Private ruling: Employee share scheme arrangement
Date of advice: 14 April 2020
Published: June 2020
Ruling period: Income tax year ending 30 June 20xx

Ruling: Q1: Are the irretrievable cash contributions by HC to the Trustee for the HC Employee Share Trust (Trust) to fund the acquisition of, or subscription for, HC shares by the Trustee assessable income of the Trust under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is a capital gain or capital loss that arises for the Trustee at the time when either CGT Event E5 or E7 happens in relation to the HC shares held by the Trustee 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? | A2: Yes.

Relevant facts and circumstances: Background There are three main documents which are incorporated in this private ruling application. They are: · The HC Employee Share Trust Deed (Deed) · The Executive Option Plan Rules (EOP Rules), and · The Short Term Incentive Plan Rules (STIP Rules) HC has sites throughout Australia and one other overseas jurisdiction. HC remunerates executives by evaluating comparable executive positions in similar companies and industries. The remuneration of executives at HC is comprised of the following elements: (a) Fixed remuneration; and (b) Variable remuneration, which consists of: a. Long term incentives, under the Executive Option Plan (EOP), and b. Short term incentives under the Short Term Incentive Plan (STIP). The variable remuneration paid under one (or more) of the arrangements above are collectively referred to as being paid under the Plans. The Plans are administered in accordance with the rules that accompany the Plans and the Deed Key details of the Plans and Deed 1. The Executive Option Plan ( EOP ) The EOP Rules broadly operate to provide eligible employees (Participants) with the opportunity to receive options over shares in HC. In order to receive shares, the Participant must satisfy all relevant vesting criteria (unless waived by HC) in accordance with the EOP Rules. Where the vesting criteria are satisfied, then following payment of the exercise price (if any) the Participant will be entitled to shares in HC (one ordinary share for every option). Those shares are then held under the HC Employee Share Trust (Trust) on behalf of the Participant subject to conditions as specified in the EOP rules. Once those conditions are satisfied, the Participant can withdraw the shares from the Trust. Broadly, the EOP operates as follows: 1.1 Employees are invited to apply and participate in the EOP through the issue of a valid Participation Letter, which outlines the following: a) The number of options offered; b) The issue price (if any) for the grant of the option(s); c) The exercise price (if any); d) Any Vesting Conditions; e) Expiry date of option(s); and f) Restrictions on disposal of the shares once granted. 1.2 Once the Participant (employee) has received the Participation Letter, the Participant may apply to be issued with options by executing the Application within the specified time limit. At this time, the Participant can also elect to have their shares subject to a disposal restriction period from the date of exercise of the option, up to a maximum of 7 years from the issue date of the option. 1.3 While the EOP Rules state that the options will generally be issued to Participants for an amount determined by HC, and this amount may be nil, HC has advised that the options have no acquisition price and may have an exercise price based on the share price at the time of grant of the options. 1.4 The exercise of each option may also be subject to a number of vesting conditions, these include: - Service-based Vesting Condition; - Performance-based Vesting Condition; and/or - Share Price Vesting Condition These are set out in the Participation Letter. These vesting conditions must be satisfied (or otherwise waived by HC) before an option vests and can be exercised by a Participant. 1.5 Participants may choose to exercise vested options at any time prior to their expiry, subject to HC's Share Trading Policy. Subject to other rules, an option expires at the earliest of: a) Expiry Date - all Options; b) Bad Leavers - all Options; c) Unvested Options; d) Death or Disability - Unvested Options; or e) Change of Control - all Options, unless otherwise determined by the Board. 1.6 Participants can choose to exercise their vested options by notifying HC and by paying the option exercise price, if any, to HC. The exercise price of each option will be outlined in the Participation Letter. 1.7 At the time a Participant successfully exercises their options, HC must direct the Trustee to subscribe for, acquire or allocate to the Participant one share for each option exercised and hold those shares in trust on behalf of the Participant. The rules specifically provide what HC does when an option is exercised by a Participant. 1.8 HC is to provide funds to the Trustee of the Trust in order to allow the Trustee to subscribe for, and/or acquire shares to be held on behalf of the Participants under the Plan. 1.9 All shares in the same class that are issued on the exercise of an option will rank equally from the date of issue. 1.10 Participants may choose to fund the option exercise price with a loan from an external financier. The funding is provided by independent third party financiers. Where this happens, the Participant may be required to lodge a Withdrawal Notice to transfer the legal title in the shares from the Trust to a party nominated by the Participant to enable the Participant to grant a security interest over the shares. 1.11 Participants may instruct HC and the Trustee to exercise and sell sufficient shares to fund the exercise price. The exercise price is paid to HC by the broker on settlement of the trade. 1.12 A Participant may submit a Withdrawal Notice to HC and the Trustee in respect of some or all of the shares the Trust holds on behalf of the Participant. At this point, HC must direct the Trustee to transfer legal title of the shares to the Participant. 1.13 The Withdrawal Notice also allows the Trustee / HC to sell the shares on behalf of the employee and provide the proceeds of sale less brokerage costs to the employee. 2. Short Term Incentive Plan ( STIP ) HC employees who are invited to participate (Participants) in the STIP are eligible to receive a short term incentive (STI) which takes the form of a contractual right to receive a cash bonus and shares in HC, subject to the achievement of certain performance conditions determined by HC. The granting of shares to a Participant pursuant to the achievement of the STI will be subject to the conditions set out in the STI Plan Rules (STIP Rules). The STIP broadly operates as follows: 2.1 At or shortly after the start of a financial year, Participants are informed in writing of their proposed remuneration package for the current financial year, which may include an offer under the STIP. 2.2 Notwithstanding any cash component, the offer under the STIP may include a right to receive shares in HC, subject to the achievement of performance conditions which are subject to an STI Expiry Date. The number of shares that relate to the Right is unknown at the date of the offer as the number is subject to the achievement of performance conditions. 2.3 A Participant must notify HC in writing within 10 days of their intention to accept the offer of a Right. There is no acquisition or exercise price for the rights. 2.4 If a Participant ceases employment with HC during the financial year, the Participant will no longer be entitled to receive any STI for that year and the Right will immediately lapse, unless expressly agreed otherwise by HC. 2.5 A Participant may not sell, assign, transfer or grant a Security Interest, or otherwise deal with a Right that has been granted to them. 2.6 Following the release of HC's financial results for a financial year, HC will determine the extent to which the employee has met the performance conditions, and will calculate the number of shares the Participant is entitled to. 2.7 Once the relevant number of vested shares has been calculated and HC has provided the Trust with the requisite funding, then HC may either: a. Issue to the Trustee ordinary shares in HC; b. Instruct the Trustee to acquire on-market ordinary shares in HC; or c. Instruct the Trustee to allocate to the Participant an amount of unallocated ordinary shares held in the Trust. 2.8 These shares will then be held in the Trust on behalf of the Participant, and subsequently allocated. 2.9 The STIP effectively provides for an automatic exercise once HC has determined the number of shares the Participant is entitled to. The Participant is not required to provide an exercise notice. 2.10 The Participant must not deal in shares held by the Trust and allocated to the Participant until the STI Restriction Expiry Date. 2.11 Provided the STI Restriction Expiry Date has passed, the Participant may lodge a withdrawal notice, and withdraw shares from the Trust. The withdrawal notice must be signed by the Participant, and instruct the Trustee to release those shares from the Trust and transfer legal title to the Participant or their nominee. Alternatively, the Participant may instruct the Trustee to sell those shares directly on their behalf. 2.12 Following receipt of the withdrawal notice, HC should ensure that the Trustee either transfers legal title, or arranges for the sale of those shares as soon as reasonably practicable. 2.13 Any dealings in shares following the provision of a withdrawal notice are subject to HC's Securities Trading Policy. 2.14 The STIP is a plan to which Subdivision 83A-C of ITAA 1997 applies. The STIP is considered an Indeterminate Rights Plan for the purposes of section 83A-340. This is due to the fact that the rights relate to an indeterminate number of shares at the date of the offer. Only once the number of shares into which the rights can be converted is known (i.e. six business days after the release of audited financial results for a financial year) will the rights become an ESS interest and therefore fall within Division 83A. The rights will then be treated as having always been an ESS interest under subsection 83A-340(2). 3. HC Employee Share Trust Deed The Trust was established as a sole purpose trust to acquire shares for employees of HC pursuant to current and future employee equity plans. The Trust provides HC with the flexibility to accommodate different incentive arrangements. The Trust provides capital management flexibility for HC, in that the Trust can use the contributions made by HC either to acquire shares in HC on market, or alternatively to subscribe for new shares in HC. Similarly, it provides an arm's length vehicle through which shares in HC can be acquired and held in HC on behalf of Participants. This allows HC to satisfy Corporations Law requirements relating to companies dealing in their own shares. An independent trustee company is the current HC Trust Trustee (Trustee). Broadly, the Trust operates as follows: 3.1 The Trust is funded by contributions from HC or a subsidiary member of the HCG (i.e. for the purchase of shares in accordance with the Plans). All fund received by the Trustee from HC or a subsidiary member of HCG will constitute Accretions to the corpus of the Trust and will not be repaid to HC and no Participant will be entitled to receive such funds. 3.2 These funds are used by the Trustee to acquire shares in HC either on-market or via a subscription for new shares in HC, based on written instructions from HC. 3.3 Irretrievable cash contributions are made regularly and progressively to the Trust in accordance with the Plan Rules and the Deed. 3.4 Shares acquired by the Trustee must be allocated to the relevant Participant and held on their behalf. Each Participant is the beneficial owner of the shares held by the Trustee on their behalf and is absolutely entitled to all other benefits and privileges attached to those shares. 3.5 After a disposal restriction period lapses, the Trustee must transfer the relevant number of shares into the name of the Participant (i.e. legal title) upon a Withdrawal Notice being submitted to the Trustee. 3.6 HC does not have any charge, lien or other proprietary right or interest in the shares acquired by the Trustee according to the Deed. 3.7 No member of the Group or the Trustee have or be entitled to obtain any beneficial interest in the Trust Assets. 3.8 Upon termination of the Trust, the Trustee must not pay any Trust Assets to any member of the Group. 3.9 No member of the Group is a beneficiary of the Trust. 3.10 The Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997. Unallocated shares The Trust may acquire shares that are not allocated to Participants (unallocated shares) to satisfy future obligations under the Plans to the extent that there are options or rights granted to Participants that have not yet vested. Contributions to the Trust Whilst HC intends to wait until the options or rights vest and to receive the exercise notice and exercise price (if applicable) from Participants before providing the Trust with the cash necessary to acquire shares to satisfy the acquisition or subscription of shares related to those options or rights, HC may make cash contributions to the Trust prior to the options or rights being exercised by the Participants. Where this occurs HC will contribute to the Trust enough funding to enable purchase of shares up to 6 months in advance of when the options or rights are likely to be exercised. This will allow the Trustee to have enough shares in the Trust ahead of the time they need to be allocated to Participants, and avoids delays in times such as blackout trading periods.

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 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 subsection 83A-105(6) | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 section 130-90 | Income Tax Assessment Act 1997 subsection 995-1(1)

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) states: Your assessable income includes income according to ordinary concepts, which is called ordinary income. Further, subsection 6-10(1) 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 are relevant in the present circumstances. Therefore, non-refundable contributions made by HC to the Trustee are not assessable income under section 6-10. Accordingly, non-refundable contributions are only 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 (i.e. ordinary income). Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. The contributions made by HC are irretrievable and non-refundable to HC in accordance with the Deed as all funds received by the Trustee from HC or subsidiary member of the HCG are not repaid to HC. Also, HC and its subsidiary members of the HCG do not have any beneficial interest in the Trust Assets, including any unallocated shares (clause 3.5). On termination of the Trust, the Trustee must not pay any balance to any member of the Group (clause 18.3). No member of the Group is a beneficiary of the Trust (clause 21(c)). Therefore, there is no clause that allows such funds to be returned to HC. Accordingly, such contributions constitute receipts of a capital nature to the Trustee and are not assessable as ordinary income under section 6-5. Given that the irretrievable cash contributions made by HC to the Trustee are neither ordinary nor statutory income respectively, they are not included in the net income of the Trust, and hence cannot be assessed to the Trustee pursuant to section 95 of the ITAA 1936. | Detailed Reasoning - CGT Event E5: Generally, CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee, subject to some exceptions (subsection 104-75(1)). The time of CGT event E5 is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)). As no exceptions apply in this case, if CGT event E5 happens, the trustee makes a capital gain or capital loss if the market value of the share (at the time of the event) is more than its cost base or less than the share's reduced cost base, respectively. In this case, when a Participant meets the Vesting Conditions and exercises their option or right, that option or right to receive a share in the Plans becomes unconditional. At this point, the Participant becomes absolutely entitled to the share (a CGT asset of the Trust) as against the Trustee, and CGT event E5 happens (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 ). Similarly, when a Participant becomes absolutely entitled against the Trustee to a HC share after the restriction period in the Plans, CGT event E5 happens. However, section 130-90 provides that any capital gain or capital loss made by an employee share trust is disregarded where it results from a CGT event under certain circumstances. The meaning of an 'employee share trust' is defined in subsection 130-85(4), which examines the activities of the trustee. The present Trust is an employee share trust because: · the Trust acquires shares in a company (being HC); · the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being rights or options in the Plans are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Deed and the relevant Plan Rules; and · the Deed provides that the Trust is managed and administered so that it satisfies the definition of 'employee share trust' for the purpose of subsection 130-85(4). The powers and activities allowed and undertaken by the Trustee according to the Deed are in line with the types of activities that are merely incidental as set out in Taxation Determination, TD 2019/13: What is an 'employee share trust'? Subsection 130-90(1) applies in respect of shares held to satisfy the future exercise of rights or options acquired under employee share schemes. | Detailed Reasoning - Subsection 130-90(1): Subsections 130-90(1) applies to disregard any capital gain or loss made by an employee share trust if: (a) the CGT event is CGT event E5 or E7; (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. | Detailed Reasoning - Paragraph 130-90(1)(a): CGT event E5 is the CGT event that applies under the terms of the Trust and the Plans at the time the Participant becomes absolutely entitled to the HC shares as against the Trustee when Vesting Conditions are met and the right or option is exercised. | Detailed Reasoning - Paragraph 130-90(1)(b): Subsection 995-1(1) defines a share in a company to mean a share in the capital of a company. An ordinary share in HC held by the Trustee and to which a Participant is entitled upon exercise of a right or option is a share in the capital of a company (i.e. HC). Accordingly, CGT event E5 happens in relation to a share. | Detailed Reasoning - Paragraph 130-90(1)(c): Paragraph 130-90(1)(c) is satisfied as a Participant has acquired a beneficial interest in a share (in HC) by exercising a right or option provided under the Plans. | Detailed Reasoning - Paragraph 130-90(1)(d): Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states: This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount. The right or option in the Plans is an 'ESS interest' under paragraph 83A-10(1)(b) because it is a beneficial interest in a right to acquire a share in HC. Subsection 83A-10(2) defines an employee share scheme as being 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 Plans are each an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which rights or options to acquire beneficial interests in ordinary shares in HC are provided to employees in relation to the employee's employment. Each right or option is acquired for no cost. As the Participant acquires the right or option for no cost, the ESS interest is acquired by the Participant at a discount. Therefore, Subdivision 83A-B or 83A-C applies to the right or option under the Plans. Accordingly, all the conditions in subsection 130-90(1) have been satisfied. Provided a Participant does not acquire the beneficial interest in the HC share for more than its cost base in the hands of the Trust at the time that CGT event E5 happens, subsection 130-90(1) applies. Any capital gain or capital loss that the Trustee makes from CGT event E5 for the Plans is disregarded. | Detailed Reasoning - CGT Events E7: Subsection 104-85(1) provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 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 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. In accordance with the Deed, each Participant is absolutely entitled to any HC shares held by the Trustee on their behalf, and is entitled to all other benefits and privileges attached to those shares. Once a Participant is absolutely entitled to a HC share held on their behalf by the Trust, section 106-50 deems the disposal of the HC share by the Trustee to be done by the Participant. This means there would be no change in the share ownership. Therefore, section 106-50 applies such that if the Trustee disposes of the HC shares under the Plans (by way of transfer of legal title to a Participant), the Trustee does not make a capital gain or capital loss under CGT Event E7.

Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 , unless specified otherwise.