Private ruling: Assessable income of an employee share trust
Date of advice: 11 August 2020
Published: September 2020
Date scheme commenced: Company P is an Australian resident company which operates an employee incentive plan (the Plan) as part of its remuneration strategy for employees of Company P and of any subsidiaries of Company P. The Plan is governed by the Plan Rules.

Ruling: Q1: Will the irretrievable payments by Company P or any subsidiary of Company P to the Trustee to fund the acquisition of Company P shares by the Trust be assessable income of the Trust under sections 6-5 or 6-10 of Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: Company P is an Australian resident company which operates an employee incentive plan (the Plan) as part of its remuneration strategy for employees of Company P and of any subsidiaries of Company P. The Plan is governed by the Plan Rules. Employees who are eligible to participate in the Plan (Participants) will be granted with Performance Rights (Rights) to acquire shares in Company P. Company P established the Trust administered by the Trustee to facilitate the acquisition, holding of and allocation of Company P shares to Participants. The Plan operates as follows: 1. Eligible employees (Participants) may receive a grant of Awards and/or Restricted Shares under the Plan. 2. Subject to the Board's discretion, Invitation letters sent to the Participants should outline: a. the type and number of Awards and/or Restricted Shares being offered, or the method by which the number will be calculated b. the amount (if any) that will be payable for the grant of Awards and/or Restricted Shares c. any vesting conditions or other conditions that apply, including and vesting period d. the terms of exercise for an Award (where exercisable), including the period(s) during which exercise is permitted e. that Awards will only be settled through an allocation of Shares or by making a cash payment (as applicable) where the Board has made a determination pursuant to the Plan rules at the time of the offer f. the circumstances in which Awards may lapse, Restricted Shares may be forfeited or a Participant's entitlement to Awards or Restricted Shares may be reduced g. how Awards and/ or Restricted Shares may be treated if a Participant ceases employment with the Company h. details of any gift component i. any restrictions (including the period of restriction) on dealing in relation to an Award and/or Restricted Share, and j. where all or part of an offer is made as a salary sacrifice offer or tax exempt offer under the Plan, the offer should specify this. 3. Unless the Board determines otherwise, no payment is required for the grant of Awards, or Restricted Shares (other than a Restricted Share purchased by salary sacrifice). 4. From the date of issue, the Restricted Shares will entitle the Participant to voting rights, rights to receive dividends, bonus shares and to participate in rights issues. 5. The offer of a Restricted Share to a Participant that is intended to fall within the $1,000 tax exemption in Division 83A, will be subject to a restriction period from the date that the Restricted Shares are allocated until the earlier of: a. the date which is three years from the date of allocation of the Restricted Shares (or such other period that may be required under subdivision 83A-B, including such earlier time as the Commissioner of Taxation allows in accordance with subsection 83A-45(5)), and b. the date on which the Participant ceases to be employed by the Company. 6. Participants' Awards will lapse on the earliest of the following, subject to the Board's overriding discretion: a. 15 years after the date on which the Rights were allocated to the Participant, or any other date nominated as the expiry date in the Offer b. the Award lapsing in accordance with the Plan (including in accordance with a term of offer) c. failure to meet a vesting condition or any other condition applicable to the Award within the vesting period, or d. the receipt by the Company of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Right. 7. Participants' Restricted Shares (except Restricted Shares that are tax-exempt) will be forfeited upon the earliest to occur of: a. the Restricted Shares being forfeited in accordance with a provision under the Plan b. the failure to meet any vesting or other conditions applicable to the Restricted Shares within the relevant vesting period, or c. the Participant electing to surrender the Restricted Shares by way of written notice to the Company. 8. Where a Participant ceases employment, the Board, in its discretion, may specify to the Participant how the Participant's Awards or Restricted Shares will be treated. This will vary depending on the circumstances in which the Participant's employment ceases (i.e. in the case of a bad leaver, the Awards or Restricted Shares will lapse or be forfeited and in the case of a good leaver, the Awards or Restricted Shares will continue on foot on cessation of employment). 9. Where there is a takeover, scheme of arrangement or winding up as described in the Plan, the Board may determine that all or a number of a Participant's Awards or Restricted Shares vest or cease to be subject to restrictions, and the treatment of any unvested Awards or Restricted Shares. 10. The Trust Deed allows the Company to use an Employee Share Trust to facilitate the allocation of shares to a Participant (i.e. the Trustee to subscribe for and/or acquire shares to be held on behalf of the Participants under the Plan). Indeterminate rights Awards granted under the Plan, where the Board has decided at the time of the Offer to settle them in Shares, will fall within the scope of Division 83A. However, Awards granted under the Plan where the Board has retained the flexibility to settle them in either cash or shares at the Board's discretion are not initially employee share scheme interests (ESS interests) as defined in section 83A-10. If the Board decides to settle the Awards in shares and not cash will the Awards become ESS interests and therefore fall within the scope of Division 83A. Where the Board decides to settle the Awards in shares, the Awards will then be treated as indeterminate rights and always having been ESS interests in line with subsection 83A-340(2). Company P Employee Share Trust (the Trust) The Trust provides Company P with greater flexibility to accommodate the incentive arrangements of the company both now and into the future as the group continues to expand its operations. The Trust provides capital management flexibility for Company P, in that the Trust can use the contributions made by Company P either to acquire shares in Company P on market, or alternatively to subscribe for new shares in Company P. Similarly, it provides a vehicle through which shares in Company P can be acquired and held in Company P on behalf of employees. In effect, this aspect allows Company P to satisfy Corporations Law requirements relating to companies dealing in their own shares. Broadly, the Trust operates as follows: · The Trustee is required to comply with the Plan Rules. · The Trustee holds as General Trust Property the Settlement Sum and all other property including but not limited to money or shares (Trust Fund) that may be paid, transferred or credited to the Trust, on trust for all Participants in accordance with the Trust . · The Trustee may apply any part of the General Trust Property for the benefit of Participants, including, amongst other things, transferring shares, conferring legal title of shares upon or granting a beneficial interest in shares, to a Participant. · The Trustee will also set aside and hold for the benefit of Participants, parts of the Trust Fund as Allocated Trust Property, in which the Board will specify the Plan under which the Allocated Trust Property is to be set aside, and the Trustee will transfer the Allocated Trust Property to the Participant at the relevant time. · If shares are held by the Trustee as Allocated Trust Property, the Participant is presently entitled to receive all dividends and other distributions, bonus issues or other benefits payable to the Trustee in respect of those shares. · The Trustee has, amongst other things, the power to acquire and dispose of shares for the benefit of the beneficiaries of the Trust consistent with the purposes of the Trust. The Trustee can also take necessary steps to administer and maintain the Trust and the Trust Fund in line with the Trust Deed. · The Trustee may exercise voting rights on behalf of a Participant who has shares held as Allocated Trust Property in the Trust, where directed to do so. · Company P will ensure the Trustee has the necessary funds to do any act requested by the Board and to enable the Trustee to pay any costs and expenses incurred in accordance with the Trust Deed. · Subject to Company covenants set out in the Trust Deed, the Board has complete discretion in relation to payments made to the Trustee and there is nothing in the Trust Deed that allows the Trustee the right to such payment · The Trustee warrants, amongst other things, that it is a valid corporation that exists under the laws of its place of registration, and has the power to enter into and perform its obligations under the Trust Deed, and to carry out the transactions contemplated by the Trust Deed. · Company P is not a beneficiary of the Trust (nor may it become a beneficiary), and the Company P has no proprietary right or interest in any of the shares acquired by the Trustee. The Rights and Restricted Shares will be provided to employees at a discount. Any off-market acquisition of Company P shares will take place at market value. Contributions to the Trust Where practicable, Company P will wait until the likelihood of the Awards vesting can be reasonably determined, or the exercise notice from Participants is received (where relevant), before providing the Trust with sufficient cash to acquire shares to satisfy the acquisition or subscription of shares related to those Awards. Where Awards may be settled in either cash or shares, Company P may make a contribution to the Trust in respect of those Awards that are likely to be settled in shares before the determination is made. Company P may make cash contributions to the Trust prior to the Awards vesting, or prior to the issue or grant of Restricted Shares and, where relevant, Awards being exercised by the Participants. In this case, Company P will contribute to the Trust sufficient funding to enable purchase of a reasonable quantity of shares in advance of when Awards are likely to be exercised or in advance of the grant date of the Restricted Shares. This enables the Trustee to hold enough shares in the Trust prior to when they need to be allocated to Participants, and avoids delays in times such as blackout trading periods. Assumption We make your Ruling based on the Assumption that the Board will not elect to settle vested Awards in cash.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10

Reasons for decision: Summary: The irretrievable payments made by Company P or any subsidiary to the Trustee to fund the acquisition of Company P shares by the Trust for the purposes of the Plan will not be assessable income of the Trust under sections 6-5 or 6-10. | Detailed Reasoning - Detailed reasoning: Sections 6-5 and 6-10 relevantly state the following: | Detailed Reasoning - Section 6-5 Income according to ordinary concepts (ordinary income): 6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income . 6-5(2) If you are an Australian resident, your assessable income includes the * ordinary income you * derived directly or indirectly from all sources, whether in or out of Australia, during the income year. ... | Detailed Reasoning - Section 6-10 Other assessable income (ordinary income): 6-10(1) 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. ... Assessable income pursuant to subsection 6-5(1) includes amounts that are income according to ordinary concepts. The expression 'income according to ordinary concepts' is not defined by the income tax legislation, however the courts have considered a number of factors which indicate whether a receipt has the character of income according to ordinary concepts. Whether a particular receipt has the character of income or capital depends upon its quality in the hands of the recipient: Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 14 ATD 286; (1966) 10 AITR 367, GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 21 ATR 1; 90 ATC 4413. Under the present Plan and in accordance with the Trust Deed, Company P and any subsidiaries will make contributions to the Trust which will enable the Trust to acquire shares to satisfy awards made to employees of Company P and any subsidiaries under the Plan. Further, the Commissioner considers that none of the provisions listed in section 10-5 would otherwise include the irretrievable contributions in the assessable income of the Trust for the purposes of section 6-10. | Detailed Reasoning - Whether assessable income of the Trustee: The Commissioner's view on whether the irretrievable payments made by Company P and any subsidiary to the Trustee are characterised as income or capital receipts is set out in ATO Interpretative Decision ATO ID 2002/965 which states: The Trustee of the employee share scheme Trust will not be assessed under sections 6-5 or 6-10 of the ITAA 1997 on contributions made to it by an employer for the purpose of and under the employer's employee share scheme. ... The funds provided to the Trustee are used in accordance with the Trust Deed and Plan Rules ... The contributions constitute capital receipts to the Trustee, ... As the irretrievable payments made by Company P (or by any subsidiary of Company P) will constitute a capital receipt to the Trustee, the payments will not be included in assessable income under section 6-5. Further, the irretrievable payments will not be included in the assessable income of the Trust pursuant to a provision listed in section 10-5, and in turn will not be included in the assessable income of the Trust under section 6-10.

Reasons for decision: All legislative references are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.