Private ruling: Employee Share Trust
Date of advice: 31 August 2018
Published: October 2018
Ruling period: Income tax year end 20xx - Income tax year end 20xx
Date scheme commenced: xx Month 20xx

Ruling: Q1: Will irretrievable cash contributions made by the Company to the Trustee of Employee Share Trust (the Trust) to fund the acquisition of, or subscription for, the Company’s shares held by the Trust be assessable income of the Trust under section 6-5 or section 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 either CGT event E5 or E7 happens in relation to the Company’s shares held by the Trustee be disregarded under section 130-90 of the ITAA 1997 if the employees acquire the shares for the same or less than that the cost base of the shares in the hands of the Trustee? | A2: Yes.

Relevant facts and circumstances: The Company is an Australian publicly listed company and the head company of income tax consolidated group. Employee share plan The Company has implemented an Employee Share Plan (Plan) as part of its remuneration strategy. Broadly, the Plan operates to provide eligible employees (Participants) with a right to acquire a share in the Company subject to the relevant performance conditions being satisfied. Employee share trust To facilitate the operation of the Plan, the Company has established an Employee Share Trust (Trust) for the sole purpose of obtaining shares in the Company for the benefit of the Participants, including subscribing for or acquiring, allocating, holding and delivering shares under the Plan for the benefit of Participants. The acquisition of shares is funded by the irretrievable cash contributions made by the Company to the Trustee of the Trust in accordance with the Plan and the terms of the Trust Deed. Shares will be acquired and held by the Trust for the benefits of the Participants subject to relevant performance conditions are satisfied.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | 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-20 | Income Tax Assessment Act 1997 section 104-5 | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 subsection 130-90(1) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the acquisition of the Company’s shares in accordance with the Plan Rules and Trust Deed will not be assessable income of the Trust under section 6-5 or 6-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 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 … Under subsection 6-5(1) of the ITAA 1997, assessable income includes income according to ordinary concepts, which is called ordinary income. Under subsection 6-10(1) of the ITAA 1997, assessable income also includes some amounts that are not ordinary income. These are included by provisions about assessable income listed under section 10-5 of the ITAA 1997. The irretrievable cash contributions made by the Company to the Trustee of the Trust under the terms of the Plan and the Trust Deed are to be used for the sole purpose of obtaining shares in the Company for the benefit of Participants (including subscribing for or acquiring, allocating, holding and delivering shares under the Plan). Accordingly, the irretrievable cash contributions constitute capital receipts to the Trustee of the Trust. The contributions made by the Company to the Trustee of the Trust pursuant to the terms of Plan and the Trust Deed are not one of the assessable income listed under section 10-5 of the ITAA 1997. Therefore, the irretrievable cash contributions made by the Company to the Trustee to fund the acquisition of the Company’s shares in accordance with the Trust Deed will not be assessable income of the Trustee pursuant to section 6-5 or 6-10 of the ITAA 1997. | Summary: Provided that the Participant does not acquire the beneficial interest in the share for more than its cost base in the hands of the employee share trust at the time CGT event E5 happens, section 130-90 of the ITAA 1997 will operate to disregard any capital gain or loss made by the Trustee of the Trust or the Participants on any share of the Company when a Participant become absolutely entitled to that share. | Detailed Reasoning - Detailed reasoning: Where a Participant becomes absolutely entitled to the Company’s shares as against the Trustee, CGT event E5 will occur and therefore under section 104-75 of the ITAA 1997, the Trustee will make a capital gain or loss. However, section 130-90 of the ITAA 1997 operates to disregard that gain or loss where specified conditions are satisfied. | Detailed Reasoning - Shares held to satisfy the future exercise of rights acquired under ESS: Subsection 130-90(1) of the ITAA 1997 applies to 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. Subsection 130-90(2) of the ITAA 1997 states that 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. In determining whether subsection 130-90(1) of the ITAA 1997 applies to the Trust, it is necessary to consider whether the Trust is an ‘employee share trust’ as defined under subsection 130-85(4) of the 1997. | Detailed Reasoning - Employee Share Trust: The term ‘employee share trust’ referred to in section 130-90 of the ITAA 1997 is defined in subsection 995-1 of the ITAA 1997 as having the same meaning given by subsection 130-85(4) of the ITAA 1997. Under subsection 130-85(4) of the ITAA 1997, 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). An ‘employee share scheme’ (ESS) 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 employee’s employment. The 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 the right to acquire shares in the Company is provided to Participants in relation to their employment with the Company. An ‘ESS interest’ in a company is defined in subsection 83A-10(1) of the ITAA 1997 as a beneficial interest in a share in the company or a right to acquire a beneficial interest in the Company. Under the terms of the Trust Deed, the Trust was established by the Company for the sole purpose of obtaining the Company’s shares, including subscribing for or acquiring, allocating, holding and delivering the Company’s shares under the Plan for the benefit of the Participants. All Participants are employees of the Company. Therefore, both rights and shares in the Company are ‘ESS interests’ within the meaning of subsection 83A-10(1) of the ITAA 1997. Accordingly, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because the activities undertaken by the Trust include: ● the Trust acquires shares in the Company, and ● the rights to acquire those shares are provided under the Plan to the Participants who are the employees of the Company. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) of the ITAA 1997 will require the Trustee to undertake incidental activities that are a function of managing the Plan and administering the 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 merely incidental. In this case, pursuant to the relevant clause of the Trust Deed, the Trustee of the Trust has the power to do all other activities which the Trustee considers necessary or expedient to administer and maintain the Trust and the Trust Assets. These other activities include, for example to open and operate a bank account; to receive dividends or distributions on shares and to do all acts, matters or things necessary or expedient to administer and maintain the Trust and the Trust Assets or for the purpose of giving effect to, and carrying out, the Trust. Under the terms of the Trust Deed, the Trustee is not permitted to carry out activities that are not matters which are necessary or expedient to administer and maintain the Trust and the Trust Assets or activities which will result in the Participants being provided with additional benefits other than the benefits arise from the Plan and the Terms of Participation. On this basis, the Trust is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the Trust in acquiring, allocating, holding and delivering the Company’s shares meet the requirements of paragraphs 130-85(4)(a) and (b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. | Detailed Reasoning - The CGT event is CGT event E5 or CGT event E7: CGT event E5 happens where a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee, the trustee will make a capital gain or capital loss under subsection 104-75 (3) of the ITAA 1997. CGT event E7 happens where the trustee of the trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary’s interest in the trust capital, the trustee will make a capital gain or capital loss under subsection 104-85(3) of the ITAA 1997. Under the Plan, following the exercise of vested Options, the Company will direct the Trustee to subscribe for, acquire and/or allocate, and hold those shares on behalf of the relevant Participant (clause 9 of the Plan). Under the terms of the Trust Deed, the Company may direct the Trustee to allocate Unallocated Trust Shares to a Participant from time to time. Following the allocation to a Participant of Trust Shares held by the Trustee in accordance with the Deed, the Company may direct the Trustee to continue to hold those Trust Shares on behalf of the Participant and on the term of the Deed (clause 8.2 of the Trust Deed). Accordingly, CGT event E5 will apply under the terms of the Plan and the Trust Deed at the time shares in the Company are allocated to Participants and they become absolutely entitled to those shares as against the Trustee. Therefore, paragraph 130-90(1)(a) is satisfied. | Detailed Reasoning - The CGT event happens in relation to a share: Section 995-1 of the ITAA 1997 defines a ‘share’ in a company 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 vesting or exercise of an Option under the Plan, is a share in the capital of the Company. Therefore, 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 - The beneficiary had acquired a beneficial interest in the share by exercising a right: Paragraph 130-90(1)(c) of the ITAA 1997 is satisfied as a Participant will have acquired a beneficial interest in a share in the Company by exercising the Option granted under the Plan. | Detailed Reasoning - 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: Subsection 83A-20(1) of Subdivision 83A-B states: This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount. Note 1: This Subdivision does not apply if Subdivision 83A-C applies. ESS interest Options granted to Participants under the Plan will be an ESS interest, within the meaning of subsection 83A-10(1) of the ITAA 1997, as they are rights to acquire the Company’s shares under the Plan for Participants in relation to their employment. Employee share scheme The Plan is an employee share scheme, within the meaning of subsection 83A-10(2) of the ITAA 1997 for the purposes of Division 83A of the ITAA 1997, under which Option are granted to Participants (including foreign resident employees) in relation to their employment with the Company or its subsidiaries. Under the Plan, Options are issued by the Company to Participants for nil consideration (clause 5.4 of the Plan Rules). An Option will entitle the holder to acquire a share, provided that any Exercise Conditions is met, at any time after the Exercise Date, at the Exercise Price (if any) (clause 7.1 of the Plan Rules). At the sole discretion of the Board, the Exercise Price of an Option may be discounted, at the time of issue of the Option (clause 7.2(b) of the Plan Rules). Accordingly, prima facie, Subdivision 83A-B of the ITAA 1997 will apply to Options acquired under the Plan because, pursuant to subsection 83A-20(1) of the ITAA 1997, the Options issued under the Plan, will be acquired under an employee scheme at a discount. It should be noted however that whether a Participant is ultimately taxed upfront on some or all of any discount received (under Subdivision 83A-B of the ITAA 1997) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C of the ITAA 1997), will depend on which of the additional requirements in Subdivision 83A-B of the ITAA 1997 or Subdivision 83A-C of the ITAA 1997 have been satisfied. Under this circumstance, subparagraph 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 that the Participant does not acquire the beneficial interest in the share of the Company for more than its cost base in the hands of the Trustee of the Trust at the time that CGT event E5 happens, subsection 130-90(2) of the ITAA 1997 will also have been satisfied. Under these circumstances, section 130-90 of the ITAA 1997 operates to disregard any capital gain or capital loss made by the Trustee on any share in the Company when a Participant becomes absolutely entitled to that share.