Private ruling: Employee Share Scheme (ESS)
Date of advice: 29 April 2024
Published: 11 June 2024
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the irretrievable cash contributions by Company X or any subsidiary member of the Company X income tax consolidated group (TCG), to the Trustee to fund the acquisition of Company X shares by the Employee Share Trust (EST) for the purposes of the Plans be assessable income of the Trust under section 6-5 of 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes. | Q2: Will dividends and other income received by the Trustee in respect of Shares held by the Trustee but not yet allocated to employees (Unallocated Shares): • be included in the calculation of the net income of the Trust under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936); and • be assessed to the Trustee under section 99A of the ITAA 1936? | A4: Yes. | Q3: Will the Trustee be entitled to a tax offset for the franking credits attached to the franked dividend on the Unallocated Shares under Subdivision 207-B of the ITAA 1997? | A5: Yes.

Relevant facts and circumstances: Company X is the head company of the Company X TCG and is listed in the Australian Securities Exchange (ASX). There are a number of subsidiaries of Company X that directly employ employees and these subsidiaries are referred to as Employer Entities. Company X carries on a business for the purpose of gaining or producing assessable income. The remuneration policy of Company X is designed to be competitive and equitable with the aim of aligning the economic interests of employees with those of its shareholders by providing competitive rewards to attract and retain high calibre executives and key employees and linking the rewards to the creation of shareholder value. The purpose of Company X having employee equity plans is to: • Recognise and reward the ability and efforts of employees who have contributed to the success of Company X; • Provide an incentive to employees to achieve the long-term objectives of the Company X and to improve the overall performance of Company X; • Encourage employees to remain with Company X; • Attract persons of experience and ability to take up employment with Company X; and • Foster and promote loyalty and a long-term relationship between the Company X and its employees. Company X offers key employees and executives the opportunity of equity ownership through the offer of Performance Rights and/or Options upon the satisfaction of certain performance and service conditions implemented through several plans, referred to as "the Plans". Company X will incur the following costs in relation to the on-going administration of the EST: • Employee plan record keeping; • Production and dispatch of holding statements to employees; • Provision of annual income tax return information for employees; • Costs incurred in the acquisition of shares on market (e.g., brokerage costs and the allocation of such shares to Participants); • Management of employee termination; and • Other trustee expenses such as the annual audit of the financial statements and annual income tax return of the EST. Company X may also incur the following costs relating to the establishment or amendment of the Plans or the EST: • Legal fees incurred in establishing the EST or ESS plan rules • Legal fees in trustee company commencement charges • Legal fees on resignation of trustee company and appointment of new trustee company • Legal fees paid on amending the EST or ESS plan • Registration fees with various authorities, such as stamp duty and Australia Securities and Investments Commission fees and • Other legal fees incurred by the trustee of the EST. Company X Employee Share Trust The EST was established in 20YYfor the sole purpose of acquiring Company X shares pursuant to the Plans for the benefit of participants The EST is operated in accordance with the Trust Deed. The Trustee of the EST is independent from Company X. Company X and the Trustee entered into the Trust Deed. A Deed of Amendment was signed by Company X amending the Trust Deed (the Amended Trust Deed). The Amended Trust Deed removed clauses XXX of the Trust Deed. The Trustee did not exercise any of the broad discretionary powers contained in clauses XXX of the Trust deed from when the Trust Deed was signed in up until the Amended Trust Deed came into effect. In accordance with the Amended Trust Deed, the EST broadly operates as follows: • The EST is managed and administered so that it satisfies the definition of EST for the purposes of subsection 130-85(4) of the ITAA 1997. • Company X must pay all Trust Expenses. • The Trustee in its reasonable discretion has the full power to do all things a trustee is permitted to do by law in respect of the Trust, the Trust Shares and the Trust Assets. • Company X and subsidiary members of Company X TCG are not beneficiaries of the EST or have, at any time, any legal or beneficial entitlement to any of the Shares held by the Trustee. • The EST is funded by cash contributions from Company X for the purchase of shares. • The funds are used by the Trustee of the EST to acquire the shares in Company X either on-market or via a subscription for new shares in Company X, based on written instructions from Company X. • All funds received by the Trustee from Company X will constitute Accretions to the corpus of the EST and will not be repaid to Company X and no Participant will be entitled to receive such funds. • The Shares acquired by the Trustee are allocated to the relevant employees upon exercise of Options or Performance Rights and the employees will become absolutely entitled to those Shares from that point in time. • The Trustee acknowledges that, in its capacity as Trustee of the Trust, the activities of the Trustee are limited to managing the Plans. • The Trust Assets, including the Unallocated Shares, are to be held by the Trustee on trust for Participants to be nominated by Company X from time to time until termination of the Trust under the Trust Deed or by operation of law. • The Trustee is not permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the EST. • The Trustee is not permitted to carry out activities which result in the Participants being provided with additional benefits other than the benefits that arise from any relevant Plan Rules and/or relevant Terms of Participation. • The Trustee will acquire, deliver and allocate the Shares for the benefit of Participants provided that the Trustee receives sufficient payment to subscribe for or purchase such shares and/or has sufficient Unallocated Shares available. • Whilst the allocated Shares are held by the trust, the Participant will be entitled to dividend and voting rights. • The structure of the EST and the rules of the Plans are such that shares allocated to each employee will generally be transferred into the name of the relevant employee following receipt of a Withdrawal Notice. • If there is an inconsistency between the Trust Deed and the relevant Plan Rules, the Trust Deed shall prevail to the extent of any such inconsistency. Any settlements of Rights or Options in cash will not flow through or involve the EST. The establishment of the EST provides Company X: • Greater flexibility to accommodate the long-term incentive arrangements of Company X. • Allows for a streamlined approach to the administration of the Plans. • The EST can also be used to provide a range of incentives involving shares in Company X as circumstances change in the labour market that require different incentives to be provided to attract, reward and retain key executives and employees. • Capital management flexibility in that the EST can use the contributions made by Company X either to acquire shares in Company X on market, or alternatively to subscribe for new shares in Company X. • Providing an arm's-length vehicle through which Shares in Company X can be acquired and held on behalf of the relevant employee. This assists to satisfy corporate law requirements relating to a company dealing in its own shares. Since implementation of the EST, money has generally only been contributed to the EST to enable the EST to acquire shares at the point in time that Shares are required to be allocated to employees under the terms of the relevant Plan. That is, Company X has not contributed money to the EST to enable the EST to "warehouse" shares. Company X Plan 1 Plan 1 is to reward performance, retaining and motivating key talent in a manner that is aligned to the creation of shareholder wealth. The Board has the discretion to make awards to eligible Participants on an annual basis subject to company and individual performance. Notification Letters are provided to the eligible Participants to advise the employees of their award. Awards may be delivered in the form of a combination of cash and/or Performance Rights. The terms on which the Participants are invited to participate in the Plan 1 are set out in the invitation letter and the offer of Performance Rights are subject to the Company X Performance Rights Plan. Company X Plan 2 Plan 2 was specifically developed and implemented in MONTH 20XX to mitigate the effects of the extremely tight labour market. Plan 2 acts as a retention incentive for those employees whose sustained contribution is of critical strategic and operational importance to the success of the business, in a manner aligned to the creation of shareholder wealth. Plan 2 provides a one-off issue of Retention Rights at the discretion of the Board. The terms on which the Participants are invited to participate in Plan 2 are set out in the invitation letter. The Retention Rights are granted in the form of Performance Rights subject to the Performance Rights Plan rules. Company X Performance Rights Plan (Rights Plan) The purpose of the Rights Plan is to assist in the reward, retention and motivation of Eligible Participants; and align the interests of Eligible Participants with shareholders of the Group. The Performance Rights granted under the Plans 1 and 2 are subject to the rules of the Rights Plan. Eligible Participants may be granted Performance Rights at the Board's absolute discretion. The Performance Rights may be subject to the satisfaction of certain pre-determined vesting hurdles and/or conditions prior to exercise. The terms on which the Participants are invited to participate in the Rights Plan are set out in the invitation letter. Following receipt of a completed and signed application form Company X will grant the Participant the relevant number of Performance Rights. No amount is payable by a Participant for the grant of Performance Rights unless an exercise price is specified in an invitation. Prior to a Performance Right being exercised a Participant is not entitled to vote at a meeting of the shareholders of Company X, nor receive any dividends declared by Company X. A Participant may not sell, assign, transfer, grant a security interest over or otherwise deal with a Performance Right that has been granted to them. The invitation and grant of Performance Rights does not automatically entitle an Eligible Participant to an award by way of equity. The actual method of settlement of a Performance Right, whether it be by way of equity or cash, is at the absolute discretion of the Board. A holder of Performance Rights does not (in respect of their Performance Rights) have the right to participate in a pro rata issue of Shares made by Company X or to receive or sell renounceable rights. A Performance Right granted under the Rights Plan will not be quoted on the ASX or any other recognised exchange. On assessment of the Vesting Conditions and provided the Performance Rights have not lapsed, an Eligible Participant's Performance Rights can be exercised by lodging with Company X a signed Notice of Exercise of Performance Rights, unless the invitation provides for a deemed automatic exercise. After the valid exercise or deemed exercise of a Performance Right, Company X will either: • Allot and issue, or cause to be transferred to that Participant (or the Trustee on behalf of a Participant), one Share for each Performance Right that is validly exercised; or • Make cash payment to the Participant equal to the sum of the Market Value of a Share at the date of exercise multiplied by the number of validly exercised Performance Rights that will be Cash Settled. All resulting Shares will rank pari passu in all respects with the Shares of the same class for the time being on issue except for any rights attaching to the Shares by reference to a record date prior to the date of issue or transfer of the resulting Shares. Any cash amount payable to a Participant for a cash settlement of Performance Rights will be paid to that Participant less all taxes required to be withheld under applicable law and any superannuation required to be paid under applicable law to satisfy the minimum amount required to be contributed by any member of the Group to avoid the imposition of a superannuation guarantee charge. If resulting Shares are in the same class as Shares which are listed on the ASX, Company X will apply for quotation of the resulting Shares issued (or any unquoted resulting Shares transferred) within the time required by the ASX Listing Rules after the date of issue. Unless otherwise stated in the invitation or determined by the Board in its absolute discretion, a Performance Right that has not vested will be forfeited immediately on the date that the Board determines (acting reasonably and in good faith) that any applicable vesting conditions have not been met or cannot be met by the relevant date. Where a Performance Right has been forfeited in accordance with the Rights Plan, the Performance Right will automatically lapse. Company X Employee Option Plan (Option Plan) The terms and conditions of the Option Plan are set out in the Company X Employee Option Plan rules updated as of MONTH 20XX. The Board may offer Options to Eligible Employees having regard to the factors outlined in Rule XX Eligibility. The terms on which the Participants are invited to participate in the Option Plan are set out in the Offer Document (Offer). The Options carry no right to dividends and not rights to voting. In accordance with the terms of the Offer and Option Plan rules, Options are only exercisable in specific window periods or at the discretion of the Board in particular circumstances. Subject to the Option Plan rules, each Option entitles a Participant to subscribe for and be issued or transferred (as the case may be) one Share at the Exercise Price. An Option is exercisable by the Participant lodging a properly completed Notice of Exercise. Unless otherwise specified in the Offer, not all Options are required to be exercised and it does not affect the Participant's right to exercise other Options at a later time provided the Options have not lapsed or expired. Options cannot be transferred nor are the Options listed for Official Quotation on the ASX. Upon exercise of the Options, the Participant will pay the required exercise price as set out in the Offer or elect a cashless exercise, which does not require an exercise price to be paid, and the underlying Shares the Participant is entitled to on exercise will be registered in the name of the Trustee and held pursuant to the Trust, unless the Board determines otherwise. Shares issued on the exercise of Options will rank pari passu with all existing Shares from the date of issue and will be entitled to those dividends which will be paid by Company X to the Trustee and the Trustee will pay the dividends to the shareholders when the Trustee holds Shares on behalf of shareholders.

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 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 subsection 83A-105(1) | Income Tax Assessment Act 1997 section 83A-340 | Income Tax Assessment Act 1997 subsection 104-75(1) | 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 Division 128 | Income Tax Assessment Act 1997 section 207-45 | Income Tax Assessment Act 1997 Subdivision 207-B | Income Tax Assessment Act 1997 subsection 207-50(4) | Income Tax Assessment Act 1997 subsection 207-150(1) | Income Tax Assessment Act 1936 subsection 44(1) | Income Tax Assessment Act 1936 subsection 95(1) | Income Tax Assessment Act 1936 Division 6 | Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1936 section 97 | Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1936 paragraph 99A(4)(a) | Income Tax Assessment Act 1936 paragraph 99A(4)(b) | Income Tax Assessment Act 1936 paragraph 99A(4)(c) | Income Tax Assessment Act 1936 paragraph 99A(4A)(a) | Income Tax Assessment Act 1936 paragraph 99A(4A)(b) | Income Tax Assessment Act 1936 paragraph 99A(4A)(c) | Income Tax Assessment Act 1936 Division 1A of the former Part IIIAA | Income Tax Assessment Act 1936 Former section 160APHO

Reasons for decision: Summary: Assessable income includes both ordinary income and statutory income according to sections 6-5 and 6-10 of the ITAA 1997. Ordinary income is income according to ordinary concepts. Statutory income is income that is not ordinary income but is included in assessable income because of a specific provision of the ITAA 1997 or Income Tax Assessment Act 1936 (ITAA 1936). As Chief Justice Jordan noted in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 ( Scott ): .. what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of receipts. | Detailed Reasoning - Ordinary income: Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. The expression " income according to ordinary concepts " is not a defined term. However, case law has identified certain factors which may assist in determining whether a receipt is properly characterised as income according to ordinary concepts. As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In GP International Pipecoaters v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 64 ALJR 392; (1990) 93 ALR 193; (1990) 21 ATR 1; 90 ATC 4413; [1990] HCA 25 ( Pipecoaters ), the High Court of Australia found that: To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. The contributions made by Company X or any other subsidiary member of the Company X TCG to the Trust will constitute Accretions to the corpus of the Trust (Clause XX of the Amended Trust Deed) that will be applied for the sole purpose of acquiring, or subscribing for, shares for the benefit of the Participants under the Plans (Clause XX of the Amended Trust Deed). The cash contributions received by the Trustee are therefore of a capital character. It is irrelevant that, from Company X's perspective, the cash contribution may be deductible under section 8-1 of the ITAA 1997 because whether a receipt is income or capital depends on its objective character in the hands of the recipient, rather than the payer. This is made clear in Pipecoaters , where the High Court held that: ...although the amount expended on the construction of the plant was a capital expenditure, it does not follow that the taxpayer's receipt of the establishment costs was a receipt of capital. From the Trustee's perspective, the irretrievable cash contributions made by Company X are capital in nature and therefore not assessable to the Trust under section 6-5 of the ITAA 1997. | Detailed Reasoning - Statutory income: Section 10-5 of the ITAA 1997 provides a list of provisions of assessable income for section 6-10 purposes. None of the provisions apply to a cash contribution made by an employer to a trust established under an employee share scheme (ESS). Therefore, the irretrievable cash contributions made by Company X or any other member of the Company X TCG to the Trustee of the Trust to fund the acquisition of, or subscription to, Company X shares are also not assessable income of the Trust pursuant to section 6-10 of the ITAA 1997. [1] | Detailed Reasoning - Question 2A: Pursuant to section 102-20 of the ITAA 1997, an entity can make a capital gain or loss if, and only if, a CGT event happens. Under subsection 104-75(1) of the ITAA 1997, CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) as against the trustee. The time of the event is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)). According to subsection 104-75(3), if CGT event E5 happens, the trustee may make a capital gain if the market value of the asset, at the time of the event, is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base. In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 of the ITAA 1997 applies. Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) explains the principles set out in the leading English trust law case of Saunders v. Vautier (1841) 49 ER 282 in relation to 'absolutely entitled' as follows: ... if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustees to transfer the trust property to them or at their direction, even though the trust deed contains a contrary intention. The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway. Pursuant to Clause XX of the Amended Trust Deed, a Participant is the beneficial owner of and absolutely entitled to their allocated shares. Allocated shares are defined as Shares allocated to, and held by the Trustee on behalf of, the Participant. Once allocated to and held by the Trustee on behalf of the Participant, the Participant (i.e., the beneficiary) will become absolutely entitled to the allocated shares (i.e., a CGT asset of the Trust) as against the Trustee. Accordingly, pursuant to subsection 104-75(1), CGT event E5 happens. | Detailed Reasoning - Question 2B: If CGT event E5 happens, any capital gain or loss that the Trustee makes is disregarded if section 130-90 of the ITAA 1997 applies. Section 130-90 provides as follows: (1A) Disregard any *capital gain or *capital loss made by an *employee share trust to the extent that it results from a *CGT event, if: (a) immediately before the event happens, an *ESS interest is a *CGT asset of the trust; and (b) either of the following subparagraphs applies: (i) the event is CGT event E5, and the event happens because a beneficiary of the trust becomes absolutely entitled to the ESS interest as against the trustee; (ii) the event is CGT event E7, and the event happens because the trustee *disposes of the ESS interest to a beneficiary of the trust; and (c) Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest. (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. (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. To qualify for the exemption in section 130-90, there must be an 'employee share trust' and an 'ESS interest'. Subsection 130-85(4) of the ITAA 1997 defines an employee share trust as 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 ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Shares that are purchased by the Trustee to satisfy its obligation under the Plans, and subsequently allocated to Participants pursuant to the Plans, are ESS interests for the purposes of subsection 83A-10(1). An 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 Plans each constitute ESS because each are a scheme under which ESS interests in Company X are provided to the employees of Company X in relation to their employment with Company X. Therefore, paragraphs 130-85(4)(a) and (b) of the definition of an employee share trust are satisfied because: a.The Trust acquires shares in a company, namely Company X; and b.The Trust ensures that ESS interests as defined in subsection 83A-10(1) are provided under an employee share scheme by allocating those shares to the employees of Company X in accordance with the Trust Deed and the Plans. Paragraph 130-85(4)(c) of the definition of an employee share trust provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b) of the ITAA 1997. The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'? (TD 2019/13). Whilst the relevant trust documents may include powers and/or duties that are broad reaching, the mere existence of those powers or duties in the trust document does not, of itself, mean that the trustee has breached the requirements to be an employee share trust. In examining whether the requirements of subsection 130-85(4) are met, it is necessary to examine the actual activities that the trustee has undertaken (paragraph 6 of TD 2019/13). The Amended Trust Deed contains only powers and/or duties that are merely incidental, as required by paragraph 130-85(4)(c) of the ITAA 1997. Therefore, the Trust established pursuant to the Trust Deed satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997. As the rights granted under the Plans will be acquired by the employees at a discount, they are ESS interests to which Subdivision 83A-B or Subdivision 83A-C of the ITAA 1997 applies. As such, a capital gain or capital loss that arises for the Trustee of the Trust established pursuant to the Trust Deed at the time when CGT Event E5 happens in relation to Company X shares held by the Trustee will be disregarded under section 130-90 of the ITAA 1997, if the employees acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee. | Detailed Reasoning - Section 95: Net income is defined by section 95 of the ITAA 1936 to mean the total assessable income of the trust estate calculated under Division 6 of the ITAA 1936 as if the trustee were a resident taxpayer in respect of that income, less allowable deductions. Under subsection 44(1) of the ITAA 1936, the assessable income of a resident shareholder in a company includes dividends that are paid to the shareholder by the company out of profits derived by it from any source. Under the Trust Deed, Unallocated Shares are held by the Trustee for the general purpose of the Trust and if the Trustee receives any income, including dividends, derived from Unallocated Shares, the income is held by the Trustee for the general purpose of the Trust. As such, dividends and other income received by the Trustee in respect of Unallocated Shares will be included in the calculation of the net income of the Trust under section 95. | Detailed Reasoning - Section 99A: Under section 99A of the ITAA 1936, the trustee of a trust estate is assessed and liable to pay tax on the part of the net income of the trust estate: • that is not included in the assessable income of a beneficiary of the trust estate under section 97 (paragraphs 99A(4)(a) and 99A(4A)(a)) • in respect of which the trustee is not assessed and is not liable to pay tax under section 98 (paragraphs 99A(4)(b) and 99A(4A)(b)), and • that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident of, and is also attributable to sources out of, Australia (paragraphs 99A(4)(c) and 99A(4A)(c)). The critical requirement for these three exclusion categories is that a beneficiary is presently entitled to a share of the income of a trust estate. Under the Amended Trust Deed, each Participant is the beneficial owner of the Trust Shares and is entitled to all benefits and privileges attached to or resulting from holding those Trust Shares. The Participant will only be entitled to dividends from allocated shares held by the Trust under the Trust Deed. Therefore, as a Participant is not presently entitled to any income derived from Unallocated Shares, none of the three exclusion categories apply, and the Trustee will be assessed and liable to pay tax under section 99A on any dividends and other income received by the Trustee in respect of Unallocated Shares. | Detailed Reasoning - Tax offset: Section 207-45 of the ITAA 1997 provides that trustees, who are liable to be assessed under section 99A of the ITAA 1936 and to whom a franked distribution flows indirectly, are entitled to a tax offset for that income year equal to its share of franking credit attached to the distribution. Pursuant to subsection 207-50(4) of the ITAA 1997, a franked distribution will be taken to flow indirectly to the trustee of a trust where, relevantly, the trustee is liable to be assessed on all or part of the trust's net income for that year under section 99A of the ITAA 1936. As determined above, the Trustee will be liable to be assessed under section 99A of the ITAA 1936 in relation to dividends received by the Trustee in respect of Unallocated Shares. Therefore, the requirements of section 207-45 of the ITAA 1997 are satisfied and the Trustee will be entitled to a tax offset equal to its shares of the franking credits attached to the dividends. | Detailed Reasoning - Qualified Person: However, subsection 207-150(1) of the ITAA 1997 denies a tax offset otherwise available under section 207-45 where the person is not a qualified person for the purposes of Division 1A of the former Part IIIAA of the ITAA 1936. Broadly, a person will be taken to be a qualified person in respect of a dividend paid on shares if the shares are held at risk for a period of 45 days and the person or an associate does not make a related payment in respect of the dividend (former section 160APHO of the ITAA 1936). It is accepted that no related payment will be made by the Trustee in respect of the dividend. It is also accepted that the Trustee will hold the Unallocated Shares at risk for a period of not less than 45 days during the period beginning the day after the Trustee acquires the Unallocated Shares and ending on the 45th day after the Unallocated Shares become ex-dividend. Therefore, it is accepted by the Commissioner that the Trustee will be a 'qualified person' for the purposes of Division 1A of former Part IIIAA of the ITAA 1936. The Trustee will be entitled to a tax offset under Subdivision 207-B of the ITAA 1997 equal to the franking credits attached to the franked dividends received in respect of Unallocated Shares. [1] This view is consistent with ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme, which found that: ' The funds provided to the Trustee are used in accordance with the Trust Deed and Plan Rules for the sole purpose of and under the employee share scheme. The contributions constitute capital receipts to the Trustee, and are not assessable under sections 6-5 or 6-10 of the ITAA 1997'.

Will CGT event E5 happen at the time when the Participants become absolutely entitled to Company X shares held by the Trustee under the Plans? | If CGT event E5 does happen, will a capital gain or capital loss made by the Trustee as a result of CGT event E5 happening be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Company X shares at a price that is the same as, or less than, the cost base of the Company X shares in the hands of the Trustee?