Private ruling: Employee Share Scheme - Trustee of the Employee Share Trust
Published: September 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the irretrievable cash contributions by the Company to the Trustee to fund the acquisition of Company shares by the Company Employee Share Trust (EST) be assessable income of the EST under sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will a capital gain or capital loss that arises for the Trustee at the time the participants become absolutely entitled to the Company shares (acquired on exercise of Performance Rights acquired under the Plan) be disregarded under section 130-90 of the ITAA 1997 if the participants acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee? | A2: Yes.

Relevant facts and circumstances: • The Company is a listed Australian public company. • The Company developed the 'Company Employee Share Plan Rules' (the Plan) as a remuneration package to recruit and retain personnel. • The Plan was approved by the Company's shareholders. • Pursuant to the Plan, eligible participants may be granted Performance Rights at the Board's discretion. • It is the Company's intention to grant Performance Rights under the Plan for this and following financial years. • The Plan is carried out through the Company Employee Share Trust (EST). • The terms of the EST are as detailed in the Trust Deed. • The EST has been established as a sole purpose trust to acquire shares for Australian employees of the Company pursuant to employee equity plans of the Company. • The Company appointed the Trustee as trustee for the EST (Trustee). • The Trustee of the EST is an independent party. • The establishment of the EST allows the Company to administer the Plan. • The EST can also be used to provide a range of incentives involving shares in the Company as circumstances change in the labour market that require different incentives to be provided to attract, reward and retain employees by aligning the economic interests of employees with those of the Company's shareholders. • The commercial benefits of using the EST are stated to include: • Greater flexibility for the Company to accommodate the long term incentive arrangements both now and into the future as the Group continues to expand operations and therefore employee numbers. • Capital management flexibility for the Company, in that the EST can use the contributions made by the Company either to acquire shares in the Company on market, or alternatively to subscribe for new shares in the Company. • Providing an arm's-length vehicle through which shares in the Company can be acquired and held on behalf of the relevant employee. This assists the Company to satisfy corporate law requirements relating to a company dealing in their own shares. • The Plan and the EST are to be administered in accordance with the terms of the Plan Rules and Trust Deed. • A Deed of Variation for the Trust Deed was executed. The Company Employee Share Plan • Pursuant to the Plan rules, eligible participants may be granted Performance Rights at the Board's discretion. The Performance Rights may be subject to the satisfaction of certain pre-determined vesting hurdles and/or conditions prior to exercise. • It is at the Board's discretion to extend an invitation to certain employees to apply for a number of Performance Rights specified on the invitation. • Invitations will be extended on such terms and conditions as the Board decides, from time to time, including: • the number of Performance Rights; • the Performance Right Fee (if any); • the Exercise Price (if any); • the Exercise Period; • Vesting Conditions (if any); • Performance Conditions (if any); • the Restriction Period; and • any right or restriction attaching to the Performance Rights or Plan Shares in respect of which the Performance Rights are exercisable being offered to the Participant. • The terms of the Plan are as detailed in the 'Company Employee Share Plan Rules' document. The Trust Deed • Pursuant to the Trust Deed, the shares acquired by the Trustee will be allocated to the relevant employees upon exercise of Performance Rights and the employees will become absolutely entitled to those shares from that point in time. • The Trust Deed provides the general powers of the Trustee to administer the Plan • The Trust Deed provides restrictive provisions on the Trustee's powers to be exercised only for the purposes of the EST and only to give effect to the plans which the EST supports. • Pursuant to the Trust Deed, the Trustee is not entitled to receive from the Trust any fees, commission or remuneration in respect of its performance of its obligations as Trustee of the Trust. The Company may pay to the Trustee from the Company's own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as the Company and the Trustee agree from time to time. • Pursuant to the Trust Deed, the funds will be used by the Trustee of the EST to acquire the shares in the Company either on-market or via a subscription for new shares in the Company, based on written instructions from the Company. • Pursuant to the Trust Deed, the EST is funded by cash contributions from the Company for the purchase of shares in accordance with the Trust Deed, the relevant Plan Rules or relevant Terms of Participation. • Pursuant to the Trust Deed, the shares allocated to each employee will generally be transferred into the name of the relevant employee following receipt of a Withdrawal Notice. • Pursuant to the Trust Deed, the Trustee will be permitted to sell shares on behalf of an employee where permitted to do so. The Deed of Variation • The Deed of Variation replaced the definition of 'Net Income' to exclude any franking credits attaching to dividends received by the Trust during a year of income for that year of income. • The Deed of Variation also replaced the wording in a clause of the Trust Deed to refer to the definition of employee share trust in section 130-85(4) of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 95 | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-5(1) | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Subsection 6-10(1) | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Subsection 83A-10(2) | Income Tax Assessment Act 1997 Subsection 83A-20(1) | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 Subsection 84A-10(1) | Income Tax Assessment Act 1997 Subsection 84A-10(2) | Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Subsection 130-85(4) | Income Tax Assessment Act 1997 Paragraph 130-85(4)(a) | Income Tax Assessment Act 1997 Paragraph 130-85(4)(b) | Income Tax Assessment Act 1997 Paragraph 130-85(4)(c) | Income Tax Assessment Act 1997 Section 130-90 | Income Tax Assessment Act 1997 Subsection 130-90(1) | Income Tax Assessment Act 1997 Paragraph 130-90(1)(a) | Income Tax Assessment Act 1997 Paragraph 130-90(1)(b) | Income Tax Assessment Act 1997 Paragraph 130-90(1)(c) | Income Tax Assessment Act 1997 Paragraph 130-90(1)(d) | Income Tax Assessment Act 1997 Subsection 130-90(2) | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: The irretrievable cash contributions made by the Company to the Trustee of the EST to fund the acquisition of the Company's shares by the EST in accordance with the Trust Deed of the EST will not be assessable income of the EST pursuant to sections 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 … Subsection 6-5(1) of the ITAA 1997 states: Your assessable income includes income according to ordinary concepts, which is called ordinary income . and subsection 6-10(1) states: Your assessable income also includes some amounts that are not ordinary income. The irretrievable contributions of money by the Company to the EST do not fall within any of the provisions listed in section 10-5 of the ITAA 1997. Therefore the irretrievable contributions made by the Company to the EST will not be assessable income under section 6-10 of the ITAA 1997. They 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 of the ITAA 1997. Pursuant to the Trust Deed, all contributions provided by the Company to the EST for the purpose of acquiring the Company's shares constitute accretions to the corpus of the EST and will not be repaid to the Company or any participating employee. The only exception is that funds received by the Trustee from the Company must be paid to the Company where the Trustee subscribes for shares in accordance with the Trust Deed, Plan Rules or Terms of Participation. Furthermore, pursuant to the Trust Deed, the Trustee must, when directed by the Board, acquire the Company's shares on behalf of participating employees and use the contributions made by the Company to do so. The general powers granted to the Trustee pursuant to the Trust Deed are restricted by paragraphs in the Trust Deed. These restrictive provisions require that the powers must be exercised only for the purposes of the EST and only to give effect to the plans which the EST supports. To this end, pursuant to the Trust Deed, the contributions received from the Company must only be used to acquire shares in accordance with the terms of the Trust Deed and Plan Rules. Accordingly, the irretrievable contributions made by the Company to the Trustee to acquire the Company's shares will not be assessable income under section 6-5 of the ITAA 1997 but will constitute capital receipts of the Trustee. Therefore, the irretrievable cash contributions made by the Company to the Trustee of the EST to fund the acquisition of the Company's shares by the EST in accordance with the Trust Deed of the EST will not be assessable income of the EST pursuant to sections 6-5 or 6-10 of the ITAA 1997. This accords, with the view expressed in ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employee share scheme (ATO ID 2002/965). Note that the Trust Deed provides that whilst the Trustee is not entitled to receive any fees, commissions or remuneration in respect of the performance of its obligations as Trustee of the EST, the Company may pay to the Trustee from its own resources any fees, commission or remuneration as the Company and the Trustee may agree from time to time. Such receipts will be assessable income of the Trustee in contrast to the irretrievable contributions made to facilitate the acquisition of the Company's shares. Note also that income derived by the employment of the property that is the fund or corpus of the trust and which the Trustee holds on trust will be income according to ordinary concepts (see Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440; (1980) 10 ATR 608; 80 ATC 4076 for a discussion of the distinction between the trust income and corpus). | Summary: Provided that the beneficiary 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 that CGT event E5 happens, section 130-90 of the ITAA 1997 operates to disregard any capital gain or loss made by the Trustee on any share when a participant becomes absolutely entitled to that share. | Detailed Reasoning - Detailed reasoning: Where a participant becomes absolutely entitled to the 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 the specified conditions are satisfied. Section 130-90 of the ITAA 1997 provides as follows: Shares held to satisfy the future exercise of rights acquired under employee share schemes 130-90(1) 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. Pursuant to subsection 130-90(2), 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 at the time the CGT event happens. | Detailed Reasoning - Employee Share Trust: The term 'employee share trust' referred to in subsection 130-90(1) of the ITAA 1997 is defined in subsection 995-1 of the ITAA 997 as having the meaning given by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides that 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). The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997. An employee share scheme 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 employees' 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 employees in relation to the employee's employment . Under the Plan, the Company has established the EST to acquire shares in the Company and to allocate those shares to employees to satisfy the Performance Rights acquired under the scheme. The beneficial interest in the share is itself provided under an employee share scheme because it is provided under the same scheme under which the Performance Rights to acquire the shares are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997. Therefore, paragraph 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because: • the EST acquires shares in the Company, and • the EST ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the governing documents of the scheme. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require the trustee to undertake incidental activities that are a function of managing the employee share scheme and administering the trust. For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental include: • the opening and operation of a bank account to facilitate the receipt and payment of money; • the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee; • the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; • dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme; • the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares; • the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and • receiving and immediately distributing shares under a demerger. 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, the general powers of the Trustee are set out in the Trust Deed. The Trust Deed, as amended by the Deed of Variation provides that the EST "… will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of section 130-85(4) of the ITAAA 1997 ". Other provisions of the Trust Deed, effectively read down the general powers given to the Trustee so as to ensure that the general powers are exercised for the purposes of the Plan thereby making it clear that the Trustee can only use the contributions received exclusively for the acquisition of shares for eligible employees in accordance with the Plan. To this end, all other duties and general powers provided to the Trustee in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the shares to be acquired for eligible employees for the purposes of the Plan. Therefore, the EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities (general powers) 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 E7: As stated above, section 104-75 of the ITAA 1997 provides that a CGT Event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee of the trust. Accordingly, CGT event E5 is the CGT event that will apply under the terms of the Plan at the time the participant becomes absolutely entitled to the shares in the Company as against the Trustee. Therefore paragraph 130-90(1)(a) will be satisfied. | Detailed Reasoning - The CGT event happens in relation to a share: Section 995-1 of the ITAA 1997 defines a share to mean a share in the capital of a company. An ordinary share in the Company held by the Trustee and to which a participant is entitled upon exercise of a performance right is a share in the capital of a company, that is, the Company. Accordingly, 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 a performance right 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 of the ITAA 1997 states: This Subdivision applies to an *ESS interest if you acquire the interest under an *employee share scheme at a discount. The term 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997. Subsection 83A-10(2) states: 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: (a) the company; or (b) … in relation to the employees' employment. For the purposes of subsection 83A-10(2) of the ITAA 1997, section 995-1 of the ITAA 1997 defines the term 'scheme' as follows: scheme means: (a) any * arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The Plan is an employee share scheme for the purposes of Division 83A of the ITAA 1997 as it is an arrangement/plan (scheme) under which an ESS interest, that is, a beneficial interest in a Performance Right to acquire a beneficial interest in a share of the Company, is provided to employees in relation to their employment by the Company. The Performance Rights are acquired under the Plan at no cost. Accordingly, prima facie Subdivision 83A-B of the ITAA 1997 will apply to Performance Rights acquired under the Plan because, pursuant to subsection 83A-20(1) of the ITAA 1997 the ESS interest, the Performance Rights 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 either 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 (as stipulated in the Question) that the beneficiary 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 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 loss made by the Trustee on any share when a participant becomes absolutely entitled to that share.