Private ruling: Employee share scheme
Date of advice: 14 March 2022
Published: May 2022

Ruling: Q1: Will irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Company Shares be assessable income of the Trust pursuant to 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 Trust at the time when Participants become absolutely entitled to Shares (CGT event E5), be disregarded under section 130-90 of the ITAA 1997 if 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: The Company carries on a business that provides services the other businesses. The Company is a public company listed on the Australian Securities Exchange and is the head company of a tax consolidated group (Group). The Company currently has two Share Plans that are facilitated through the Trust: • Omnibus Plan • SARs Plan. Omnibus Plan The Company has the Omnibus Plan in place which allows it to grant the following Awards to Participants: • Performance Rights • Options • Share Appreciation Rights (SARs), or rights to an Award equivalent • Salary Sacrificed Rights: Rights received by non-executive directors in sacrifice of their director fees • Tax Exempt Shares The Company expects these Awards to be offered on an annual basis moving forward. SARs Plan The Company has the SARs Plan in place which allows the Company to provide Participants with an equity interest in the Company in the form of SARs. Offer The Awards that may be offered to Participants pursuant to the Omnibus Plan and the SARs offered to Participants pursuant to the SARs Plan are hereinafter collectively referred to as "Awards". An Invitation to a Participant to apply for Awards/SARs may be made on such terms and conditions as the Board decides from time to time, including as to: • the number of Awards/SAR/Tax Exempt Shares for which the Participant may apply • the Grant Date • the amount payable (if any) for the grant of each Award/SAR/Tax Exempt Share or how such amount is calculated • whether Awards upon vesting will be Manually Exercised (through providing an Exercise Notice and paying the Exercise Price) or Automatically Exercised (on the date of the Confirmation/Vesting Notice) • the Exercise Conditions for Awards • the Exercise Price for Awards • whether the Company must fulfil a vested Award/Tax Exempt Share by acquiring Shares on-market or by any other means The Invitation to a Participant must be accompanied by an Application Form and the Ancillary Documentation (if any). A Participant may apply for the Awards/SARs/Tax Exempt Shares by sending the completed Application Form to the Company (or its designated officer as set out in the Application Form) by the time and date specified in the Invitation, unless otherwise determined by the Board. Unless otherwise expressly permitted in the Invitation, a Participant may only submit an Application in the Participant's name and not on behalf of any other person or entity. If permitted, the Participant may nominate another person or entity (the Nominated Affiliate) to be granted the Awards/SARs/Tax Exempt Shares. General Conditions for the Share Plans In order to ensure compliance with the Share Plans, each Participant must grant an irrevocable power of attorney (in the form set out in the Invitation or such other form as agreed by the Company) to any person nominated from time to time by the Board. If a Participant and the Company (acting by the Board) agree in writing that some or all of the Awards/SARs granted to that Participant are to be cancelled on a specified date or on the occurrence of a particular event, those Awards/SARs may be cancelled in the manner agreed between the Company and the Participant. Administration of the Share Plans The Share Plans will be administered by the Board. The Trustee does not act as an agent of the Company and (Group Company) or any Participant. The Company is not a beneficiary of the Trust. To enable the Company to satisfy its obligations to allocate Shares under the Share Plans, the Trustee must, if directed by the Board, acquire: • Shares in the ordinary course of trading on the market conducted by ASX • Shares by way of an off-market transaction • new Shares issued by the Company. On receipt of a direction by the Board to do so, the Trustee must transfer to any Participant nominated by the Board the number of Shares specified by the Board, on the date specified by the Board. Upon Shares being transferred to a Participant, the Company will register the Participant as the holder of those Shares and the Participant will be absolutely legally and beneficially entitled to them. The Trustee may, prior to the termination of the Trust, apply that part of the capital of the Trust to which no Participant would be entitled, in payment of any costs and expenses incurred by the Trustee in the execution or purported execution of the Trust. Awards (Omnibus Plan) An Award will vest when a Vesting Notice in respect of that Award is given or is deemed to be given to the Participant. A Vesting Condition for an Award may, subject to any applicable laws and regulations and the Listing Rules, be waived by the Board by written notice to the relevant Participant and on such terms and conditions as determined by the Board and set out in that notice. Settlement of Awards As soon as practicable, after the valid exercise or deemed exercise of an Award by a Participant the Company will: • issue, allocate or cause to be transferred to that Participant the number of Shares that the Participant is entitled to receive under these Rules • where permitted in the relevant Invitation, pay a cash amount to that Participant in accordance with Rules When Awards have vested and are settled with a cash payment, the outgoing will not flow through the Trust. Tax Exempt Shares Participants in the Omnibus Plan will face no risk of forfeiting their Tax Exempt Shares (within the meaning of that expression in section 83A-35(7)) acquired under this Plan. A Participant will have an absolute and indefeasible entitlement to any dividend declared and paid or payable by the Company on any Tax Exempt Share held by or on behalf of a Participant, as at the books closing date for determining an entitlement to the dividend. If a Participant becomes a Leaver, their Tax Exempt Shares will not be subject to compulsory divestiture. Share Appreciation Rights (SARs Plan) Prior to a SAR Vesting and being Exercised a Participant holding a SAR: • does not have any interest in any Shares the subject of the SAR other than those expressly set out in these Rules • is not entitled to notice of, or to vote or attend at, a meeting of Shareholders • is not entitled to receive any dividends Unless the Board in its discretion so approves, or the relevant dealing is effected by force of law on death or legal incapacity to the Participant's legal personal representative, a Participant may not sell, assign, transfer or grant a mortgage, charge, lien, encumbrance or other third party interest over or otherwise deal with a SAR that has been granted to it. The Board may determine that the Performance Hurdles and/or other conditions attaching to a SAR have been satisfied, or determine to waive the Performance Hurdles and/or other conditions. SARs are deemed to have Vested if both of the following have occurred: • the Performance Hurdles and/or other conditions applicable to those Share Appreciation Rights have been determined by the Board (acting reasonably) to be satisfied, are waived by the Board, or are deemed to have been satisfied under these Rules • the Company has issued a Vesting Notice to the Participant informing him or her that some or all of his or her Share Appreciation Rights have Vested. A Participant will be deemed to have automatically Exercised all Vested SARs that are the subject of a Vesting Notice on the date of the relevant Vesting Notice. On or as soon as reasonably practicable from the date a Vesting Notice is given to a Participant and the Participant is deemed to have automatically Exercised the Share Appreciation Rights that are the subject of that Vesting Notice the Company will: • settle the Exercised Share Appreciation Rights by Equity Settlement, Cash Settlement, or a combination as both, as relevantly set out in the Vesting Notice. • issue a substitute Certificate to the Participant for any remaining SARs held by that Participant. When SARs have vested and are settled with a cash payment, the outgoing will not flow through the Trust. Forfeiture of Awards and SARs under the Share Plans Where an Award or SAR has been forfeited in accordance with the Share Plans, the Award/SAR will automatically lapse. Unless stated in the Invitation or determined by the Board, an Award or SAR which has not yet vested or exercised will be forfeited immediately on the date that the Board determines that any applicable Vesting Conditions or Exercise Conditions have not been met or cannot be met by the relevant date. If a Participant ceases to be an employee (Leaver), all unvested Awards and SARs will be forfeited automatically or on a date determined by the Board, unless the Board provides express written consent that the Participant may retain any or all of their unvested Awards and SARs. Awards and SARs which have not yet been validly exercised will be automatically forfeited on the Expiry Date. Awards and SARs will also be forfeited in any other circumstances expressly set out in the Participant's Invitation. Where in the opinion of the Board, if a Participant acts fraudulently, dishonestly or materially breaches their obligations to the Group, the Board may take actions by: • requiring any Awards, SARs or Resulting Shares of the Participant to be forfeited or compulsorily divested • where any Resulting Shares held by the Participant as a result of the exercise of one or more Awards have been sold by the Participant, by requiring the Participant to pay all or part of the net proceeds of that sale (to the extent that they exceed the Exercise Price paid by the Participant to the Company in respect of those Resulting Shares) to the Company. Unless otherwise determined by the Board or stated in the Invitation, all of a Participant's Awards and SARs (whether vested or unvested) will be forfeited on the date that the Board determines that the Participant has become Insolvent. Trust The Company established the Trust pursuant to the Trust Deed. The Trustee is an independent third party. The Company created and establish the Trust for the purposes of holding Shares for the benefit of Participants who are, or will become, the beneficial owners of Shares pursuant to the Share Plans. The Trustee acknowledges and agrees that each Participant is absolutely entitled to any and all Allocated Plan Shares held by the Trustee on their behalf, and all other benefits and privileges attached to or resulting from holding those Allocated Plan Shares. On receipt of a direction by the Board, the Trustee must allocate to a Participant nominated by the Board the number of Shares specified. The Shares acquired in accordance with the Trust Deed and allocated to a Participant must, subject to the relevant Plan Rules be, held by the Trustee on the terms and conditions of the Trust Deed on behalf of the Participant who is the beneficial owner of the Shares, and allocated in the books of the Trustee to the relevant Participant. On receipt of a direction by the Board, the Trustee must transfer to any Participant the number of Shares specified. Upon the Shares being transferred, the Company will register the Participant as the holder of those Shares and the Participant will be absolutely legally and beneficially entitled to them. The Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of an EST for the purpose of section 130-85(4) of the ITAA 1997. Funding The Company must provide the Trustee with any funds required by the Trustee in order to comply with its obligations under the Trust Deed. Funds received by the Trustee from the Company will constitute Accretions to the corpus of the Trust and will not be repaid to the Company. The Trustee is not entitled to receive from the Trust any fees, commission or other remuneration in respect of its office. The Company will incur costs associated with the on-going administration and management of the 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 for employees • management of employee termination, and • other Trustee expenses including the annual audit of the financial statements and annual income tax return of the Trust.


Reasons for decision: Detailed Reasoning - All legislative references are to provisions of the ITAA 1997.: Question 1 | Detailed Reasoning - Detailed reasoning: The total assessable income of a trust estate is calculated as if the Trustee were a resident taxpayer in respect of that income (subsection 95(1)). The assessable income of a taxpayer includes income under ordinary concepts (section 6-5) or statutory income (section 6-10). Section 10-5 contains a summary list of the provisions for statutory income. No provisions listed in section 10-5 are relevant in the present circumstances. Therefore, irretrievable contributions made by the Company to the Trustee for the Trust will not be assessable income under section 6-10. They will only be included in the calculation of the net income of the Trust under section 95 if they are assessable as income according to ordinary concepts under section 6-5. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In 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 the Commissioner expresses the view that funds provided to the Trustee of an employee share scheme (ESS) for the sole purpose of providing Shares under an ESS will constitute capital receipts to the Trustee and are not assessable under sections 6-5 or 6-10. An ESS is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2)). An ESS interest is a beneficial interest in a share in a company or a right to acquire a beneficial interest in a share in a company (subsection 83A-10(1)). Under the Share Plans, Participants may acquire Rights, Options, or Tax Exempt Shares, each being either a beneficial interest in a Share or a right to acquire a beneficial interest in a Share (i.e. an ESS interest). The irretrievable cash contributions made by the Company to the Trustee under the terms of the Share Plans and the Trust Deed are to be used solely for the purpose of funding the subscription for, or acquisition on-market of Shares for the benefit of Participants in accordance with the terms of the Trust Deed. Accordingly, the irretrievable cash contributions constitute receipts of a capital nature to the Trustee and will not be assessable income of the Trustee pursuant to section 6-5 or 6-10. Question 2 | Detailed Reasoning - Detailed reasoning: Pursuant to section 102-20, an entity can make a capital gain or loss if, and only if, a CGT event happens. CGT event E5 Under subsection 104-75(1), 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 applies) as against the trustee. The time of the event is when a beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)). If CGT event E5 happens, the trustee may make a capital gain or loss if the market value of the asset, at the time of the event, is more than its cost base or less than the asset's reduced cost base respectively (subsection 104-75(3)). In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 applies. 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 ITAA 1997 explains the principles set out in the leading English trust law case of Saunders v Vautier (1841) 49 ER 282 in relation to 'absolutely entitled' as follows: ... if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustees to transfer the trust property to them or at their direction, even though the trust deed contains a contrary intention. The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway. A Participant will become absolutely entitled to the Rights, Options or Tax Exempt Shares (as the case may be) in accordance with the Share Plans when those Shares or Rights have vested, been exercised and the restrictions in respect of the Shares have ceased or no longer apply. Upon the cessation of all the restrictions, the Participant has the right to request the Trustee to transfer the Shares into his or her name and deal with the Shares at his or her own will. At this point, the Participant will become absolutely entitled to the Shares as against the Trustee, and CGT event E5 happens pursuant to subsection 104-75(1). However, any capital gain or loss that a Trustee makes from CGT event E5 in these circumstances is disregarded if section 130-90 applies. Subsection 130-90(1A) applies to shares held for future acquisition under employee share schemes (as in the Tax Exempt Shares under the Omnibus Plan) while subsection 130-90(1) applies in respect of shares held to satisfy the future exercise of rights or options acquired under employee share schemes (as in the Rights and Options). Subsection 130-90(1) applies to disregard any capital gain or loss made by an employee share trust (EST) if all the following apply: Subsection 130-90(1A) applies to disregard any capital gain or loss made by an EST if: o 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 (subparagraph 130-90(1A)(b)(i)) o the event is CGT event E7, and the event happens because the trustee disposes of the ESS interest to a beneficiary of the trust (subparagraph 130-90(1A)(b)(ii)), and Employee share trust In examining whether the requirements of an EST in subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that are relevant. To qualify as an EST, a trustee's activities must be limited to: The Trust Deed provides that the Company and the Trustee agree that the 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)(a) is satisfied because the purpose of the Trust is to acquire, hold and transfer shares in a company, namely the Company. Paragraph 130-85(4)(b) is satisfied because: In respect of paragraph 130-85(4)(c), the phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'. The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'? 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. In the present case, paragraph 130-85(4)(c) is satisfied as activities undertaken by the Trustee other than the acquisition of Shares and the allocation of those Shares to Participants in accordance with the Trust Deed and the Share Plans are merely incidental to the operation of the Share Plans. Paragraph 130-90(1)(a) CGT event E5 will apply under the terms of the Share Plans when the Participant becomes absolutely entitled to the 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 to mean a share in the capital of a company. An ordinary share in the Company held by the Trustee and to which a Participant is entitled upon the vesting of a Right or upon the exercise of an Option is a share in the capital of a company. Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share. Paragraph 130-90(1)(c) Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a Share by: Paragraph 130-90(1)(d) Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states: This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount. The Right or Option in the Share Plans is an 'ESS interest' under paragraph 83A-10(1)(b) because it is a beneficial interest in a right to acquire a share in the Company. 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 Share Plans are ESSs within the meaning of subsection 83A-10(2) because they are schemes under which Rights or Options to acquire beneficial interests in ordinary shares in the Company are provided to employees in relation to the employee's employment. Each Right or Option is acquired for no cost. As the Participant acquires the Right or Option for no cost, the ESS interest is acquired by the Participant at a discount. Therefore, Subdivision 83A-B or 83A-C applies to the Right or Option under the Share Plans. Accordingly, all the conditions in subsection 130-90(1) have been satisfied. Paragraph 130-90(1A)(a) Paragraph 130-90(1A)(a) is satisfied as the shares held by the Trustee are ESS interests which are CGT assets of the Trust. Paragraph 130-90(1A)(b) CGT event E5 is the CGT event that will apply under the terms of the Omnibus Plan at the time the Participant becomes absolutely entitled to the Company Shares as against the Trustee. Therefore paragraph 130-90(1A)(b) is satisfied. Paragraph 130-90(1A)(c) The Omnibus Plan is an employee share scheme 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 the Company in accordance with the Trust Deed. Therefore, Subdivision 83A-B or 83A-C can apply to the Company Shares acquired under the Omnibus Plan and paragraph 130-90(1A)(c) will be satisfied. Accordingly, all the conditions in subsection 130-90(1A) have been satisfied. Subsection 130-90(2) Subsection 130-90(1A) and 130-90(1) do not apply if the beneficiary acquired the beneficial interest in the shares for more than its cost base in the hands of the EST at the time the CGT event happens (subsection 130-90(2)). Provided a Participant does not acquire the beneficial interest in the Share for more than its cost base in the hands of the Trust at the time that CGT event E5 happens subsection 130-90(2) will have been satisfied.

whether the Awards/SARs will be settled with cash, Shares, a combination of both or to be determined by the Board on or following the Performance Qualification Date | disposal restrictions attaching to the Shares | any other supplementary terms and conditions. | the CGT event is CGT event E5 or E7 (paragraph 130-90(1)(a)) | the CGT event happens in relation to a share (paragraph 130-90(1)(b)) | the beneficiary had acquired a beneficial interest in the share by exercising a right (paragraph 130-90(1)(c)) | 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 (paragraph 130-90(1)(d)). | immediately before the event happens, an ESS interest is a CGT asset of the trust (paragraph 130-90(1A)(a)), and | either of the following subparagraphs applies: | Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest (paragraph 130-90(1A)(c)). | obtaining shares or rights in a company (paragraph 130-85(4)(a)) | ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the ESS to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph 130-85(4)(b)) | other activities that are merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and (b) (paragraph 130-85(c)). | Options acquired by Participants under the Plan which subsequently vest and are exercised (with each Option constituting an ESS interest as defined in subsection 83A-10(1)). | Rights acquired by Participants under the Plan which subsequently vest (with each Right constituting a 'right' to which paragraph 130-85(4)(b) applies) | the Share Plans are an ESS within the meaning of subsection 83A-10(2) as they are schemes under which rights to acquire Shares are provided to employees in relation to the employees' employment. | exercising an Option granted under the Omnibus Plan, or | being taken to have exercised a Right granted under the Share Plans once the Right has vested in accordance with the Share Plans and Offers.