Private ruling: Employee Share Scheme
Date of advice: 19 January 2018
Published: June 2018
Date scheme commenced: The scheme commences in the income year ending 30 June 20XX.

Ruling: Q1: Will Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the acquisition of units held by you from the trustee of the trust? | A1: Yes, except where you acquire additional units for market value consideration. | Q2: When will a taxing point arise under Division 83A in relation to the acquisition of units by you? | A2: In the income year in which the deferred taxing point arises for the ESS interests acquired by you. | Q3: Will contributions made by you to acquire additional units in the trust constitute your assessable income? | A3: No. | Q4: In the event of a disqualifying event occurring in relation to employee units held by you, will section 83A-310 of the ITAA 1997 operate to treat Division 83A to be taken to never have applied to the ESS interests represented by such units? | A4: Yes. Issue 2- Capital Gains Tax | Q5: Will you be liable for capital gains tax on any capital gain made upon the redemption of ordinary employee units? | A5: No, unless the redemption of ordinary units occurs after the deferred taxing point for the ESS interest. | Q6: Where you have paid market value for the acquisition of additional employee units, will you be liable for capital gains tax on any capital gain made upon the redemption of employee units? | A6: Yes | Q7: Will the general anti-avoidance provisions under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the scheme described? | A7: No. This ruling applies for the following periods: Income Tax year ending 30 June 20XX Income Tax year ending 30 June 20XX Income Tax year ending 30 June 20XX Income Tax year ending 30 June 20XX Income Tax year ending 30 June 20XX

Relevant facts and circumstances: This scheme description incorporates and should be read with the draft Employee Share Plan Trust Deed (Trust Deed) you provided. The Employer Group is an Australian based company group which currently has over XXX employees nationally. The Employer group consists of a Group Holdings company and three wholly owned subsidiary companies, one of which operates as trustee for the Group’s wholly owned unit trust. The Employer has decided to introduce the Employee Share Plan (the Plan) as a mechanism for rewarding, retaining and motivating its employees. The Employer has the following reasons for introducing the Plan: ● Provide a mechanism for rewarding staff for their loyalty and effort in a structured, equitable and transparent manner; ● Provide benefits for existing employees and attract new employees; ● Assist to engender responsibility for the performance of our business throughout our employees and provide a mechanism that rewards staff for our collective and individual contributions. The Employer will operate the Plan through a trust (the Trust). The Trustee Company is owned by two of the current owners and directors of the Group Holdings Company. They also act as directors of the Trustee Company. It is intended that the Trust will be used to acquire fully paid ordinary shares in the capital of the Employer (Shares) for employees pursuant to the Plan. The Trust provides an arm’s-length vehicle through which Shares can be acquired and held on behalf of employees providing the liquidity of employee held Shares in a simple flexible manner compared to the Employer buying back Shares from employees. In effect, this aspect allows the Employer to satisfy corporate law requirements relating to companies dealing in their own shares. The Trust provides the following benefits to the Employer: ● Allows key shareholders to keep control over company ownership. ● Registration of shares in the Trustee’s name provides control over identity of shareholders, preventing a sale to unrelated persons. ● If the Employer is sold, it is easier to “mop-up” employee shareholders. ● Enables the disqualification event and disqualification discount provisions to be enforced in a simple manner through the Trust. An initial contribution to the Trust consisting of 10% of the Employer has been made by the directors of the Group Holdings Company. Further annual contributions will be made to the Trust by the Employer in accordance with a formula established by the Employer. Contribution = (Net Profit – Benchmark Net Profit) x Benchmark Profit % The Trustee will at the direction of the Employer use any money contributed by the Employer and any residual amounts to purchase Shares from the existing shareholders of the Employer, although a small amount will be retained to provide for the administration of the Plan. The Trust Deed allows for the Employer to direct the Trustee to subscribe for Shares, but it is not the Employer’s current intention for the Trustee to use this method to acquire Shares. Shares will be held by the Trustee as Unallocated Shares until such Shares are allocated to Eligible Employees who become Participants in the Plan. The Employer will be entitled under the Trust Deed to nominate and invite Eligible Employees to participate in the Plan; however, it will not have any right to the income or capital of the trust. Eligibility to participate in the Plan is based upon two independently assessed set of criteria. Initial eligibility applies only during the first year of operation of the Plan and entitles Eligible Employees to benefit from both the initial contribution and the annual contributions (including any residual amounts of capital after the application of disqualify events or disqualifying discounts). To be eligible to benefit from the initial contribution an employee must have been continuously employed as a permanent employee of the Employer for three years excluding any breaks in employment (e.g. leave without pay). This includes full time and part time permanent employees. To be eligible to benefit from any subsequent contributions (and any residual amounts of capital after the application of disqualifying events or disqualifying discounts) an employee must have been continuously employed as a permanent employee of the Employer for two years excluding any breaks in employment (e.g. leave without pay). This includes full time and part time permanent employees. The beneficial interest of the Shares in the Trust Fund shall be divided into Units. Subject to a demonstrated commitment to the Employer (determined by the exercise of the Directors discretion) and meeting the expectations of their current role (demonstrated by having no significant performance issues), the Employer will invite Eligible Employees to participate in the Plan by owning Employee Units. The invitation will include the terms and conditions upon which the Units will be issued. Following receipt of an invitation, an Eligible Employee who wishes to participate in the Plan will return the completed application form. Upon acceptance of the application by the Employer, Eligible Employees become Participants in the Plan. The Employer will then instruct the Trustee to allocate a specific number of Units to the Eligible Employee and to designate one Share to each Unit (Allocated Share). The Trustee shall ensure such designation is recorded in the books and records of the Trust. Eligible Employees may make a contribution toward the acquisition of an Employee Unit. The Employee Units provided to the Participants are substantially the same rights in respect of the Shares which are allocated to the Units as if the Participants were the legal owners of the Shares. Subject to the provisions of the Trust Deed, a Unit entitles the Participants to: ● receive the income deriving from the Allocated Shares including dividends declared by the Directors at their discretion in respect of the Shares; ● to the extent that voting rights are attached to the Shares, direct the Trustee on how it should be exercised; ● receive the Redemption Entitlement on redemption. ● to request the Trustee to pass a resolution allowing for the redemption of Units. The Units may be issued to an associate of an Eligible Employee (and the associate will be a Participant under the Plan). The number of Employee Units issued to a Participant will be determined by the Trustee with reference to the following factors: ● Length of Service (pro rata for permanent part time) and excludes any breaks in employment (i.e. leave without pay) but includes all paid leave periods in accordance with standard leave entitlements for employees; ● Role/responsibility– reflected by consideration of current role, with key metric including current base salary level (FTE); and ● Performance. No Eligible Employee may acquire Units, by way of an Invitation or otherwise, if, immediately after the acquisition of those Units, the Eligible Employee would directly or indirectly hold or control a legal or beneficial interest in 10% or more of the issued capital of the Employer (including the voting rights that relate to those shares). The Trustee shall keep and maintain an up-to-date register of all Unit Holders. Subject to receiving written consent from the Employer a Participant may transfer his or her Units to an Associate, otherwise Units cannot be transferred or assigned or otherwise dealt with in favour of any person nor can any equitable, contingent, future or partial interest or other security interest be created in a Unit. Where the Shares are allocated to a particular Participant, any dividends that the Trustee receives as the result of holding those Shares in the Trust will flow-through to the relevant Participant. Where Shares remain unallocated in the Trust any dividends that the Trustee receives as the result of holding those Shares in the Trust will be retained as part of the capital of the Trust. If a Disqualifying Event occurs, the relevant Participant will forfeit any right or interest in the Units acquired for the benefit of the Participant under the Plan. “Disqualifying Event” includes (but is not limited to) the employment of the relevant Participant ceasing because of Termination or Termination for Cause. ‘Termination’ means termination of employment of the relevant employee by the Company other than in Special Circumstances, Resignation and Termination for Cause’. ‘Termination for Cause’ means termination of the relevant Eligible Employee without notice by the Employer due to fraud or gross misconduct; fraud and other similarly serious events. The Trustee may by resolution redeem all or a specified number of Units registered in a Participant’s name on the happening of any of the following events: ● upon the Trustee’s determination to redeem any or all at the Trustee’s absolute unfettered discretion; ● notification by the Employer to the Trustee that the employment of the Participant (or the relevant Eligible Employee) has ceased because of Resignation or Special Circumstances; ● receipt by the Trustee of a request in writing from the Participant to cancel one or more Units provided that request is: ● made while the Participant (or their associate) is an Employee; and ● made with the written approval of the Board. Subject to the terms of the Trust Deed the relevant Disqualification Discounts (if any) as set out below will apply to the Units redeemed, rounded up to the nearest whole number. The Participant will be entitled to the rights and interests in the Remaining Units (i.e. the interest in the Allocated Shares referable to those Remaining Units), and will forfeit any rights or interests in the Units that the Participant would, but for the application of the Disqualification Discounts, have been entitled to, but provided that no Disqualification Discounts shall be applicable to any Unit whose issue has been funded by the Participant (or the relevant Eligible Employee) entirely by the contribution of funds to the Trustee by the Eligible Employee, or upon the occurrence of Special Circumstances; and “Disqualification Discounts” means the percentage of Units a Participant is entitled to redeem as set out in Item 2 of the table below, determined by reference to the duration each individual Unit is held for, but provided that if the relevant Eligible Employee has completed 10 years of service when they (or their associate) first become a Participant, then Item 3 of the table will apply as the Disqualification Discounts: “Special Circumstance” means the cessation of employment due to Redundancy, where the Eligible Employee dies, or where the employment relationship ends because of Retirement, including for reasons of trauma or total and permanent disability; Held individual Units for Entitlement Percentage (Item 2) Entitlement Percentage (Item 3) 1 Year 10% 30% 2 Years 20% 35% 3 Years 30% 40% 4 Years 40% 45% 5 Years 50% 50% 6 Years 60% 60% 7 Years 70% 70% 8 Years 80% 80% 9 Years 90% 90% 10 Years or more 100% 100% The Participant who holds Remaining Units shall be entitled to direct the Trustee to sell the Allocated Shares and receive from the Trustee the cash value of the Shares sold net of any selling costs or to transfer to them the Allocated Shares. You are an employee of the Employer who expects to receive an invitation to participate in the Plan.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Section 83A-20 | Income Tax Assessment Act 1997 Section 83A-45 | Income Tax Assessment Act 1997 Section 83A-105 | Income Tax Assessment Act 1997 Section 83A-110 | Income Tax Assessment Act 1997 Section 83A-115 | Income Tax Assessment Act 1997 Section 83A-125 | Income Tax Assessment Act 1997 Section 83A-310 | Income Tax Assessment Act 1997 Subdivision 130-D | Income Tax Assessment Act 1997 Subsection 130-80 | Income Tax Assessment Act 1997 Subsection 130-85 | Income Tax Assessment Act 1936 Part IVA

Reasons for decision: Detailed Reasoning - Detailed reasoning: Division 83A of the ITAA 1997 applies to an employee share scheme (ESS) interest if you acquire the interest under an ESS at a discount. Section 83A-1 states that your assessable income includes discounts on shares, rights and stapled securities you (or your associate) acquire under an employee share scheme. Section 83A-10 states that an ESS interest, in a company, is a beneficial interest in: a share in the company; or a right to acquire a beneficial interest in a share in the company. An employee share scheme is a scheme under which ESS interests in a company are provided to employees or associates of employees, (including past or prospective employees) of the company; or subsidiaries of the company; in relation to the employees’ employment. The combined effect of section 83A-20 and paragraph 83A-105(1)(a) is that Division 83A (and in particular either Subdivision 83A-B or 83A-C) will apply to an ESS interest if you acquire the interest under an employee share scheme and at a discount. Where you accept an invitation to acquire units in the trust for no consideration you acquires ESS interests. The combined effect of section 83A-10 and section 130-85 is that your acquisition of the units in the trust are beneficial interests in shares of the company. Subsection 130-85(4) defines an employee share trust for an employee share scheme as a trust whose sole activities are (a) obtaining shares in a company; and (b) ensuring that ESS interests in the company that are beneficial interests in those share or rights are provided under the employee share scheme to employees, or to associates of employees, of: (i) the company; (ii) or a subsidiary of the company (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b) As the Trust‘s sole activities are obtaining shares in the Employer and providing those shares to employees under the Plan the trust is an employee share trust. As you have not paid consideration for the units and the value of the units are equal to the value of the underlying shares, you are taken to have acquired the ESS interests at a discount. The units in the Trust and therefore the ESS interests are provided to you as an incentive by your employer and as such are clearly acquired by you in relation to your employment. Therefore Division 83A will apply to the acquisition of units by you. However, where you acquire additional units in the trust and pay market value consideration for such units, neither of the operative Subdivisions of Division 83A will apply to the acquisition of such units. Although the interests acquired meet the definition of ESS interests in section 83A-10 and such interests are arguably acquired in relation to employment, Division 83A will only apply where such interests are acquired at a discount. Therefore Division 83A will not apply to any additional units acquired by you at market value. | Detailed Reasoning - Question 2: When will a taxing point arise under Division 83A of the ITAA 1997 in relation to the acquisition of units by you? | Detailed Reasoning - Detailed reasoning: Where an ESS interest is acquired under an employee share scheme in relation to the employee’s employment and at a discount, section 83A-20 states that Subdivision 83A-B applies to the interest unless Subdivision 83A-C applies. Subdivision 83A-B applies to include the discount in the year in which an ESS interest is acquired. However where the conditions in subsection 83A-105(1) are met, Subdivision 83A-C applies and the discount (i.e. the market value of the interest less its cost base) is included in the employee’s assessable income in the income year in which the deferred taxing point occurs. As the scheme is a share scheme and there is no salary sacrifice involved, the conditions which must be met for deferral to apply are those contained in subsections 83A-45(1),(2),(3) and (6) and subsections 83A-105(2) and (3). You are a current employee of the company and so the condition in subsection 83A-45(1) is met. Subsection 83A-45(2) applies as only beneficial interests in ordinary shares of the company will be acquired under the Plan. Subsection 83A-45(3) applies because the company does not have a predominant business of the acquisition, holding or sale of shares. Subsection 83A-45(6) applies because the terms of the Trust are such that “no Eligible Employee may acquire Units, by way of an Invitation or otherwise, if, immediately after the acquisition of those Units, the Eligible Employee would directly or indirectly hold or control a legal or beneficial interest in 10% or more of the issued capital of the Employer (including the voting rights that relate to those shares)”. The Commissioner accepts that provided the Employer does not utilise discretion to prevent more than 25% of employees with more than three years of service from participating in the Plan, the condition in subsection 83A-105(2) is met as it is the clear intention of the trust deed that all employees with at least two years of service with the Employer will be eligible to participate. Under the terms of the trust deed all employee units (except those where the employee acquired units for market value) are subject to the disqualifying events and disqualifying discounts. The disqualifying discounts effectively operate as an employment vesting condition. As employee participants only become entitled to have their units vest at a minimum after satisfying the employment condition for one year the Commissioner accepts that all such units and the underlying shares are subject to a real risk of forfeiture for purposes of subsection 83A-105(3). Consequently as all of the required conditions in subsection 83A-105(1) have been met, Subdivision 83A-C will apply to the ESS interests acquired under the Plan. As the ESS interests acquired are shares, the ESS deferred taxing point will be determined in accordance with section 83A-115. Therefore the deferred taxing point will be the earliest of the following times ● the time when there is no real risk that, under the conditions of the scheme, you will forfeit or lose the ESS interest (other than by disposing of it) and if, at the time you acquired the interest the scheme genuinely restricted you from immediately disposing of the interest the scheme no longer so restricts you [subsection 83A-115(4)]; ● the time when the employment in respect of which you acquired the interest ends [subsection 83A-115(5)]; and ● the end of the 15 year period starting when you acquired the interest [subsection 83A-115(6)]. Under the terms of the trust deed once the disqualification period under the terms of the disqualification discounts has been exceeded, the units and underlying shares are no longer subject to a real risk of forfeiture. Although employees are required to seek approval prior to redeeming units, there are no absolute disposal restrictions embodied in the trust deed terms and as such a deferred taxing point would arise once those vesting conditions had been met (provided a deferred taxing point had not arisen earlier). As the longest period of time prior to vesting is potentially 10 years from acquisition, the maximum time period for deferral under subsection 83A-115(6) cannot be met. Therefore, the deferred taxing point calculated with reference to subsection 83A-115(4) to (6) is the earlier of the vesting time or the time when you cease employment. However, the ESS deferred taxing point will instead be the time you dispose of the interest if that time occurs within 30 days of the earliest time worked out above [subsection 83A-115(2)]. | Detailed Reasoning - Question 3: Will contributions made by you to acquire additional units in the trust constitute your assessable income? | Detailed Reasoning - Detailed reasoning: When you acquire additional units at market value you are providing arms-length market value consideration for the acquisition of an asset, namely the unit. The acquisition is neither ordinary nor statutory income and the consideration provided is an outgoing and clearly not assessable. | Detailed Reasoning - Question 4: In the event of a disqualifying event occurring in relation to employee units held by you, will section 83A-310 of the ITAA 1997 operate to treat Division 83A to be taken to never have applied to the ESS interests represented by such units? | Detailed Reasoning - Detailed reasoning: Section 83A-310 of the ITAA 1997 provides that Division 83A (apart from Subdivision 83A-E) is taken never to have applied to an ESS interest that is a share acquired by an individual under an employee share scheme if disregarding section 83A-310 an amount is included in the individual’s assessable income under Division 83A in relation to the share and the individual forfeits the share and the forfeiture is not the result of either a choice made by the individual (other than a choice to cease employment) or a condition of the scheme that has the direct effect of protecting the individual against a fall in the market value of the share. There are no conditions in the trust deed which could be taken to have the effect of protecting the individual from a fall in the market value of the share. The only choice that could potentially affect the individual’s entitlement to the shares is a choice to cease employment. As such a choice is excluded from those which would prevent the section from operating section 83A-310 will operate to treat Division 83A to be taken to never have applied to the ESS interests represented by such units in the event of a disqualify event occurring. | Detailed Reasoning - Question 5: Will you be liable for capital gains tax on any capital gain made upon the redemption of ordinary employee units? | Detailed Reasoning - Detailed reasoning: Subdivision 130-D of the ITAA 1997 operates to recognise that Division 83A contains the primary rules for taxing gains on ESS interests acquired under employee share schemes and that capital gains and capital losses on such interests should usually be disregarded during the period in which Division 83A applies to them. In particular section 130-80 operates to disregard any capital gain or capital loss to the extent it results from a CGT event (other than where the capital gain or loss results from CGT events E4, G1 or K8) if the CGT event happens in relation to an ESS interest you acquire under an employee share scheme and: if Subdivision 83A-C applies to the interest the time of the acquisition is the time when the CGT event happens; or the CGT event happens on or before the ESS deferred taxing point for the interest. As Subdivision 83A-C applies to the acquisition of ordinary units the effect of subsection 130-80 is to disregard the capital gain or capital loss from CGT events that happen from the time of acquisition up until the deferred taxing point. Once a deferred taxing point arises in respect of the unit section 83A-125 operates inter alia to reset the cost base of the unit at its market value unless the deferred taxing point occurs at the time the unit is disposed of. | Detailed Reasoning - Question 6: Where you have paid market value for the acquisition of additional employee units, will you be liable for capital gains tax on any capital gain made upon the redemption of employee units? | Detailed Reasoning - Detailed reasoning: As noted in the reasoning for question 5 above, section 130-80 of the ITAA 1997 only operates to disregard capital gains and capital losses where either Subdivision 83A-B or Subdivision 83A-C applies to the ESS interest. Where a unit is acquired for market value (i.e. not at a discount), neither Subdivision 83A-B or 83A-C will apply. Consequently the acquisition of the units (and underlying shares) will constitute an acquisition of a CGT asset to which section 109-5 of the ITAA 1997 and the remainder of Part 3-1 and Part 3-3 will apply. | Detailed Reasoning - Question 7: Will the general anti-avoidance provisions under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the scheme described? | Detailed Reasoning - Detailed reasoning: A consideration of all the factors referred to in subsection 177D(2) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to you in a form that promotes the Employer’s business objectives, rather than to obtain a tax benefit. Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any tax benefit derived by you a result of your participation in the Plan as described.

Question 1: Will Division 83A apply to the acquisition of units held by you from the trustee of the trust?