Private ruling: Employee share scheme
Date of advice: 25 October 2024
Published: 9 December 2024
Ruling period: 1 July 2024 to 30 June 2025 | 1 July 2025 to 30 June 2026 | 1 July 2026 to 30 June 2027 | 1 July 2027 to 30 June 2028 | 1 July 2028 to 30 June 2029
Date scheme commenced: 1 July 2024

Ruling: Q1: Will the irretrievable cash contributions from A Co to the Trustee to fund the subscription for, or acquisition on-market of, fully-paid ordinary shares in A Co (Shares) pursuant to A Co's employee share plans (Plans), be assessable income of the trust pursuant to sections 6-5, 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) or Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | Q2: Will CGT event E5 of section 104-75 of the ITAA 1997 happen for the Trustee at the time a Participant becomes absolutely entitled to Shares under the Plans? | A2: Yes. | Q3: If CGT event E5 does happen, will a capital gain or loss made by the Trustee, as a result of CGT event E5 happening, be disregarded under section 130-90 of the ITAA 1997 if the Participant acquires the Shares for the same or less than the cost base of the Shares in the hands of the Trustee? | A3: Yes.

Relevant facts and circumstances: A Co A Co is an Australian resident public company listed on the Australian Securities Exchange (ASX) and is the head company of an income tax consolidated group (the A Co TCG). A Co is a major diversified company that operates different businesses. A Co's current employee share plans are: • Plan A • Plan B • Plan C • Plan D (together, the Plans). A Co grants Shares under Plan A, Plan B and Plan D. A Co also grants Performance Rights (as defined under the Plan A Rules, being an entitlement to a Share or to a cash payment equal in value to a Share) (Share Rights) under Plan C. The Plans are a component of A Co's compensation and benefits packages and are described as a 'retention and alignment tool (aligning employee behaviour with shareholders' interests)'. The Plans generally apply to all eligible employees of A Co and its subsidiaries within the meaning of Division 6 of Part 1.2 of the Corporations Act (the Group) . Plan A Plan A was introduced in 20XX as the general share plan for Australian resident employees. It is governed by the Plan A Rules. Under the Plan A Rules, the Board may, in its absolute discretion, make invitations to Eligible Employees to participate in Plan A to acquire Shares. On XX August 20XX, the Plan A Rules were amended and approved. In particular, the new rule X provides the Board with the absolute discretion to apply an adjustment (upwards or downwards) to the number of a Participant's Shares or Performance Rights that vest once the conditionsattached to those awards are satisfied. Where the Board decides to reduce the number of a Participant's Shares or Performance Rights that vest, those Shares or Performance Rights that would otherwise have vested will instead lapse or be forfeited. An Eligible Employee means a director of A Co, a person employed by a Group Company or other person the Board determines to be eligible to participate. Shares allocated under Plan A to Eligible Employees are subject to a 3-year trading restriction period from allocation date and they are held by the Trustee of the Trust on behalf of the Participants during the trading restriction period. Participants can choose to leave their Shares in the trust after the trading restriction period. Participants are entitled to receive dividends for their allocated Shares. A Co made the following offers under Plan A: • Tax Deferred Plan - Award • Tax Deferred Plan - Salary Sacrifice • Tax Exempt Plan - Award • Tax Exempt Plan - Salary Sacrifice Tax Deferred Plan - Award The Tax Deferred Plan - Award is an award of Shares of a value specified to the employee. Offers may be made to permanent employees in senior roles each year, depending on the performance of the Group and the employee's division. Shares are allocated on a specified date shortly after an offer is accepted. Generally, the Shares are subject to a one, two or three-year forfeiture period, subject to the following: • if the Participant ceases employment for reasons other than retirement, redundancy, ill health or death, the allocated Shares will be forfeited. • if a Participant ceases employment due to retirement, redundancy, ill health, or death during the forfeiture period, the Participant will be entitled to retain the Shares allocated. If, in the opinion of the Board, the Participant ceases employment because of fraud, theft, or other gross misconduct at any time, all of the Shares allocated will be forfeited. Tax Deferred Plan - Salary Sacrifice The Tax Deferred Plan - Salary Sacrifice provides Participants an opportunity to acquire up to $5,000 worth of Shares through a salary sacrifice arrangement, deducted from the Participants' pre-tax salary or wages in equal instalments each pay cycle. Offers are made to all permanent employees each year. Shares are allocated monthly over 12 months. If the Participant ceases employment during the trading restriction period, the trading restriction is lifted. Rule XX of the Plan A Rules states that if the invitation consists of an offer which is a salary sacrifice arrangement where the employee's maximum participation in employee share schemes does not exceed $5,000, then Subdivision 83A-C of the Tax Act applies to that offer. Tax Exempt Plan - Award The Tax Exempt Plan - Award is an award of up to $1,000 worth of Shares. Offers may be made to permanent employees each year, depending on the performance of the Group and the employee's division. Shares are allocated on a specified date shortly after an offer is accepted. If the Participant ceases employment during the trading restriction period, the trading restriction is lifted. Shares allocated under the Tax Exempt Plan - Award are intended to satisfy the conditions for tax exemption under section 83A-35 and cannot be forfeited for any reason. Tax Exempt Plan - Salary Sacrifice The Tax Exempt Plan - Salary Sacrifice provides Participants an opportunity to acquire either $500 or $1,000 worth of Shares through a salary sacrifice arrangement, deducted from the Participants' pre-tax salary or wages in equal instalments each pay cycle over 12 months. Shares are allocated monthly over 12 months. Offers may be made to all permanent employees each year. If the Participant ceases employment during the trading restriction period, the trading restriction is lifted. Shares allocated under the Tax Exempt Plan - Salary Sacrifice are intended to satisfy the conditions for tax exemption under section 83A-35 and cannot be forfeited for any reason. Plan B Plan B provides an award of Shares and it is delivered partly in: • Restricted Shares, which are subject to a three-year trading restriction (Restricted Shares), and • Performance Shares, which are subject to performance conditions over four years. Shares are allocated on a specified date shortly after an offer is accepted. Plan B is also governed by the Plan A Rules. To the extent of any inconsistency, the terms of the Plan B offer letter will prevail, followed by the explanatory notes and the Plan A Rules. In relation to the Restricted Shares: • they are subject to a three-year forfeiture period from the Grant Date, and a three-year trading restriction, unless the Participant requests a longer restriction period of 5, 10 or 15 years, and • the dividends paid will be distributed by the Trustee directly to the Participants on the payment date. In relation to the Performance Shares: • they will vest and become unrestricted shares, subject to satisfaction of the performance condition measured over a four-year performance period. The Participants will be notified of vesting outcomes. Any Performance Shares that do not vest will be forfeited. • dividends paid are subject to the terms of an Escrow Deed entered into between A Co, the Participant, and the escrow agent, whereby the dividends will be held in an interest-free escrow account until the vesting date and then paid to the Participant only to the extent, and at the time the Performance Shares, vest. If the underlying Share has been forfeited, the remaining escrowed amount is paid to A Co and is treated as assessable income of A Co. Plan C Plan C is governed by the Plan A Rules. To the extent of any inconsistency between the terms set out in the Plan C offer letter and the Plan A Rules, the terms in the offer letter will prevail. Plan C is an award to senior executives subject to the satisfaction of performance measures over a 12-month period. The awards being delivered are Share Rights in the form of Performance Rights (as defined under the Plan A Rules) being rights to receive: • cash for performance up to "target" (Cash Award), where the senior executives may elect to receive some or all of their Cash Award in the form of Restricted Shares (Additional Shares) rather than in cash. The election to forgo some or all of the Cash Award for Additional Shares is made shortly after an offer is accepted, subject to a subsequent option to revoke this election (closer to the end of the performance period), and • Shares in A Co for performance between "target" and "maximum" (Deferred Shares), where it is mandatory to receive Shares and the Performance Rights to receive Deferred Shares cannot be settled in cash. Where the Cash Awards are settled in cash, the outgoing will not flow through the Trust. During the Performance Period: • if the Participant resigns or their employment is terminated for cause or for not meeting acceptable standards of performance in connection with employment - the Participant will not be eligible to receive an award under Plan C, unless the Board determines otherwise, • if the Participant ceases employment with the Group for any other reason, including redundancy, ill health, death or normal retirement, the Participant will remain eligible to receive a pro-rated amount of their award under Plan C, which will be awarded entirely in cash. If the Participant ceases employment after the Performance Period but before they receive any award under Plan C, they will remain eligible to receive the award in full which will be awarded entirely in cash. In respect of the Deferred Shares and Additional Shares: • they are allocated after the end of the performance period once the performance measures are assessed • they are subject to a three-year trading restriction period, unless the senior executive elects to extend the trading restriction period. If a longer restriction period is elected, the restriction period commences from the start of the performance period and ends on the trading day following the announcement of A Co's half-year results. • they will be held by the Trustee during the restriction period • the senior executives are entitled to any dividends paid on the allocated Shares • upon expiry of the restriction period, the Participant may direct the Trustee to sell the Deferred Shares and Additional Shares • Participants can choose to leave their Shares in the Trust after the trading restriction period. In respect of the Deferred Shares: • if, within 12 months of the Deferred Shares being allocated, the senior executive resigns or has their employment terminated for cause or for not meeting acceptable performance standards in connection with employment, all of the Deferred Shares may be forfeited at the Board's discretion • if the senior executive ceases employment for any other reason during the 12-month period, or after the 12-month period (but before the end of the mandatory three-year restriction period), the Deferred Shares remain on foot and the trading restrictions will cease to apply, unless the Board determines otherwise. In respect of the Additional Shares, the voluntary or extended nominated restriction periods end on the date nominated, even where employment may end earlier. Plan D Plan D is an award of newly issued Shares to the executives and the award is delivered partly in: • restricted shares, that are subject to a 12-month service condition and a further 3, 4 and 5 year trading restriction (Deferred Shares); and • performance shares which are subject to performance conditions over four years (Performance Shares). The number of Deferred Shares and Performance Shares to be allocated to the Participants is set out in the offer letter and they are held by the trust. Plan D is governed by the Plan D Rules. The Deferred Shares: • are subject to a 12-month continued service condition, commencing on the Grant Date and ending after 12 months (service period). • vest at the end of the service period and will be held in trust, subject to a further 3, 4, and 5 year trading restriction (and the Deferred Shares will be released and available to trade in three equal tranches after 3, 4 and 5 years on the trading day following the full-year results announcement), unless a extension is requested by the Participant for 7, 10 or 15 years from the Grant Date. • If the Participant ceases employment because they: ­ resign during the 12-month service period (during the time which the Deferred Shares are unvested) ­ are dismissed for cause or significant underperformance ­ breach the restraints clause in their service agreement, or ­ are otherwise dismissed in circumstances determined by the Board in its absolute discretion to justify bad leaver treatment any unvested Deferred Shares and vested Deferred Shares subject to a holding lock will be forfeited. • if the Participant ceases employment for any other reason, or if they resign after the service period has ended, unless the Board decides otherwise, their Deferred Shares will remain on foot. In relation to Performance Shares: • they will vest and become unrestricted shares upon satisfying certain performance conditions over a 4-year performance period. The Participants are expected to be advised of the vesting outcome around August. • any Performance Shares that do not vest will be automatically forfeited. • If the Participant ceases employment because they: ­ resign (except due to death, disability or serious illness), ­ are dismissed for cause or significant underperformance, ­ breach the restraints clause in their service agreement, or ­ are otherwise dismissed in circumstances determined by the Board in its absolute discretion to justify bad leaver treatment, the Performance Shares will be forfeited, unless the Board determines otherwise. • if the Participant ceases employment for any other reason, unless the Board decides otherwise, the Performance Shares will remain on foot and subject to the original performance conditions and the Plan A Rules, as though the employment had not ceased. • if the Participant ceases employment after the performance period has ended but before the Performance Shares vest, the Performance Shares will be eligible to vest. Participants can choose to leave their Shares in the trust after the performance period or trading restriction period (as applicable). Participants are presently entitled to dividends arising on their Deferred Shares and Performance Shares as against the Trustee. • During the 12-month service period, any dividends referrable to the Deferred Shares will be subject to a deferred payment date. Upon vesting following the end of the service period, A Co will seek quotation of the Deferred Shares and any accrued dividend entitlements will be paid to the Participants to the extent the Deferred Shares are not forfeited. • During the 4-year performance period, any dividends referable to the Performance Shares will be subject to a deferred payment date. Following the end of the performance period and confirmation of the vesting outcome, A Co will seek quotation of the Performance Shares and any accrued dividend entitlements will be paid to the Participants to the extent the Performance Shares are not forfeited. Any distributions (excluding dividends) paid on the Deferred Shares and Performance Shares will be held in escrow and directed to the Trustee to transfer any such funds into the escrow account to be held in accordance with the terms of the Escrow Deed between the Participant, A Co, and the agent for Plan D offer. Acquisition of Shares by the Trustee The following describes the share acquisition process under Plan A where A Co makes irretrievable cash contributions to the Trustee to allow the Trustee to either subscribe for Shares or acquire Shares on-market. • A Co makes irretrievable cash contributions on behalf of its wholly owned subsidiaries and other subsidiaries it controls (as defined in the Corporations Act 2001 ). • The Plan Administrator (a division of Computershare Limited) advises A Co of the number of Shares and the value of the irretrievable cash contributions required to satisfy the obligations of the Plan A Rules. • Following the completion of the invitation period, in the case of an issue of new Shares by A Co: ­ A Co submits an Appendix 3B to the ASX for the issuance of new Shares. Once submitted, A Co pays the irretrievable cash contributions to the Trustee for the Plans to be administered appropriately. ­ once the irretrievable cash contributions are received by the Trustee (typically the same day as the irretrievable cash contributions is made by A Co), A Co arranges with the Plan Administrator for the issue of new Shares in the name of the Trustee, who then arranges the payment for the Shares to A Co. • Where Shares are to be acquired on-market: ­ the Trustee, via the Plan Administrator, places an order with a nominated broker(s) for the requisite number of Shares to be purchased on-market. ­ A Co can pay the irretrievable cash contributions to the Trustee before or after the acquisition of the Shares. If the Trustee approves, contributions can be made directly to the broker after the acquisition of Shares, on behalf of the Trustee. ­ the broker(s) purchases Shares on-market and advise the Trustee of the total invoice value including brokerage. ­ the Trustee settles the trade with the broker(s) on nominated terms (this can be T+1, T+2 upon the request of A Co). ­ The broker(s) provides the Shares to, and in the name of, the Trustee in accordance with the directions of the Trustee. The Share acquisition process under Plan B, Plan C and Plan Dis the same as for Plan A as set out above, except for the timing of acquisition. • It is A Co's practice to acquire the Shares for the Plan B progressively over the four-year performance period based on the number of Performance Shares expected to vest for each grant. • It is A Co's practice to acquire the Shares for Plan C progressively over the 12-month performance period based on the number of Share Rights (Performance Rights to receive Additional Shares and Deferred Shares) expected to vest for each grant. Share acquisitions usually happen in August following full-year results in the financial year subsequent to the invitation and are all acquired in one day. The Trust In 20XX, A Co appointed the Trustee to receive funds from A Co and acquire and hold property on trust for the benefit of employees of A Co and its subsidiaries in accordance with the rules of the Plans and the terms and conditions in the Trust Deed. The Trustee has all the powers in respect of the Trust that is legally possible for a trustee as a body corporate to have for the sole purpose of exercising its powers and discharging its obligations under the Trust Deed and the rules of the applicable Plan. The Trustee's activities are limited to managing A Co's employee shares schemes for the purposes of section 1100S of the Corporations Act . The Trust Deed sets out a conformed version of the original trust deed and subsequent amendments since that date. "Beneficiaries" is defined to mean any person who participates in the Plans and any full-time or permanent part-time employee of A Co or its subsidiaries. A Co is not a beneficiary of the Trust and has no entitlement to any Shares forming the Trust Fund (being the settlement sum and other property including money or fully paid Shares) at any time. The Trustee is neither a subsidiary nor a related body corporate of A Co for the purposes of the Corporations Act 2001 . Trustee's obligations and powers Under the Trust Deed, the Trustee agrees to: • hold the Trust Fund on trust for all beneficiaries (General Trust Property ) in the manner required by the rules of the Plans, and • at the request of the Board, set aside and hold some of the Trust Fund for the benefit of identified Participants (Allocated Trust Property). In relation to the General Trust Property, the Trustee may apply it for the benefit of Beneficiaries. If Shares are held as part of the General Trust Property (e.g. unallocated shares), the Trustee: • may, with the consent of the Board, or shall if directed by the Board, apply any dividends or other distributions received on those Shares in repaying any loans from a Group Company, acquiring further Shares, defraying the costs and expenses of administering the trust and managing the Plans and otherwise must hold those amounts on trust for Beneficiaries • must hold bonus issues or other benefits received on those Shares on Trust for the Beneficiaries • may vote or refrain from voting in respect of those Shares in its absolute discretion (if the Trustee is not an associated entity of A Co) • may participate in other corporate actions of A Co (e.g. a rights or bonus issue) in its absolute discretion • may not transfer those Shares to another person In relation to the Allocated Trust Property (e.g. Allocated Shares), the Trustee must act at all times in accordance with the rules of the Plans and: • must not deal with any part of Allocated Trust Property otherwise than as set out in the rules of the Plans • must comply with the rules of the Plans, including any requests of the Board so far as is reasonable • is not bound to observe instructions from an Allocated Trust Property Beneficiary except as required by the rules of the Plans • subject to the rules of the Plans, must, at the request of an Allocated Trust Property Beneficiary on whose behalf an identified part of the Allocated Trust Property is held, transfer that part of the Allocated Trust Property to the Allocated Trust Property Beneficiary If Shares are held on trust for a specified Allocated Trust Property Beneficiary: • the Allocated Trust Property Beneficiary is presently entitled to receive all dividends and other distributions, bonus issues and other benefits payable or provided to the Trust in respect of those Shares • the Trustee may direct A Co to pay any dividends directly to the Allocated Trust Property Beneficiary or distribute the dividends to that Beneficiary upon receipt, or escrow certain dividends on behalf of the Allocated Trust Property Beneficiary and distribute them under the rules of the Plans • any bonus shares issued in respect of those Shares will be issued to the Trustee and held for the Allocated Trust Property Beneficiary on the same terms and conditions as the underlying Shares • the Trustee may vote or refrain from voting in its absolute discretion, in the absence of any direction from the Allocated Trust Property Beneficiary in writing on how to exercise the voting rights attaching to those Shares. The following applies to Shares held by the Trustee in respect of an Allocated Trust Property Beneficiary under a specified Allocated Trust Property Beneficiary under the Plans (Specified Beneficiary). If Shares forming part of the Trust Fund are held on trust for a Specified Beneficiary: • the Specified Beneficiary is not entitled to receive any dividends and other distributions in respect of those Shares until they are released from any restrictions, unless the rules of the Plans provide otherwise or the Board determines otherwise • the Trustee must hold any such dividends or other distributions until those underlying Shares are released from any restrictions, and to the extent any such Share are forfeited, the dividends or distributions held by the Trustee will form part of the General Trust Property • the Trustee may, with consent of the Board, apply any interest received from the investment of such dividends or distributions to defray the costs and expenses of administering the Trust and managing the Plans, and otherwise must hold those amounts as part of the Trust Fund. • any bonus shares that are issued in respect of those Shares will be issued to the Trustee and held for the Specified Beneficiary on the same terms and conditions as the underlying Shares and transferred to the Specified Beneficiary for no further consideration when the underlying Shares are released from any restrictions. The investment referred to above is interest payable if the dividend was held in an interest-bearing bank account and all funds held by the Trustee are currently held in non-interest bearing accounts. The Trustee must comply with any direction from A Co to subscribe for, purchase or accept Shares on behalf of the Beneficiaries in accordance with the rules of the Plans and apply any amount paid to it, whether by way of gift or loan or otherwise, by A Co or any Subsidiary pursuant to the rules of the Plans in accordance with A Co's directions, provided A Co has provided sufficient funds to comply with the direction. Neither A Co nor any of its subsidiaries currently loan money to the Trustee. A Co only funds the Trustee bank account in advance of shares being acquired to satisfy share awards. None of the irretrievable cash contributions made by A Co to the Trust will be used to establish or form part of a fund which will be applied to make loans or otherwise provide finance to the A Co group employees. In the event that the Trust is terminated, clause Y of the Trust Deed provides: The Trustee must, as soon as practicable after the Termination Date, wind up the Trust and transfer the Trust Fund or the proceeds on sale of the Trust Fund (as appropriate): (1) in relation to Allocated Trust Property, to the appropriate Allocated Trust Property Beneficiary; (2) in relation to General Trust Property, to the Company in repayment of any outstanding loan from the Company, to a Subsidiary in repayment of any outstanding loan from that Subsidiary, and otherwise at the discretion of the Trustee, having regard to and not being inconsistent with the purpose of this Trust. A Co's obligations Under the Trust Deed, A Co agrees to: • pay all the costs and expenses in administering the Trust Deed including all costs and expenses in maintaining the corporate existence of the Trustee or incurred in connection with the acquisition, registration, disposal of or other dealing with Shares and otherwise incurred by the Trustee in carrying out its duties, • indemnify the Trustee against all liabilities, costs and expenses and actions, proceedings, costs, claims and demands that may arise out of or in connection with the Trustee acting as Trustee, unless it is proved that the act giving rise to the claim or demand has been committed, made or omitted in bad faith by the Trustee.

Relevant legislative provisions: ITAA 1997 | section 6-5 | section 6-10 | section 8-1 | section 10-5 | Division 83A | Subdivision 83A-B | Subdivision 83A-C | subsection 83A-10 | subsection 83A-10(1) | subsection 83A-10(1)(a) | subsection 83A-10(2) | subsection 83A-20 | subsection 83A-20(1) | subsection 83A-105 | subsection 83A-105(1) | subsection 102-5(1) | subsection 102-20 | subsection 104-75 | subsection 104-75(1) | subsection 104-75(2) | subsection 104-75(3) | subsection 130-85 | subsection 130-85(1) | paragraph 130-85(1)(a) | paragraph 130-85(1)(b) | paragraph 130-85(1)(c) | subsection130-85(2) | subsection130-85(3) | subsection 130-85(4) | paragraph 130-85(4)(a) | paragraph 130-85(4)(b) | paragraph 130-85(4)(c) | section 130-90 | subsection 130-90(1A) | subparagraph 130-90(1A)(a) | subparagraph 130-90(1A)(b)(i) | subparagraph 130-90(1A)(b)(ii) | subparagraph 130-90(1A)(c) | subsection 130-90(1) | paragraph 130-90(1)(a) | paragraph 130-90(1)(b) | paragraph 130-90(1)(c) | paragraph 130-90(1)(d) | subsection 130-90(2) | Division 128 | subsection 995-1(1) | ITAA 1936 | Division 6 | section 95 | subsection 95(1)

Reasons for decision: Summary: The irretrievable cash contributions made by A Co to the Trustee to fund the subscription for, or acquisition on-market of Shares pursuant to the Plans, will not be assessable income of the Trust under sections 6-5 or 6-10 or Division 6 of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Assessable income of the Trust under section 6-5 or 6-10 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) of the ITAA 1936). Subsection 6(1) of the ITAA 1936 states that 'assessable income' has the meaning given by subsection 995-1(1), which takes the meaning given by sections 6-5 and 6-10. 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. None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, the non-refundable cash contributions made by A Co to the Trustee of the Trust will not be assessable income under section 6-10. The contributions will only be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936 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 2022/965 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 for the sole purpose of providing shares under the scheme will constitute capital receipts to the trustee and are not assessable under section 6-5 or 6-10. An employee share scheme 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 beneficial interest in a right to acquire a beneficial interest in a share in a company (subsection 83A-10(1)). Under the Plans, each Participant will acquire a Share or a Share Right and they constitute an ESS interest under subsection 83A-10(1) because each represents, respectively, a beneficial interest in a share in a company paragraph 83A-10(1)(a)), or a beneficial interest in a right to acquire a beneficial interest in a share in the company (paragraph 83A-10(1)(b)). In the case of the Shares granted under Plan B, they constitute indeterminate rights for the purposes of section 83A-340 because they are subject to the exercise of the Board's discretion to adjust (upwards or downwards) the number of a Participant's Shares that vest based on the satisfaction of the performance conditions and the number of Shares that the Participant is entitled to cannot be determined at the time of grant. Accordingly, the grant of a Share under the Plan B is not a right to acquire a beneficial interest in a share (an ESS interest) unless, and until the time the number of Shares the Participant is entitled is determined. Therefore, the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted. When the number of Shares the Participant is entitled to receive is determined, the indeterminate right will be treated as if it had always been an ESS interest (subsection 83A-340(2)). In the case of the Share Rights to receive Cash Award and Deferred Shares granted under Plan C, they constitute indeterminate rights for the purposes of section 83A-340 because they can be settled by either a Share or by the making a payment of a cash equivalent amount in lieu of a Share, to be determined at a future time. Accordingly, the issue of a Share Right to receive Cash Award or Deferred Shares is not a right to acquire a beneficial interest in a share (an ESS interest) unless, and until the time it is determined that they will be satisfied by the provision of Shares and the number of shares the Participant is entitled to receive is determined. Therefore, the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted. When it is ultimately satisfied with Shares instead of cash and when the number of shares the employee is entitled to receive is determined), the indeterminate right will be treated as if it had always been an ESS interest (subsection 83A-340(2)). Subject to the possibility of the Share Right to be satisfied in cash payment in lieu of being allocated a Share under Plan C, each Participant will acquire a Share or a Share Right, being a beneficial interest in a share in a company or a beneficial interest in a right to acquire a beneficial interest in a share, in relation to their employment. Having regard to the above matters, the Plans constitute an employee share scheme within the meaning of subsection 83A-10(2). The irretrievable cash contributions made by A Co to the Trustee under the terms of the Plans and the Trust Deed are to be used for the sole purpose of acquiring, holding and transferring Shares for the benefit of Participants. Accordingly, the irretrievable cash contributions constitute capital receipts to the Trustee and will not be assessable income of the Trustee under sections 6-5 or 6-10. Given that the irretrievable cash contributions made by A Co to the Trustee are neither ordinary income nor statutory income under sections 6-5 or 6-10, these contributions will not be included in the net income of the Trust under Division 6 of the ITAA 1936. | Summary: CGT event E5 will happen to the Trustee in relation to Shares held by the Trustee under the Plans at a time when a Participant becomes absolutely entitled to the Shares acquired under the Plans. | Detailed Reasoning - Detailed reasoning: Subsection 102-5(1) states that a taxpayer's assessable income includes their net capital gain (if any) for the income year. Under section 102-20, an entity can make a capital gain or loss if, and only if, a CGT event happens. | Detailed Reasoning - Participants become absolutely entitled to a Share under the Plans - 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 the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)). If CGT event E5 happens, the trustee may make a capital gain or capital 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. Subsection 130-85(2) treats a beneficiary as absolutely entitled to the relevant share or right from the time of acquisition of the ESS interest until they no longer have an interest in the share or the right. Subsection 130-85(2) only applies if the following requirements under subsection 130-85(1) are satisfied: (a) the beneficiary acquires an ESS interest under an employee share scheme (b) Subdivision 83A-B or 83A-C applies to the ESS interest, and (c) the ESS interest is, or arises because of, an interest the beneficiary holds in an employee share trust. | Detailed Reasoning - Participants acquire ESS interests under an employee share scheme (paragraph 130-85(1)(a)): As stated in the response to Question 1, as Participants are granted awards under the Plans in relation to their employment, which provide them with a beneficial interest in a share in A Co, or, a beneficial interest in a right to acquire a beneficial interest in a share in A Co (in the case of Share Rights to receive Cash Award or Deferred Shares granted under Plan C), they are taken to have acquired ESS interests under an employee share scheme and paragraph 130-85(1)(a) will be satisfied. | Detailed Reasoning - Subdivision 83A-B or 83A-C applies to the Shares and Share Rights (paragraph 130-85(1)(b)): 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: 83A-20(1) This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount. Under the Plans, Shares and Share Rights may be acquired for no consideration or at a discount. As such, Subdivision 83A-B will apply to these Shares and Share Rights (unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C would apply instead). Therefore, paragraph 130-85(1)(b) is satisfied. | Detailed Reasoning - The ESS interest arises because of an interest the Participants hold in an employee share trust (paragraph 130-85(1)(c)): As outlined above, Shares and Share Rights granted to Participants under the Plans constitute ESS interests, as they provide Participants with a beneficial interest in the Shares, or a beneficial interest in a right to acquire a beneficial interest in the Shares held in the Trust. Subsection 130-85(4) provides that an employee share trust for an employee share scheme (having the meaning given by subsection 83A-10(2)) is a trust whose sole activities are: (a) obtaining shares or rights in a company (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 (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). As stated in the response to Question 1, the Plans comprise an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which either Shares or Share Rights (being ESS interests), are provided to Participants in relation to their employment with A Co. A Co has established the Trust to facilitate the Plans by acquiring Shares and allocating those shares to Participants in order to satisfy the invitations, awards and offers under A Co's employee share scheme arrangements. The awards granted to Participants under the Plans provide Participants with a beneficial interest in the Shares, or the right to acquire a beneficial interest in Shares held in the Trust. Paragraphs 130-85(4)(a) and (b) of the definition of an employee share trust are satisfied because the Trustee: • acquires Shares, and • ensures those Shares (which are ESS interests) are provided under the Plans (being an employee share scheme) to Participants (who are employees of the Group) by allocating those Shares to the Participants in accordance with the Trust Deed and the terms of the Plans. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) will also require that the Trustee undertake incidental activities that are a function of managing the Plans and administering the Trust. Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). 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'? Whether the Trust is an employee share trust for the purposes of subsection 130-85(4) requires an analysis of what the Trustee actually does, not only the powers and duties that are prescribed in the Trust Deed. 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, the Trust Deed supports the conclusion that the Trustee may only use irretrievable cash contributions received from A Co to acquire Shares for Participants in accordance with the rules of the Plans. All other duties and 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 Shares to be acquired for Participants and paragraph 130-85(4)(c) is satisfied. Therefore, the Commissioner considers the Trust to be an employee share trust based on the terms of the Trust Deed and paragraph 130-85(1)(c) is satisfied. As all of the conditions in subsection 130-85(1) are satisfied, CGT event E5 is the CGT event that will apply under the terms of the Plans at the time that Participant becomes absolutely entitled to the Shares as against the Trustee. | Summary: A capital gain or loss that arises to the Trustee at the time when CGT event E5 happens in relation to Shares held by the Trustee under the Plans will be disregarded under section 130-90, 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: Any capital gain or capital loss an employee share trust makes, as a result of CGT event E5 happening, is disregarded if subsection 130-90(1A) or 130-90(1) applies, provided the Participants acquire the Shares for the same or less than the cost base of the shares in the hands of the Trustee (subsection 130-90(2)). | Detailed Reasoning - Shares held for future acquisition under employee share scheme (subsection 130-90(1A)): Subsection 130-90(1A) applies to disregard any capital gain or capital loss made by an employee share trust to the extent that it results from a CGT event if: a) immediately before the event happens, an ESS interest is a CGT asset of the trust, b) either of the following applies: (i) the event is CGT event E5, and the event happens because a beneficiary of the trust becomes absolutely entitled to the ESS interest as against the trustee (ii) the event is CGT event E7, and the event happens because the trustee disposes of the ESS interest to a beneficiary of the trust c) Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest. For the reasons discussed in response to Question 2, the Trust is an employee share trust as that term is defined in subsection 130-85(4). Paragraph 130-90(1A)(a) is satisfied as the Shares held by the Trustee are ESS interests which are CGT assets of the Trust. Subparagraph 130-90(1A)(b)(i) is satisfied as CGT event E5 is the CGT event that will happen under the terms of the Plans at the time the Participant becomes absolutely entitled to the Shares as against the Trustee. Paragraph 130-90(1A)(c) is satisfied because: • the Plans comprise an employee share scheme for the purpose of Division 83A as it is an arrangement under which ESS interests are provided to a Participant in relation to their employment, and • Subdivision 83A-B or 83A-C will apply as Participants acquire the Shares under the Plans at a discount (or if the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C would apply instead). Accordingly, all conditions in subsection 130-90(1A) are satisfied. | Detailed Reasoning - Shares held to satisfy the future exercise of rights acquired under employee share schemes (subsection 130-90(1)): Subsection 130-90(1) applies to disregard any capital gain or loss made by an employee share trust if: • 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)). As stated above, CGT event E5 will happen under the terms of the Plans when the Participant becomes absolutely entitled to the Shares as against the Trustee. Therefore, paragraph 130-90(1)(a) is satisfied. Paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share in A Co, being a fully paid ordinary share in the capital of A Co held by the Trustee (as defined under subsection 995-1), to which a Participant becomes absolutely entitled to under the Plans upon vesting or exercise of the Share Rights. Paragraph 130-90(1)(c) is satisfied as the Participant will have acquired a beneficial interest in a Share on vesting and exercise of the Share Rights granted under the relevant Plans in accordance with the relevant Plan rules. Paragraph 130-90(1)(d) is satisfied because: • the Plans comprise an employee share scheme for the purpose of Division 83A (subsection 83A-10(2)) as they are an arrangement under which ESS interests (i.e. Share Rights under the Annual Incentive Plan) are provided to a Participant in relation to their employment, and • Subdivision 83A-B or 83A-C will apply as Participants may acquire Share Rights under the Plans at a discount (or if the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C would apply instead). Accordingly, all the conditions in subsection 130-90(1) are satisfied. | Detailed Reasoning - Conclusion: As all the conditions in subsection 130-90(1) or (1A) are satisfied, any capital gain or loss that arises for the Trust at the time when CGT event E5 happens will be disregarded if the Shares are acquired by the Participant for the same or less than the cost base of the Shares in the hands of the Trust.