribe for, purchase or otherwise acquire and to sell or otherwise dispose of property, rights or privileges which the Trustee is authorised to acquire or dispose of on terms and conditions it thinks fit; • appoint and remove or suspend custodians, trustees, managers, servants and other agents, determine the powers and duties to be delegated to them, pay such remuneration to them as it thinks fit and any person so employed or engaged is deemed for the purpose of the deed to be employed or engaged by the Trustee; • institute, conduct, defend, compound or abandon any legal proceeding concerning the ESP Trust and settle or compromise and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the Trustee in respect of the ESP Trust; • refer any claim or demand by or against the Trustee in respect of the ESP Trust to arbitration and observe and perform awards; • make and give receipts, releases and other discharges for money payable to the ESP Trust; • open bank accounts, retain on current or deposit account at any bank any money which it considers proper and make regulations for the operation of those bank accounts including the signing and endorsing of cheques; • take and act upon the advice or opinion of any legal practitioner, or other professional person and whether obtained by the Trustee or not, whether in relation to the interpretation of this deed, any other document or statute or the administration of the ESP Trust without being liable in respect of any act done or omitted to be done by it in accordance with such advice or opinion; • determine who is entitled to sign on the Trustee's behalf receipts, acceptances, endorsements, releases, agreements and documents; and • do all acts, matters or things which it may deem necessary or expedient for the purpose of giving effect to, and carrying out, the trusts, powers and discretions conferred on the Trustee by this deed or the law. • Clause E of the ESP Trust Deed is about Remuneration: • sub-clause E(a) of the ESP Trust Deed states that the Trustee is not entitled to receive from the ESP Trust any fees, commission or other remuneration in respect of its office (clause 5.13(a). • sub-clause E(b) of the ESP Trust Deed states that Company A must pay to the Plan Trustee, from the Company's own resources, such fees and reimburse such expenses incurred by the Trustee as the Company and Plan Trustee agree. • sub-clause E(c) of the ESP Trust Deed states that the Plan Trustee is entitled to retain for its own benefit any such fee or reimbursement. • Clause F of the ESP Trust Deed states that Company A and the Trustee agree that the ESP Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purpose of section 130-85(4) of the ITAA 1997. • Clause G of the ESP Trust Deed states that Company A or a subsidiary of Company A may contribute money to the Trustee to fund the acquisition of Company A shares for the purposes of the Company A Share Plan and that the Trustee must not accept any contribution of money or money's worth from a Participant. • Clause H of the ESP Trust Deed is about Application of Funds: • sub-clause H(a) of the ESP Trust Deed states that for the purpose of enabling Company A to satisfy its obligations to allocate shares under the Company A Share Plan either at that time or in the future the Trustee must, if directed by the Company A Board, acquire Company A shares: in the ordinary course of trading on the market conducted by the ASX; by way of an off-market transaction; or through new shares issued by Company A. • sub-clause H(b) of the ESP Trust Deed states that the Company A Board must offer to have Company A or a subsidiary of Company A provide funds and/or request that the Trustee apply some of the capital of the ESP Trust to acquire shares in Company A. • sub-clause H(c) of the ESP Trust Deed states that nothing in clause H requires the Trustee to acquire shares in Company A if it does not receive sufficient payment from Company A or a subsidiary of Company A if it does not have sufficient funds to do so out of the property of the ESP Trust. • Clause I of the ESP Trust Deed is about Funding: • sub-clause I(a) of the ESP Trust Deed states that Company A or a subsidiary of Company A must provide the Trustee with any funds required by it in order to comply with its obligations under clause 6.2 (after application by the Trustee of any capital of the ESP Trust). • sub-clause I(b) of the ESP Trust Deed states that all funds received by the Trustee from Company A or a subsidiary of Company A will constitute accretions to the ESP Trust and will not be repaid to Company A or a subsidiary of Company A nor will any Participant be entitled to receive such funds. • sub-clause I(c) of the ESP Trust Deed states that funds received by the Trustee from Company A or a subsidiary of Company A may be paid to Company A where the Trustee subscribes for shares in Company A in accordance with the ESP Trust Deed, Rules or relevant terms of participation. • sub-clause I(d) of the ESP Trust Deed states that where an amount received by the Trustee from Company A or a subsidiary of Company A is in excess of the amount required by the Trustee to subscribe for, acquire, allocate or deliver shares Company A may require the Trustee to: v apply the amount to subscribe for, acquire and/or allocate and deliver shares in accordance with the ESP Trust Deed, Rules or relevant terms of participation; or v deposit the funds into any account opened and operated by the Trustee to be used for the purposes of acquiring and/or allocating and delivering shares in accordance with the ESP Trust Deed, Rules or relevant terms of participation • Clause J of the ESP Trust Deed is about Unallocated Plan Shares: • sub-clause J(a) of the ESP Trust Deed states that until Plan Shares are allocated to a Participant or transferred to a Participant the Trustee holds those Plan Shares on trust for the benefit of Participants generally from time to time in accordance with the terms and conditions of the ESP Trust Deed. • Clause K of the ESP Trust Deed is about the Allocation of Plan Shares: • sub-clause K(a) of the ESP Trust Deed states that on receipt of a direction by the Company A Board, the Trustee must allocate to any Participant nominated by the Company A Board the number of Company A shares specified by the Company A Board on the date specified by the Company A Board. • sub-clause K(b) of the ESP Trust Deed states that shares acquired in accordance with the ESP Trust Deed and allocated to a specified Participant must, subject to the relevant Rules, be: v held by the Trustee on the terms and conditions of the ESP Trust Deed and on behalf of the relevant Participant who is the beneficial owner of the Plan Shares. v allocated in the books of the Trustee to the relevant Participant. • sub-clause K(c) of the ESP Trust Deed states that all interests and benefits held by the Trustee on behalf of a Participant under the ESP Trust Deed are strictly personal to the Participant. • sub-clause K(d) of the ESP Trust Deed the Trustee must retain possession of the holdings statements of the Plan Shares. • Clause L of the ESP Trust Deed is about the Transfer of Plan Shares: • sub-clause L(a) of the ESP Trust Deed relevantly states that on receipt of a direction by the Company A Board to do so, the Trustee must transfer to any Participant nominated by the Company A Board the number of Plan Shares specified by the Company A Board on the date specified by the Company A Board. • sub-clause L(b) of the ESP Trust Deed relevantly states that upon Plan Shares being transferred to a Participant Company A will register the Participant as the holder of those Shares and the Participant will be absolutely legally and beneficially entitled to them. • Clause M of the ESP Trust Deed states that prior to termination of the ESP Trust capital to which no Participant would be entitled can be applied in payment of costs and expenses incurred by the Trustee or for specific benevolent options but cannot be repaid to Company A. • Clause N of the ESP Trust Deed states that when the ESP Trust terminates the Trustee must transfer Plan Shares as directed by Company A (but not for the benefit of Company A) and that the Trust terminates and must be wound up by the Trustee upon the first of the following events occurring: • an order being made or an effective resolution being passed for the winding up of Company A, other than for the purpose of amalgamation or reconstruction; • Company A determining that the ESP Trust is to be wound up; • should the ESP Trust be at any time subject to the rule of law against perpetuity, on the later of v the date on which the ESP Trust becomes subject to the rule of law against perpetuity; and v the day before the 80th anniversary of the ESP Trust Deed. • Clause O of the ESP Trust Deed states that the balance of the capital or income of the Trust to which no Participant is entitled must not be paid to Company A or a subsidiary of Company A but may be applied in whole or in part for the benefit of one or more of the following beneficiaries as the Trustee thinks fit: • an employee share or option trust established and maintained for the benefit of all or any employees of Company A or a subsidiary of Company A; or • any charity nominated by the Trustee. Reasons for establishing the ESP Trust Establishment of the ESP Trust provides Company A with greater flexibility to accommodate the long term incentive arrangements of the company. Similarly, it allows for a streamlined approach to the administration aspect of the Company A Share Plan. The ESP Trust can also be used to provide a range of incentives involving shares in Company A as circumstances change in the labour market that require different incentives to be provided in order to attract, reward and retain key employees. The commercial benefits of using the ESP Trust include: • assisting the Company A with its capital management, as Company A can direct the Trustee to use the contributions received to either acquire shares on-market, which will prevent the dilution of interests held by existing Shareholders, or alternatively to subscribe for new shares in Company A. • providing the opportunity of a price hedge. That is, shares can be acquired at a favourable price and held in the ESP Trust until needed. • allowing for greater flexibility to accommodate the long term incentive plans of Company A both now and into the future as the company continues to grow and expand its operations and as a result, its employee numbers. • providing a single vehicle for the administration of various plans and will assist Company A to comply with various plan rules. • providing an arm's-length vehicle through which shares in Company A can be acquired and held in the company on behalf of the relevant employee. This assists Company A to satisfy corporate law requirements relating to a company dealing in their own shares and to provide comfort to employees. • assisting with managing insider trading issues as the trustee, as an independent party, is acquiring shares in accordance with a set policy. • enabling easy recycling of Company A shares - when Company A shares are forfeited (i.e. due to the failure to meet vesting conditions) the forfeited Company A shares can be reused for future offers to employees. • providing a mechanism to warehouse Company A shares upfront until they are needed to satisfy future equity incentive awards (e.g. under an acquisition transaction the acquirer may set aside Company A shares for management to be later used for equity awards). Establishment costs and ongoing costs administering the ESP Trust Company A will incur costs in relation to the establishment and implementation of the ESP Trust, including the costs associated with applying for this private binding ruling. Company A will also incur further costs associated with the services provided by the Trustee of the ESP Trust in respect of the on-going administration and management of the ESP Trust, including, but not limited to: • costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to participants); • employee plan record keeping; • production and dispatch of holding statements to employees; • provision of annual income tax return information to employees; • management of employee termination; and • other Trustee expenses, including the annual audit of the financial statements and annual income tax return of the ESP Trust.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 95 | 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 section 10-5 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 paragraph 130-85(4)(a) | Income Tax Assessment Act 1997 paragraph 130-85(4)(b) | Income Tax Assessment Act 1997 paragraph 130-85(4)(c) | Income Tax Assessment Act 1997 section 130-90 | Income Tax Assessment Act 1997 subsection 130-90(1A) | Income Tax Assessment Act 1997 subsection 130-90(1) | Income Tax Assessment Act 1997 subsection 130-90(2) | Income Tax (Transitional Provisions) Act 1997 subsection 83A-5(1)..

Reasons for decision: Summary: 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 list of these provisions, see section 10-5. None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore non-refundable contributions made by Company A to the Trustee will not be assessable income under section 6-10. They will only be included in the calculation of the net income of the ESP Trust under section 95 of the ITAA 1936 if they are assessable as income according to ordinary concepts under section 6-5 of the ITAA 1997. Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts which is 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. The contributions provided by Company A to the Trustee of the ESP Trust are used in accordance with the terms of the ESP Trust Deed and Rules. Clause C of the ESP Trust Deed states that the Plan Shares and other property of the ESP Trust will be vested in the Trustee upon trust on behalf of Participants on the terms and conditions set out in the ESP Trust Deed. Sub-clause I(b) of the ESP Trust Deed states that all funds received by the Trustee from Company A or a subsidiary of Company A will constitute accretions to the ESP Trust and will not be repaid to Company A or a subsidiary of Company A nor will any Participant be entitled to receive such funds. The contributions constitute receipts of a capital nature to the Trustee and will not be assessable as ordinary income under section 6-5. When a participant in the Company A Share Plan becomes absolutely entitled to the shares as against the Trustee, CGT Event E5 will occur and under section 104-75, the Trustee will make a capital gain or loss. However, section 130-90 may operate to disregard that gain or loss where specified conditions are satisfied. Preliminary - application of Division 83A Division 83A applies to ESS Interests issued on or after 1 July 2009 and also, in certain circumstances, to ESS Interests that were provided under an employee share scheme prior to 1 July 2009. Division 83A will apply to SRs issued under the Company A Share Plan on or after 1 July 2009 as they will have been acquired on or after 1 July 2009 thereby satisfying subsection 83A-5(1) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997). Section 130-90 of the ITAA 1997 Section 130-90 of the ITAA 1997 relevantly states: Shares held to satisfy the future exercise of rights acquired under employee share schemes | 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) of the ITAA 1997 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). | Detailed Reasoning - Paragraphs 130-85(4)(a) and (b) of the ITAA 1997: The right to acquire a beneficial interest in a share (SR) and 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 ESP Trust Deed are both ESS interests within the meaning of subsection 83A-10(1). Subsection 83A-10(2) defines an employee share scheme 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 Company A Share Plan is an employee share scheme 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 (SRs) are provided to employees in relation to the employee's employment. Company A has established the ESP Trust 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 Company A Share Plans. The beneficial interest in the Company A share is itself provided under an employee share scheme because it is provided under the same scheme under which the SRs are provided to the Participant in relation to the Participant's employment, being an employee share scheme as defined in subsection 83A-10(2). Clause C of the ESP Trust Deed states that the Plan Shares and other property of the ESP Trust will be vested in the Trustee upon trust on behalf of Participants on the terms and conditions set out in the ESP Trust Deed. Sub-clause H(a) of the ESP Trust Deed states that for the purpose of enabling Company A to satisfy its obligations to allocate shares under the Company A Share Plan either at that time or in the future the Trustee must, if directed by the Company A Board, acquire Company A shares: in the ordinary course of trading on the market conducted by the ASX; by way of an off-market transaction; or through new shares issued by Company A. Sub-clause J(a) of the ESP Trust Deed states that until Plan Shares are allocated to a Participant or transferred to a Participant the Trustee holds those Plan Shares on trust for the benefit of Participants generally from time to time in accordance with the terms and conditions of the ESP Trust Deed. Sub-clause K(a) of the ESP Trust Deed states that on receipt of a direction by the Company A Board, the Trustee must allocate to any Participant nominated by the Company A Board the number of Company A shares specified by the Company A Board on the date specified by the Company A Board. Paragraphs 130-85(4)(a) and (b) are therefore satisfied because: • the ESP Trust acquires shares in a company, namely Company A; and • the ESP Trust ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the ESP Trust Deed and Company A Share Plan. | Detailed Reasoning - Paragraph 130-85(4)(c) of the ITAA 1997: Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will also require that the Trustee undertake incidental activities that are a function of managing the Company A Share Plan. 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) of the ITAA 1997: • 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. Clause D of the ESP Trust Deed states some specific things that the Trustee has the power to do but they are subject to the terms of the ESP Trust Deed and all would be considered incidental for the purposes of paragraph 130-85(4)(c). Clause F of the ESP Trust Deed states that Company A and the Trustee agree that the ESP Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purpose of section 130-85(4). Paragraph 130-85(4)(c) of the ITAA 1997 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 ESP Trust Deed and Rules are merely incidental to operation of the Company A Share Plan. The ESP Trust satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 as: • the ESP Trust acquires shares in a company (being Company A); • the ESP Trust ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the ESP Trust Deed and Rules; and • the ESP Trust 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 ESP Trust. Paragraph 130-90(1)(a) CGT event E5 is the CGT event that will apply under the terms of the Company A Share Plan at the time the Participant becomes 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 a SR 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 (SR) granted under the Company A Share Plan. 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 employee share scheme 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 Company A Share Plan is an employee share scheme 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 (SRs) are provided to employees in relation to the employee's employment. Each SR is acquired for no cost or at a discount. Subdivision 83A-B will apply to SRs acquired under the Company A Share Plan as pursuant to subsection 83A-20(1) the ESS interest (i.e. SR issued under the Company A Share Plan) will be acquired under an employee share scheme (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 ESP Trust at the time that CGT event E5 happens, subsection 130-90(1) will apply. Under these circumstances, 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: 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 sub-clause B(a) of the ESP Trust Deed each Participant is absolutely entitled to any Company A shares held by the Trustee on their behalf, and is entitled to the same rights in respect of those shares as if he or she was the legal owner of the shares (subject to the Company A Share Plan and terms of participation). Once a Participant is absolutely entitled to the Company A share held on their behalf by the ESP 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 Company A Share Plan (by way of transfer to a Participant), the Trustee will not make a capital gain or capital loss under CGT Event E7.