Private ruling: Employee Benefits Arrangement
Published: August 2014
Ruling period: 1 July 2013 - 30 June 2014 | 1 July 2014 - 30 June 2015 | 1 July 2015 - 30 June 2016 | 1 July 2016 - 30 June 2017 | 1 July 2017 - 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the irretrievable cash contributions by the head company or other members of the tax consolidated group to the Trustee to fund the acquisition of the head company's shares by the EST be assessable income of the EST under sections 6-5 or 6-10 of ITAA 1997? | A1: No | Q2: Will a capital gain or capital loss that arises for the Trustee at the time the Participants become absolutely entitled to the head company shares (acquired on exercise of Performance Rights acquired under the Plan) be disregarded under section 130-90 of ITAA 1997 if the Participants acquire the shares for the same or less than the cost base of the shares 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. Head company is the head entity of an Australian tax consolidated group and is listed on the Australian Securities Exchange (ASX). Head company established the Performance Rights Plan (the Plan) to facilitate the provision of its shares to its Australian employees. The Plan is operated through a trust. The Employee Share Trust (EST) was established in 20XX. The stated reason for establishing the EST is as a sole purpose trust to acquire shares for Australian employees of the tax consolidated group (Group). You are that Trustee, and you are an independent entity unrelated to that company or its associated entities, i.e. an entity that is external to head company Group. Head company operates an Australian-based business. Operation of the Limited Performance Rights Plan (the Plan) The Plan broadly operates as follows: Invitations to apply for Performance Rights are at the absolute discretion of the Board (who will be appointed by head company) ("the Board"). Invitations are extended on such terms and conditions as the Board decides, from time to time, including: • The number of Performance Rights; • The Grant Date; • The amount payable (if any) for the grant of each Performance Right or how such amount is calculated; • The Performance Right Exercise Price; • Any vesting conditions; and • Any supplementary terms and conditions. Upon receipt of an Invitation an eligible person (i.e. an employee or director of any member of the head company consolidated group) may apply for the Performance Rights which are the subject of the Invitation by sending the completed application form to head company. The Board may accept an application from an eligible person in whole or in part, and may determine that an application not be accepted where certain conditions are not met. Upon acceptance of the application head company will grant the eligible person the relevant number of Performance Rights, subject to the terms and conditions set out in the Invitation, the Application Form, the Plan Rules and any other ancillary documentation. The eligible person will then be a Participant under the Plan. It is envisaged that the rights granted under the Plan will be subject to either Subdivision 83A-B of the ITAA 1997 or Subdivision 83A-C of the ITAA 1997. The Board may elect to use, on such terms and conditions as determined by the Board in its absolute discretion, an employee share trust for the purposes of holding Shares before or after the exercise of a Performance Right or delivering any Shares as a result of the exercise of a Performance Right under the Plan. Performance Rights granted are able to be exercised (subject to any exercise conditions as set out in the Plan Rules) once any vesting conditions have been satisfied and a Vesting Notice has been given to the Participant. Upon exercise of a Performance Right in accordance with the Plan Rules, the Participant is entitled to one fully paid ordinary share in head company. All shares provided to a Participant as a result of the exercise of Performance Rights, rank pari passu in all respects with all other ordinary shares. Performance Rights can only be exercised by the Participants to whom they are issued and cannot be sold, transferred, encumbered or disposed of by the Participant. Rights may be forfeited in accordance with the Plan Rules. If a holder of Performance Rights ceases to be an employee, they will be designated as either a 'Good' or 'Bad' Leaver under the Plan Rules. Unless otherwise stated in the Invitation, or determined by the Board in its absolute discretion, a Performance Right held by a 'Bad' Leaver (whether unvested, or vested but unexercised) will be forfeited. Unless the Invitation provides otherwise, within 20 days of the Participant becoming a 'Good' Leaver the Board shall issue a written notice (Performance Right Retention Notice) to the Participant confirming to them which of the Performance Rights may be retained. Generally they would be all vested Performance Rights held by the Participant, and to the extent expressly determined at the Board's absolute discretion, those unvested Performance Rights held by the Participant. Where a Performance Right has been forfeited it will automatically lapse. Shares that are acquired on exercise of Performance Rights may be subject to disposal restrictions that were provided for in the Invitation. The Plan Rules explain the nature of the disposal restrictions and permit the Board to implement any procedure necessary to ensure compliance with the restrictions, including but not limited to imposing an ASX administered holding lock or using an employee share trust to hold the shares during a restricted period. Administration of the Plan is vested in the Board. Operation of the EST Pursuant to the Trust Deed, the EST has been established for the sole purpose of subscribing for or acquiring, delivering, allocating and holding shares in head company in connection with the Plan (as well as any future plans established by head company under which shares are to be provided to employees where the written consent of the Trustee has been obtained). Pursuant to the Trust Deed the Board from time to time instructs the Trustee, by way of notice in writing, to: • purchase, subscribe for and/or allocate the requisite number of shares in head company specified in the notice to be held by the Trustee in respect of an identified Participant or Participants as Allocated Shares; or • purchase, subscribe for and/or allocate a specified number of shares as Unallocated Shares; or • dispose of Unallocated Shares. Pursuant to the Trust Deed, the EST will be funded by cash contributions from head company and members of the head company consolidated group. Provided the Trustee has received sufficient contributions or has sufficient capital, the Trustee must acquire shares in head company either on market or via a subscription for new shares for the benefit of relevant Participants or employees generally, or allocate any Unallocated Shares to Participants, in accordance with the written instructions from the Board. Head company envisages that contributions will be made at or about the time when the rights vest in Participants and the shares will be allocated to Participants as soon as practicable thereafter. The decision to either acquire shares on market or via a subscription for new shares will be made at or around the time the funds are contributed as part of head company's capital management policy. The subscription price for each of the shares must be the market value of the shares as ascertained by the Board on the date on which the shares are issued to the Trustee. All funds received by the Trustee from head company, subject to the Trustee's rights to remuneration and indemnity, will constitute accretions to the corpus of the trust and will not be repaid to head company unless the funds are used to subscribe for shares in head company under the terms of the Trust Deed or Plan Rules. Pursuant to the Trust Deed, the Trustee holds a Participant's Allocated Shares for their benefit and the Participant is the beneficial owner of the Allocated Shares and absolutely entitled to those shares as against the Trustee from the time that the shares are allocated to them. While the Trustee holds shares for the benefit of an identified Participant (or a number of Identified Participants) the Trustee (or any other party which the Trustee considers appropriate) must establish and maintain a separate Trust Share Account in respect of each Participant. The Trustee and Participants must not deal with an Allocated Share during any period of disposal restrictions imposed in respect of the shares under the Plan Rules. After the expiry of any such disposal restriction period, Participants can give the Trustee a withdrawal notice requiring the Trustee to transfer legal title to the shares held in the EST on their behalf to themselves or their nominee or to sell the shares on their behalf with a remittance of the sale proceeds (less any brokerage costs). The Trust Deed states that the EST will be managed and administered so that it will be an 'employee share trust' as defined in subsection 995-1(1) of the ITAA 1997. The Trustee is not permitted to carry out activities that are not matters or things that are necessary or expedient to administer and maintain the EST. In addition, it will not be permitted to carry out activities that result in the Participants being provided with additional benefits other than the benefits that arise from the relevant Plan Rules.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-10(1) | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Subsection 83A-10(1) | Income Tax Assessment Act 1997 Subsection 83A-10(2) | Income Tax Assessment Act 1997 Subsection 83A-25(1) | Income Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 Subsection 130-85(4) | Income Tax Assessment Act 1997 Section 130-90 | Income Tax Assessment Act 1997 Subsection 130-90(1) | Income Tax Assessment Act 1997 Section 130-90(2) | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Detailed reasoning: As stated in the relevant facts of the ruling, the EST, as an employee share trust, will be funded by contributions from head company for the purchase of shares, either on-market or via subscription, which will be allocated to relevant employees who will become absolutely entitled to them once all vesting conditions have been met and the Performance Rights are exercised. The Trustee will use the funds for a specific purpose, namely the acquisition of shares for Participants in the Plan. Consequently, in receiving these amounts, the Trustee will not have derived anything in the nature of income or profit and therefore the funds will not constitute assessable income in the hands of the Trustee under either section 6-5 or 6-10 of the ITAA 1997. In coming to our decision on this matter we have considered ATO Interpretative Decision ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme . | Detailed Reasoning - Question 2: Will a capital gain or capital loss that arises for the Trustee at the time the Participants become absolutely entitled to the head company shares (acquired on exercise of Performance Rights acquired under the Plan) be disregarded under section 130-90 of ITAA 1997 if the Participants acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee? | Detailed Reasoning - Detailed reasoning: Head company established the EST in 20XX to facilitate the provision of its shares to its Australian employees and appointed the Trustee as the Trustee. Clause 4.2 of the Trust Deed provides that head company and the Trustee agree the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997. | Detailed Reasoning - Subdivision 130-D of the ITAA 1997: Under section 104-75 of the ITAA 1997 a capital gain or capital loss may arise for the Trustee of the EST when it allocates shares to an employee, unless an exception for employee share trusts applies, namely Subdivision 130-D of the ITAA 1997. Subsections 130-90(1) and (2) of the ITAA 1997 (Shares held by employee share trusts) provide: (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. (2) Subsection … (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. | Detailed Reasoning - Employee share trust: The term 'employee share trust' referred to in subsection 130-90(1) of the ITAA 1997 is defined in subsection 995-1(1) of the ITAA 997 as having the meaning given by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides that an 'employee share trust' for an employee share scheme (having the meaning given by subsection 83A-10(2) of the ITAA 1997) 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). The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997. An 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as 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. Head company's Plan is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which rights to acquire shares in head company are provided to employees of the head company consolidated group in relation to the employee's employment . Under the Plan, head company has established the EST to acquire shares in head company and to allocate those shares to its employees to satisfy rights acquired under the scheme. The beneficial interest in the shares is itself provided under an employee share scheme because it is provided under the same scheme in which the rights to acquire the shares are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997. Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because: • the EST acquires shares in the company; and • the EST ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the governing documents of the scheme. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require the Trustee to undertake incidental activities that are a function of managing the employee share scheme and administering the Trust. For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental include: • 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; • 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 merely incidental. For the purposes of the EST the general powers of the Trustee are set out in the Trust Deed. Other clauses effectively record the general powers given to the Trustee so as to ensure that the general powers are exercised for the purposes of the Plan thereby making it clear that the Trustee can only use the contributions received exclusively for the acquisition of shares for eligible employees in accordance with the Plan. To this end, all other duties/general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee, in relation to its dealing with the shares to be acquired for eligible employees for the purposes of the Plan. Therefore, the EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. | Detailed Reasoning - Paragraph 130-90(1)(a) of the ITAA 1997: CGT event E5 is the CGT event that will apply under the terms of the Plan at the time the Participant becomes absolutely entitled to the shares in head company as against the Trustee. Therefore paragraph 130-90(1)(a) will be satisfied. | Detailed Reasoning - Paragraph 130-90(1)(b) of the ITAA 1997: Subsection 995-1(1) of the ITAA 1997 defines a share to mean a share in the capital of a company. An ordinary share in head company held by the Trustee, and to which a Participant is entitled upon exercise of a Performance Right, is a share in the capital of a company, that is, head company. Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph. | Detailed Reasoning - Paragraph 130-90(1)(c) of the ITAA 1997: Paragraph130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a share (in head company) by exercising a Performance Right granted under the Plan. | Detailed Reasoning - Paragraph 130-90(1)(d) of the ITAA 1997: You have advised that Performance Rights granted under the Plan will be subject to either Subdivision 83A-B or Subdivision 83A-C of the ITAA 1997. Therefore, paragraph 130-90(1)(d) of the ITAA 1997 will be satisfied. Accordingly, all the conditions in subsection 130-90(1) of the ITAA 1997 have been satisfied. Provided (as stipulated in the Question in the ruling application) that the Participant does not acquire the beneficial interest in the share for more than its cost base in the hands of the EST at the time that CGT event E5 happens, subsection 130-90(2) of the ITAA 1997 will also have been satisfied. Under these circumstances, subsection 130-90(1) of the ITAA 1997 operates to disregard any capital gain or loss made by the Trustee on any share when a Participant becomes absolutely entitled to that share.