Private ruling: Employee Share Scheme Trust
Date of advice: 21 September 2018
Published: October 2018
Ruling period: 1 July 2018 to 30 June 2024

Ruling: Q1: Will the irretrievable cash contributions made by Company A to the trustee of A Trust (Trustee) in accordance with the Incentive Plan (as defined below) and the trust deed of A Trust (Trust Deed) to fund the subscription for, or acquisition on-market of, shares in Company A be assessable income of the Trust pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) or Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | Q2: (a) Will the Trustee make a capital gain or capital loss from CGT event E5 (section 104-75 of the ITAA 1997) happening when a Participant (as defined below) satisfies the vesting conditions for an Award (as defined below), and the Trustee allocates a share to the Participant? | A3: No. | Q3: Will dividends received by the Trustee on shares which have been allocated to a Participant, where the legal title to the shares is held by the Trustee, be included in the calculation of the net income of the Trust under subsection 95(1) of the ITAA 1936? | A4: Yes. | Q4: Will dividends and other income received by the Trustee in respect of unallocated shares be included in the calculation of the net income of the Trust under subsection 95(1) of the ITAA 1936? | A5: Yes. | Q5: Will the Trustee be assessed and liable to pay tax on any of the net income of the Trust under section 99A of the ITAA 1936? | A6: Yes, in respect of the part of the net income of the Trust that is not included in the assessable income of a beneficiary of the Trust under section 97 of the ITAA 1936, in respect of which the Trustee is not assessed and liable to pay tax under section 98 of the ITAA 1936, and that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident of Australia and is also attributable to sources out of Australia. | Q6: Will the Trustee (a) have to include an amount in its assessable income pursuant to subsections 207-35(5) and (6) of the ITAA 1997; and (b) be entitled to a tax offset pursuant to section 207-45 of the ITAA 1997 equal to the franking credits on franked distributions made to the Trustee in respect of the unallocated shares? | A7: Yes.

Relevant facts and circumstances: 1. Company A is an Australian resident company. It operates an employee share plan (the Incentive Plan) as part of its remuneration strategy. The Incentive Plan is operated according to a number of governance documents. 2. Under the Incentive Plan, eligible employees (Participants) are granted rights and options (together referred to as ‘Awards’) to acquire shares in Company A subject to certain conditions being met. 3. The Incentive Plan operates as follows: ● Company A settled A Trust to facilitate the acquisition, holding of, and allocation of shares to Participants. ● Company A makes irretrievable cash contributions to the Trustee to enable the Trustee to acquire shares in Company A in order to satisfy the Awards. The contributions will be determined in accordance with certain protocols. ● The Awards are offered by Company A to the Participants subject to certain conditions. When the conditions of the Awards are satisfied by a Participant, shares are released by the Trustee to the Participant. ● Once the shares are transferred to the Participants, the Participants are entitled to dispose of their shares (subject to complying with certain policies of Company A) according to their own wishes. 4. Company A is not a beneficiary of A Trust. It does not have any legal or beneficial entitlement to any of the shares forming part of the trust fund at any time, and it cannot acquire such an interest.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1936 section 97 | Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1936 Division 6 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 section 104-85 | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 section 130-90 | Income Tax Assessment Act 1997 subsection 207-35(5) | Income Tax Assessment Act 1997 subsection 207-35(6) | Income Tax Assessment Act 1997 section 207-45

Reasons for decision: Summary: The irretrievable cash contributions received by the Trustee from Company A will not be assessable income of the Trust pursuant to sections 6-5 or 6-10 of the ITAA 1997 or Division 6 of Part III of the ITAA 1936, because they are not ordinary income or statutory income of the Trust. A capital gain or loss from CGT event E5 (in section 104-75 of the ITAA 1997) will be disregarded under section 130-90 of the ITAA 1997 when a Participant satisfies the vesting conditions for an Award and the Trustee allocates a share to the Participant. The Trustee will not make a capital gain or loss from CGT event E7 (in section 104-85 of the ITAA 1997) or CGT event A1 (in section 104-10 of the ITAA 1997) happening when the Trustee transfers the legal ownership of the shares to the Participant following allocation. | Detailed Reasoning - Questions 3 and 4: The dividends received by the Trustee on shares which have been allocated to a Participant, where the legal title to the shares is held by the Trustee, will be included in the calculation of the net income of A Trust under subsection 95(1) of the ITAA 1936. The dividends and other income received by the Trustee in respect of unallocated shares will be included in the calculation of the net income of A Trust under subsection 95(1) of the ITAA 1936. | Detailed Reasoning - Question 5: The Trustee will be assessed and liable to pay tax under section 99A of the ITAA 1936 on the part of the net income of A Trust that is not included in the assessable income of a beneficiary of A Trust under section 97 of the ITAA 1936, in respect of which the Trustee is not assessed and is not liable to pay tax under section 98 of the ITAA 1936, and that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources of out of Australia. | Detailed Reasoning - Question 6: The Trustee will have to include an amount in its assessable income pursuant to subsections 207-35(5) and (6) of the ITAA 1997, and will be entitled to a tax offset pursuant to section 207-45 of the ITAA 1997 equal to the franking credits on franked distributions made to the Trustee, in respect of the unallocated shares.

(b) Will the Trustee make a capital gain or capital loss from CGT event E7 (section 104-85 of the ITAA 1997) or CGT event A1 (section 104-10 of the ITAA 1997) happening when the Trustee transfers the legal ownership of the shares to a Participant following allocation?