Private ruling: Employee share scheme
Date of advice: 19 September 2018
Published: December 2018
Ruling period: ● Income tax year ended 30 June 2018 | ● Income tax year ended 30 June 2019 | ● Income tax year ended 30 June 2020 | ● Income tax year ended 30 June 2021 | ● Income tax year ended 30 June 2022

Ruling: Q1: Will the irretrievable cash contributions made by Company A to trustee of the Employee Share Scheme Trust (EST) established by the Trust Deed (Deed) to fund the subscription for, or acquisition on market of, Company A shares by the trustee of the EST in accordance with the Deed be assessable income of the trustee of EST under sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the trustee of the EST make a capital gain or loss from CGT event E5 (in section 104-75 of the ITAA 1997) when a Participant under the Plan Rules becomes absolutely entitled as against the trustee of the EST to a Plan Share held by the EST? | A2: No | Q3: Will the trustee of the EST make a capital gain or loss from CGT event E7 (in section 104-85 of the ITAA 1997) when trustee of the EST transfers legal ownership of a Plan Share of the EST to a Participant in accordance with the Deed? | A3: No

Relevant facts and circumstances: Company A is a public company which is listed on the Australian Stock Exchange (ASX). Company A is the head company and the only employing entity of the Company A income tax consolidated group. Company A has established a remuneration strategy that supports achievement of the business strategy of Company A. The remuneration framework has been designed to align the interests of key management personnel with shareholder interests. Company A is committed to developing and maintaining a remuneration strategy and framework which is designed to attract, retain and reward highly talented and qualified executives to lead the business of Company A. Plan Rules Company A implemented an employee share scheme governed by the Plan Rules. Company A provided the Plan Rules. Company A Employee Share Scheme Trust Company A established a trust known as the Company A Employee Share Scheme Trust (Company A EST) by entering into the Company A EST Deed. The Company A EST was established to acquire, allocate, hold and transfer shares in connection with incentive plans established by Company A. Company A provided the Company A EST Deed.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 section 66 | Fringe Benefits Tax Assessment Act 1986 section 67 | Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(h) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(ha) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 177A | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 subsection 177F(1) | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 paragraph 8-1(2)(a) | Income Tax Assessment Act 1997 Division 83A | 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 section 83A-210 | Income Tax Assessment Act 1997 paragraph 83A-210(a)(i) | 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 701-1 and | Income Tax Assessment Act 1997 subsection 995-1(1).

Reasons for decision: Detailed Reasoning - Question 1: 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) of the ITAA 1997 states: Your assessable income includes income according to ordinary concepts, which is called ordinary income. The irretrievable cash contributions made by Company A to the trustee of the EST will not be included in the assessable income of trustee under section 6-5 as ordinary income because the contributions are of a capital nature. Subsection 6-10(1) of the ITAA 1997 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 of the ITAA 1997 are relevant in the present circumstances. The irretrievable cash contributions made by Company A to the trustee of the EST will therefore not be included in the assessable income of the trustee under section 6-10 of the ITAA 1997. | Detailed Reasoning - Question 2: CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) as against the trustee (disregarding any legal disability the beneficiary is under). The time of CGT event E5 is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2) of the ITAA 1997). In this case, the EST is neither a unit trust nor a trust to which Division 128 of the ITAA 997 applies (as it does not relate to the death of an individual). If CGT event E5 happens, the trustee of a trust makes a capital gain if the market value of the asset (at the time of the event) is more than its cost base. The trustee of a trust will make a capital loss if the market value of the asset is less than its reduced cost base. On satisfying any Vesting Conditions for an Award (other than an Award ultimately settled in cash) a Participant will have an unconditional right to a Plan Share. If a Plan Share related to that Award is held by the trustee of the EST, the Participant will be absolutely entitled to that Plan Share (being a CGT asset of the EST) as against the trustee of the EST and CGT event E5 will happen (Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words ‘absolutely entitled to a CGT asset as against the trustee of a trust’ as used in Parts 3-1 and 3-3 of the Income Tax assessment Act 1997 (TR 2004/D25)). However, any capital gain or capital loss made by trustee of the EST from CGT event E5 may be disregarded pursuant to section 130-90 of the ITAA 1997. To qualify under section 130-90 of the ITAA 1997, there must be an ‘employee share trust’ and an ‘ESS interest’. The term ‘employee share trust’ is defined in subsection 130-85(4) of the ITAA 1997: 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). The terms ‘employee share scheme’ and ‘ESS interest’ are defined in section 83A-10 of the ITAA 1997: (1) An ESS interest , in a company, is a beneficial interest in: (a) a share in the company; or (b) a right to acquire a beneficial interest in a share in the company. (2) An employee share scheme is a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of: (a) the company; or (b) subsidiaries of the company; in relation to the employees' employment. An Award (other than an Award ultimately settled in cash) issued under the Plan Rules is an ESS interest under paragraph 83A-10(1)(b) of the ITAA 1997. The Plan Rules are an ‘employee share scheme’ for the purposes of subsection 83A-10(2) of the ITAA 1997 as it is a scheme under which ESS interests in Company A are provided to employees of Company A in relation to their employment with Company A. The EST satisfies the definition of an ‘employee share trust’ in subsection 130-85(4) of the ITAA 1997 as: ● the EST acquires shares in a company (specifically, Company A); and ● the EST ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in Company A shares), 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 Deed and Plan Rules. ● the Deed provides that the EST will be managed and administered by trustee so that it satisfies the definition of ‘employee share trust’ for the purpose of subsection 130-85(4) of the ITAA 1997. CGT event E5 will happen when a Participant under the Plan Rules becomes absolutely entitled as against the trustee of the EST to a Plan Share held by the EST. However, as the requirements of section 130-90 of the ITAA 1997 are satisfied, any capital gain or capital loss that the trustee of the EST will make from CGT event E5 will be disregarded. | Detailed Reasoning - Question 3: Subsection 104-85(1) of the ITAA 1997 provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 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 of the ITAA 1997 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 becomes absolutely entitled to a Plan Share allocated to them pursuant to the Deed when Vesting Conditions (if any) are satisfied (causing CGT event E5 to happen). When the trustee of the EST transfers the legal ownership of the Plan Share to a Participant following allocation of the Plan Share, section 106-50 of the ITAA 1997 will deem the Plan Share to be an asset of the Participant. This means that there would be no change in the ownership of the Plan Share when the trustee of the EST transfers the Plan Share to the Participant. CGT event E7 will not happen when trustee of the EST transfers legal title in a Plan Share to which a Participant is absolutely entitled to that Participant in accordance with the Deed (Paragraph 144 of TR 2004/D25). As such, the trustee of the EST will not make a capital gain or loss from CGT event E7.