Private ruling: Employee Incentive Plans
Published: August 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016

Ruling: Q1: Will the irretrievable cash contributions made by Company A to Company B as trustee for (Trustee) the Company A Employee Share Trust (EST) to fund the acquisition of Company A shares by the EST in accordance with the deed of trust entered into between Company A and the Trustee (Trust Deed) be assessable income of the EST? | A1: No. | Q2: Will a capital gain or capital loss that arises for the Trustee of the EST at the time participants become absolutely entitled to the Company A shares under the Company A Incentive Plans be disregarded under section 130-90 of the Income Tax Assessment Act 1997 (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: Company A is a provider of integrated engineering solutions in the mining, resources, energy and power sectors as a result of the merger of two listed companies. Company A uses in-house expertise to deliver a range of turnkey projects from design and manufacture to construction, installation, maintenance and off-site repair. It operates through four business streams via related entities and has an extensive network of operations in key locations throughout Australia, New Zealand and Asia. Company A's executive remuneration strategy is designed to attract, retain and motivate appropriately qualified and experienced executives whilst balancing the expectations of shareholders. As part of its remuneration strategy, Company A operates an Employee Share Option Plan (ESOP) and a Performance Rights Plan (PRP) - together referred to as the Company A Incentive Plans. The applicant considers that the key to its remuneration strategy is the ability to align executive remuneration to shareholders interests. Company A has now established a single employee share trust, known as the Company A Employee Share Trust (EST) to facilitate the provision of shares in Company A to executives and employees under the Company A Incentive Plans. Company B is the trustee of the EST. It is an external trustee acting in an independent capacity on behalf of the beneficiaries of the EST in accordance with the Trust Deed for the Company A Employee Share Trust between Company A Ltd and Company B. The applicant has stated that this scheme utilising the EST and to which this ruling relates is in effect an arm's-length arrangement. Use of the EST is intended to facilitate Company A's compliance with Corporations Law requirements, in addition to: · providing greater flexibility in the management of Company A's capital structure; and · providing a single vehicle which the administration of the Company A Incentive Plans (and any future employee equity plans) can be centralised in and outsourced to, thus freeing up the internal resources of Company A. Operation of the ESOP The ESOP is governed by the Employee Share Option Plan Rules (ESOP Rules). The objectives of the ESOP are to: · establish a method by which Eligible Persons (as defined in the ESOP Rules) can participate in the future growth and profitability of Company A; · provide an incentive to, and reward for, Eligible Persons for their contributions to Company A; and · to attract and retain a high standard or managerial and technical personnel for the benefit of Company A. The Board of Directors of Company A (Board), at their absolute discretion, may from time to time make an offer in writing to an Eligible Person inviting them to take up an award of options (Options or Option in the singular). The offer document must specify, amongst other things, the number of Options, the terms and conditions of the issue of the Options and include an application form and a copy of the ESOP Rules. Options may be offered to full and part-time officers and employees of Company A but may not be offered to Directors (unless shareholder approval is given by the shareholders of Company A in a general meeting) or Non-executive Directors. Exercise of an Option entitles the participant to one fully paid ordinary share in Company A. Each Option is granted for nil consideration however, an Exercise Price (calculated in accordance with the ESOP Rules) is payable to Company A on the exercise of the Option. An Option will expire on its Expiry Date and can only be exercised by lodging with Company A an Option Exercise Notice together with the payment of the Exercise Price. Options will lapse upon the earliest of any of the conditions stated in clause 10 of the ESOP Rules. Options may only be exercised on or after the first anniversary of the date of issue of the Options or such other date as determined by the Directors (in their absolute discretion as set out in the offer). Once Options are exercised, Company A must instruct the Trustee (subject to it receiving sufficient funds from Company A) within 15 Business days from receiving the Exercise Notice from the participant, to subscribe for or acquire on-market and then allocate to the participant, the relevant number of shares. The Trustee will hold those shares on behalf of the participant in accordance with the terms of the Trust Deed. Shares allotted under the ESOP will rank pari passu in all respects with ordinary shares outstanding in Company A. The Board may determine that a Restriction Period will apply to the shares allocated to a participant following exercise, up to a maximum of seven years from the Issue Date of the Options. The Board may, in its sole discretion, waive a Restriction period however a participant cannot dispose of or otherwise deal with any shares while they are restricted shares. A participant may submit a Withdrawal Notice to Company A in respect of some or all of the shares the EST holds on behalf of the participant which are not restricted shares. At this point, Company A must direct the Trustee to transfer legal title of the shares to the participant or dispose of the shares in accordance with terms of the approved Withdrawal Notice. Operation of the PRP The PRP is governed by the Long Term Incentive Plan Rules (LTIP Rules). The purpose of the PRP is to drive long-term performance for shareholders and retain executives. It is targeted at Company A executives whose responsibilities provide them with the opportunity to significantly influence long-term shareholder value. The Board may from time to time, in its absolute discretion, make an award of performance rights (Performance Rights or Performance Right in the singular) to an Eligible Executive (as defined in the LTIP Rules). A Non-executive Director is not eligible to participate in the PRP. The responsibility for the establishment and operation of the PRP rests with the Board (who may delegate the management and administration of the PRP as they see fit). Performance Rights are granted for nil consideration (unless determined otherwise by the Board from time to time). Each Performance Right represents a right to acquire one fully paid ordinary share in Company A. The PRP operates on the basis of an annual cycle correlated to the company's financial year (unless determined otherwise by the Board). An Eligible Executive who is offered the opportunity to participate in a cycle will receive a written offer in a form approved by the Board. The offer specifies, amongst other things, the date of the offer, the Grant Date, the number of Performance Rights offered, the Performance Criteria and Vesting Date of each Performance Right. Vesting of Performance Rights is subject to the satisfaction of Performance Conditions, namely Performance Tranche 1 and Performance Tranche 2 hurdles (together referred to as Performance Hurdles) determined, in the main, three financial years out from the Grant Date of the Performance Rights. The Performance Hurdles have been developed to create a link to shareholder value. The Performance Tranche 1 Hurdle comprises a pre-defined EPS (calculated on a compound rate of 15%) and Company A's TSR performing better than the TSR performance over the same period for companies in the S&P/ASX 300 Index. The Performance Tranche 2 Hurdle requires an Eligible Executive participating in the PRP to remain continuously employed by a Group for the requisite period of time. Upon automatic vesting of a Performance Right (on achievement of the Performance Hurdles) Company A must instruct the Trustee to either subscribe for or acquire on-market and then allocate to a participant the number of Company A shares in respect of which they are entitled and Company A (or the Trustee upon recept of instruction from Company A) must notify the participant that the Trustee holds the shares on the participant's behalf. The Board may determine whether there will be a Restriction Period (up to a maximum of seven years) and what restrictions on dealing with shares will apply during the Restriction Period, for some or all of the shares allocated to a participant. The Board may waive the restriction period having regard to the circumstances at the time. A participant cannot dispose of or otherwise deal with any shares while the shares are restricted. A participant can withdraw their vested Performance Rights by submitting a Withdrawal Notice to Company A in respect of some or all of the shares the Trustee holds on their behalf which are not restricted shares. At this point, if the Board approves the withdrawal notice Company A must direct the Trustee to transfer legal title in the shares to the participant in accordance with the terms of the approved Withdrawal Notice. Employee Share Trust The EST has been established for the sole purpose of obtaining securities for the benefit of employees, including accepting the grant of and subscribing for, acquiring, holding, allocating and delivering employee shares under the Company A Incentive Plans. The EST will be funded by contributions from Company A. In accordance with the intended operation of the Company A Incentive Plans, contributions are likely to occur subsequent to a participant's valid request to exercise their Options or upon the automatic vesting of Performance Rights when the Board determines that the Performance Hurdles have been met. These funds will be used by the Trustee of the EST to acquire the shares in Company A either on-market or via subscription for new shares in Company A. Shares acquired by the Trustee will be immediately allocated to the relevant employees and held on trust on their behalf. Shares allocated to each employee will generally be transferred into the name of the employee (that is, legal title will pass) upon a valid Withdrawal Notice being lodged and approved by the Board. Company A will pay the Trustee's costs of operation to the extent that they relate to the operation of the EST which will facilitate the Company A Incentive Plans. The Trustee will not price hedge when purchasing shares or buy shares in advance of the issue of Options or Performance Rights. The applicant has advised that some Options issued under the ESOP will be subject to Division 83A of the ITAA 1997, some Options may be subject to Division 83A of the ITAA 1997 by operation of the transitional legislation and some Options may be subject to former Division 13A of the ITAA 1936. All Performance Rights granted pursuant to the PRP are subject to Division 83A of the ITAA 1997 only (as the PRP was not established until November 2010).

Relevant legislative provisions: 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 Division 83A | 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 Section 130-85 | Income Tax Assessment Act 1936 Section 95 | Income Tax Assessment Act 1936 Former Section 139-90 | Income Tax Assessment Act 1936 Former Section 139C

Reasons for decision: Summary: 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. Further, subsection 6-10(1) of the ITAA 1997 states: Your assessable income also includes some amounts that are not ordinary income. Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5. None of the provisions listed in section 10-5 of the ITAA 1997 are relevant in the present circumstances. Therefore non-refundable contributions made by Company A to the Trustee 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 EST 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. Subclause 8.4(b) of the Trust Deed provides that all contributions by Company A to the EST for the purpose of acquiring Company A shares constitute accretions to the corpus of the EST and that funds provided to the EST in excess of the amount required by the Trustee will not be refundable to Company A. Further, the applicant has noted at page 17 of its application that the Trustee of the EST holds all Company A shares pursuant to the Company A Incentive Plans on capital account. The non-refundable cash contributions made by Company A to the Trustee of the EST to fund the acquisition of Company A shares in accordance with the Trust Deed will not be assessable income of the EST pursuant to sections 6-5 or 6-10 of the ITAA 1997. Note that clause 14.1 of 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, Company A may pay to the Trustee from its own resources any fees, commission or remuneration as Company A 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 Company A 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 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) When a participant becomes absolutely entitled to the shares as against the Trustee, CGT Event E5 will occur and 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 may operate to disregard that gain or loss where specified conditions are satisfied. | Detailed Reasoning - Division 13A of the ITAA 1997 - former section 130-90 of the ITAA 1997 - applies to Options still subject to Division 13A: (NB - all references to section 130-90 of the ITAA 1997 under this heading are references to the former section 130-90 of the ITAA 1997) Section 130-90 of the ITAA 1997, insofar as it is relevant, states: 130-90(1) A capital gain or a capital loss a trustee or a beneficiary makes when the beneficiary becomes absolutely entitled to a share or right in a company is disregarded if these conditions are satisfied. 130-90(1A) The beneficiary must be: (a) an individual who receives (or is entitled to receive) withholding payments covered by subsection (5) from the company or from another company (at the time the beneficiary first became beneficially entitled to the share or right); or (b) an associate or affiliate company of such an individual; or (c) an individual who is engaged in foreign service (within the meaning of section 139GBA of the Income Tax Assessment Act 1936 ), or an associate or affiliate company of such an individual. 130-90(2) The terms of the trust must have required or authorised the trustee to transfer the share or right to the individual, associate or affiliate company. 130-90(3) Either: (a) the individual, associate or affiliate company must have acquired the share or right: (i) under an employee share scheme; or (ii) alternatively in the case of a share - as a result of exercising a right acquired under an employee share scheme; (b) the share or right must, because of section 139DQ of the Income Tax Assessment Act 1936 , be a share or right that is treated, for the purposes of Division 13A of Part III of that Act, as if it were a continuation of a share or right acquired under an employee share scheme; (c) if the share was acquired as a result of exercising a right, the right must, because of section 139DQ of the Income Tax Assessment Act 1936 , be a right that is treated, for the purposes of Division 13A of Part III of that Act, as if it were a continuation of a right acquired under an employee share scheme. 130-90(4) The individual, associate or affiliate company must not have acquired the share or right for more than the cost base of the share or right (in the hands of the trustee) at the time of the transfer 130-90(5) This subsection covers a withholding payment covered by any of the provisions in Schedule 1 to the Taxation Administration Act 1953 listed in the table. Withholding payments covered Item Provision Subject matter 1 Section 12-35 Payment to employee 2 Section 12-40 Payment to company director 3 Section 12-45 Payment to office holder 3A Section 12-47 Payment to *religious practitioner 4 Section 12-50 Return to work payment 5 Subdivision 12-D Benefit, training and compensation payments Paragraph 130-90(1A)(a) of the ITAA 1997 is satisfied as eligible employees who participate in the ESOP receive salary or wages that are withholding payments. The terms of the Trust Deed satisfy subsection 130-90(2) in that the Trustee is authorised to transfer any shares where the employee requests it by issuing Company A a Withdrawal Notice (as defined in the Trust Deed). The condition in subsection 130-90(3) of the ITAA 1997 stipulates that the share or right must have been acquired under an employee share scheme or alternatively, in the case of a share, as a result of exercising a right acquired under an employee share scheme. Section 139C of the ITAA 1936 outlines the requirements for a plan to be considered an employee share scheme. The requirements relevant to the present ESOP are that the Options must have been acquired by the taxpayer in respect of his or her employment (subsection 139C(1) of the ITAA 1936) and must have been acquired for less than market value (subsection 139C(3) of the ITAA 1936). The ESOP satisfies these requirements (Options are granted to eligible employees in respect of their employment with Company A pursuant to the ESOP for nil consideration). Therefore, the condition in subsection 130-90(3) of the ITAA 1997 is met, in the case of the ESOP, under subparagraph 130-90(3)(a)(ii) of the ITAA 1997. Finally, provided that the condition in subsection 130-90(4) of the ITAA 1997, requiring that the participant must not have acquired the share or right for more than its cost base in the hands of the Trustee, is met, all of the provisions of section 130-90 of the ITAA 1997 will have been satisfied. An exercise price is payable by a participant for a share in respect of Options. Provided then, that the Option Exercise Price paid by a participant in accordance with the terms of the ESOP is not more than the cost base in the hands of the Trustee and a participant continues not to be required to pay/contribute any price that is more than the cost base in the hands of the Trustee under the ESOP, subsection 130-90(4) of the ITAA 1997 will 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 participating employee becomes absolutely entitled to that share. | Detailed Reasoning - Division 83A of the ITAA 1997 - current section 130-90 of the ITAA 1997: Division 83A of the ITAA 1997 will apply to ESS interests issued on or after 1July 2009 and also, in certain circumstances, to ESS interests that were provided under an employee share scheme prior to 1 July 2009. | Detailed Reasoning - Options and Rights issued on or after 1 July 2009: Division 83A of the ITAA 1997 will apply to Performance Rights and Options issued under the Company A Incentive Plans on or after 1 July 2009 as they will have been acquired on or after 1 July 2009 thereby satisfying subsection 83A-5(1) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997). | Detailed Reasoning - Options issued before 1 July 2009: The applicant has advised that some Options were issued under the ESOP before 1 July 2009. Subdivision 83A-C of the ITAA 1997 (and therefore Division 83A) will also apply to Options issued under the ESOP before 1 July 2009 if all of the following subparagraphs of paragraph 83A-5(2)(a) of the IT(TP)A 1997 are satisfied: · at the pre-Division 83A time, subsection 139B(3) of the Income Tax Assessment Act 1936 applied in relation to the interest; · the interest was acquired (within the meaning of former Division 13A) before 1 July 2009; · the cessation time mentioned in subsection 139B(3) of the Income Tax Assessment Act 1936 , as in force at the pre-Division 83A time, for the interest did not occur before 1 July 2009. | Detailed Reasoning - Current section 130-90 of the ITAA 1997: The current section 130-90 of the ITAA 1997 states: 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. 130-90(2) Subsection (1A) or (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: Subsection 130-85(4) of the ITAA 1997 states: An employee share trust , for an employee share scheme, 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 Company A Incentive Plans are employee share schemes within the meaning of subsection 83A-10(2) of the ITAA 1997 because they are a scheme under which rights to acquire shares in the company are provided to employees in relation to the employee's employment. Under the Company A Incentive Plans the employer has established the EST to acquire shares in the company and to allocate those shares to employees to satisfy the Performance Rights and Options 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 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, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because: · the EST acquires shares in the company (that is, in Company A); 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 a 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 · 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. For the purposes of the EST, the powers of the Trustee are set out in clause 11.3 of the Trust Deed. Clause 11.4 limits the powers given to the Trustee under the Trust Deed so as to ensure that the powers of the Trustee under the Trust Deed are exercised pursuant to Recital B "for the sole purpose of obtaining securities for the benefit of Employees." Collectively, these provisions make it clear that the Trustee will only use the contributions received exclusively for the acquisition of shares for eligible employees in accordance with the Company A Incentive Plans. To this end, all other duties/general powers listed (at Clause 11 in particular) 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 participants for the purposes of the Company A Incentive Plans. 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 as concluded above, 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 - Paragraph 130-90(1)(a) of the ITAA 1997: CGT event E5 is the CGT event that will apply under the terms of the Company A Incentive Plans at the time the participant becomes absolutely entitled to the shares in Company A as against the Trustee. Therefore paragraph 130-90(1)(a) will be satisfied. | Detailed Reasoning - Paragraph 130-90(1)(b) of the ITAA 1997: Section 995 of the ITAA 1997 defines a share to mean a share in the capital of a company. An ordinary share in Company A held by the Trustee and to which a participant is entitled to upon the vesting of a Performance Right or upon exercise of an Option is a share in the capital of a company (Company A). 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 - Paragraph 130-90(1)(c) of the ITAA 1997: Paragraph 130-90(1)(c) is satisfied as a participant will have acquired a beneficial interest in a share (in Company A) by the vesting of a Performance Right under the LTIP or by exercising an Option granted under the ESOP. | Detailed Reasoning - Paragraph 130-90(1)(d) of the ITAA 1997: 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;…. in relation to the employees' employment. For the purposes of subsection 83A-10(2) of the ITAA 1997, section 995 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 Company A Incentive Plans are employee share schemes for the purposes of Division 83A of the ITAA 1997 as they are an arrangement/plan (scheme) under which an ESS interest, being a beneficial interest in a right to acquire a beneficial interest in a share of Company A, is provided to eligible employees or executives in relation to their employment by Company A or its subsidiaries. Rights are acquired under the PRP at no cost. Options are also granted for nil consideration and may be exercised upon the payment of an exercise price (if applicable). Accordingly, prima facie Subdivision 83A-B of the ITAA 1997 will apply to Performance Rights or Options acquired under the Company A Incentive Plans as pursuant to subsection 83A-20(1) of the ITAA 1997 the ESS interest (issued under the Company A Incentive Plans) will be acquired under an employee share scheme (for the reasons stated immediately in the preceding paragraph) at a discount (no cost). 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(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 then (as stipulated above) that the beneficiary does not acquire the beneficial interest in the share for more than its cost base in the hands of the EST at the time that CGT event E5 happens, subsection 130-90(2) of the ITAA 1997 will also have been satisfied. In relation to Performance Rights, participants will not pay any amount to acquire their ESS interests or Company A shares upon the vesting of the Performance Rights and therefore, subsection 130-90(2) of the ITAA 1997 will not apply to shares acquired by the grant of Performance Rights. However, participants are required to pay an exercise price upon vesting of an Option in order to acquire one Company A share. Provided then, that this total exercise price paid by a participant in accordance with the terms of the ESOP is not more than the cost base in the hands of the Trustee, and a participant continues not to be required to pay/contribute any price that is more than the cost base in the hands of the Trustee under the ESOP, subsection 130-90(2) will 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 under CGT event E5 on any share when a participant becomes absolutely entitled to that share. | Detailed Reasoning - CGT Event E7: Subsection 104-85(1) of the ITAA 1997 provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. However, section 106-50 of the ITAA 1997 provides: If you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it. The participant, on allocation of the shares by the Trustee, becomes absolutely entitled to those shares. In accordance with subclause 5.3 of the Trust Deed each participant is absolutely entitled to the trust shares allocated to a participant and held by the Trustee on their behalf and is entitled to the same rights in respect of the shares as if he or she was the legal owner of the shares (subject to the relevant plan rules and terms of participation). Once the participants are absolutely entitled to shares held on their behalf by the EST, section 106-50 of the ITAA 1997 will deem the disposal of the shares by the Trustee to be done by the participant. Therefore, section 106-50 of the ITAA 1997 will apply, such that if the Trustee disposes of the shares under the relevant Company A Incentive Plans (by way of transfer to a participant), the Trustee will not make a capital gain or capital loss under CGT event E7.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.