Private ruling: Employee Share Plan and Demerger
Date of advice: 18 March 2016
Published: May 2016
Ruling period: Income Year ended 30 June 2016

Ruling: Q1: Did CGT event G1 happen to the Trustee when it received a return of capital on the Demerger Date in respect of Allocated Company A Shares it held on behalf of a Participating Employee under the Company A Share Plan? | A1: No. | Q2: Is any amount required to be included in the net income of the Trust in respect of a return of capital, satisfied by the provision of Entity B Securities, received by the Trustee on the Demerger Date in respect of Allocated Company A Shares held by the Trustee under the Company A Share Plan? | A2: No. | Q3: For CGT purposes, will the acquisition date of the Entity B Securities by the Trustee be the Demerger Date and does the Trustee have, in accordance with subsections 110-25(2) and 110-55(2) of the Income Tax Assessment Act 1997 (ITAA 1997), a first element of the cost base and reduced cost base of each Entity B Security it acquired in respect of any Allocated Company A Shares equal to the 5 day VWAP? | A3: Yes. | Q4: Did CGT event E5 occur on the Demerger Date when, in accordance with the Trustee's exercise of its discretion under the Trust Deed, a Participating Employee is allocated the Entity B Securities, which it acquired in respect of Allocated Company A Shares it held on behalf of the Participating Employee on the Scheme Record Date? | A4: Yes. | Q5: If the answer to question 4 is yes, did the Trustee make a capital gain or capital loss when CGT event E5 happened on the Demerger Date in accordance with subsection 104-75(3) of the ITAA 1997? | A5: No. | Q6: Did CGT event A1 happen to the Trustee when the Trustee disposed of Entity B Securities it acquired in respect of Allocated Company A Shares the Trustee held on behalf of a Participating Employee, to, or on behalf of, the Participating Employee? | A6: No. | Q7: Did CGT event G1 happen to the Trustee when it received a return of capital on the Demerger Date in respect of any Unallocated Company A Shares it held on the Scheme Record Date and continued to hold on the Demerger Date? | A7: Yes. | Q8: If the answer to question 7 is yes, will the Trustee either make a capital gain in respect of any Unallocated Company A Share and be required to reduce the cost base and reduced cost base of any Unallocated Company A Share to nil in accordance with subsection 104-135(3) of the ITAA 1997, or be required to reduce the cost base and reduced cost base of any Unallocated Company A Share in accordance with subsection 104-135(4) of the ITAA 1997? | A8: Yes. | Q9: For CGT purposes, will the acquisition date of the Entity B Securities by the Trustee be the Demerger Date and does the Trustee have, in accordance with subsections 110-25(2) and 110-55(2) of the ITAA 1997, a first element of the cost base and reduced cost base of each Entity B Security it acquired in respect of any Unallocated Company A Shares equal to the 5 day VWAP? | A9: Yes. | Q10: Will CGT event A1 happen when the Trustee disposes of the Entity B Securities it acquired in respect of the Unallocated Shares it held on the Scheme Record Date? | A10: Yes. | Q11: Did or will the Trust fail the sole activities test in subsection 130-85(4) of the ITAA 1997 by receiving, distributing and selling Entity B Securities which the Trustee acquired in respect of both Allocated and Unallocated Company A Shares under the Demerger? | A11: No.

Relevant facts and circumstances: Company A Share Plan Overview Company A is an Australian resident company and is the head entity of an income tax consolidated group (Company A Consolidated Group). The Company A Consolidated Group operates a number of employee share schemes within the meaning of Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997). One such employee share scheme is the Company A Share Plan under which ordinary shares in Company A (Company A Shares) are made available to employees. The Company A Share Plan is used by Company A in connection with a number of remuneration and incentive programs. Under the Company A Share Plan, Company A Shares are offered to employees who either: • seek to participate in the form approved by the Board. This generally involves the employee sending a participation/application form to the Trustee which will be attached to an invitation to the employee to participate in the Company A Share Plan. The employee must also agree to be bound by the terms of the Company A Share Plan and the constitution of Company A; or • become a Participating Employee unless they opt out of the Company A Share Plan. The Company A Share Plan is facilitated by the Company A Employee Share Plan Trust (Trust) of which Company A Trustees Limited (Trustee) is the trustee. The Trust is set up pursuant to the Company A Employee Share Plan Trust Deed (Trust Deed). The Trust Deed sets out the rights and obligations of the Trustee and explains how the Trustee is to facilitate the provision of Company A Shares to Participating Employees in accordance with the Company A Share Plan. Operation of the Company A Share Plan The Trustee acquires Company A Shares on behalf of employees who participate in the Company A Share Plan (Participating Employees) and holds those shares under the terms of the Trust. In respect of unvested Company A Shares held under the Company A Share Plan, the Participating Employee has not paid or given any consideration to acquire the Company A Shares. The Trustee allocates Company A Shares (being shares it has either acquired on-market, shares which it has been issued, or existing shares held by the Trustee which it does not hold on behalf of specific employees) to an account held for each Participating Employee (Allocated Shares) so that the Participating Employee acquires a beneficial interest in those Company A Shares. Company A Shares are registered in the name of the Trustee on acquisition. The Trustee holds the shares on behalf of Participating Employees who are the beneficial owners of those Company A Shares. Participating Employees are entitled to receive all cash dividends paid on Company A Shares held on their behalf. Participating Employees are also entitled to certain benefits which accrue to Company A Shares. For example, bonus shares and rights. The Trust Deed also provides that if an Accretion arises in respect of a Share other than by way of cash dividend, Bonus Shares or Rights, the Trustee may in its absolute discretion decide to transfer, or provide the benefit of, all or such part of the Accretion as the Trustee determines to the Participant. Participating Employees are not permitted to deal with their Company A Shares during a particular period (Restriction Period). Various offers are made under the Trust Deed. While the Restriction Period differs depending on the particular offer, it is generally the period ending on the earlier of: • a date set out in the terms of offer, which may be, for example, the first, third, fifth or tenth anniversary of the date of allocation of Company A Shares to the Participating Employee; or • the time the Board makes a determination following certain extraordinary events. At the end of the Restriction Period, Participating Employees can request the Trustee to transfer Company A Shares into their name or to sell the Company A Shares on their behalf. The Trustee must then comply with that request. In certain limited circumstances (for example where required by law) the Trustee may transfer or deal with a Participating Employee's Company A Shares even though the Restriction Period has not ended. If the Participating Employee requests the sale of their Company A Shares, the Trustee will pay the proceeds of sale (after deducting all costs of sale) to the Participating Employee. The Trustee can transfer to, or sell and pay the proceeds of Company A Shares to, the Participating Employee after the minimum holding period has ended if it does not receive any directions from the relevant Participating Employee. The specific forfeiture conditions that apply to Company A Shares allocated under the Company A Share Plan vary depending on the particular offer the Company A Shares are allocated under. The Board generally has the ability to determine that Company A Shares will be forfeited in various circumstances. For example, before the end of the Restriction Period Company A Shares may be forfeited where: • a Participating Employee's employment with the Company A Group is terminated for any reason (except in circumstances of retrenchment or redundancy); • the failure to meet minimum compliance requirements or, in some cases, a minimum performance outcome; • where an allocation has been made in error or a performance outcome has changed and that outcome means that the Participating Employee has been awarded too many Company A Shares; or in other circumstances, subject to compliance with the law, in the absolute discretion of the Board. Demerger of Entity B from the Company A Group Company A restructured its business by separating and demerging Entity B from Company A's other businesses. Company C, a member of the Company A Group, was the holder of all the issued shares in Company D. Company C transferred its entire shareholding in Company D to Company A as an intergroup transaction. Company A exited its investment in Company D by broadly: • Company A entering into a Sale and Purchase Agreement with Entity B in which the Company A Group wholly owned all the shares, under which, subject to the scheme of arrangement becoming effective (Scheme), Company A agreed to transfer its entire shareholding in Company D to Entity B in consideration for the issue of new ordinary shares in Entity B (Entity B Shares) in accordance with the Scheme; • demerging 75% of Entity B Shares on issue on the Demerger Date to Company A Shareholders. The demerger occurred by way of the Scheme and a capital reduction which resulted in 75% of the Entity B Shares being provided to Company A Shareholders (Demerger); and • the remaining Entity B Shares on issue at the Demerger Date were divested by Company A via an initial public offering to institutional investors under the Institutional Offer. However, the Demerger was not conditional on the Institutional Offer proceeding. Accounting for the Demerger The amount of the return of capital was debited to Company A's share capital account. What happened to Company A Shares held by the Trustee In respect of Company A Shares allocated by the Trustee to a Participating Employee under the Company A Share Plan: • the Trustee, as registered holder of the Company A Shares, participated in the Demerger and received Entity B CDIs unless it made an election to receive Entity B Shares; and • there was no change to any restriction period or forfeiture conditions applying to the Company A Shares under the relevant Company A Share Plan terms. In respect of Company A Shares acquired by the Trustee under the terms of the Trust Deed which were not, at the time of the Demerger, allocated to the account of a Participating Employee (Unallocated Company A Shares), the Trustee participated in the Demerger by receiving Entity B CDIs. What happened to Entity B Securities received by the Trustee The Entity B Securities acquired by the Trustee in respect of Company A Shares it held on behalf of a Participating Employee: • were allocated to the Participating Employee, and the Participating Employee became absolutely entitled to those Entity B Securities as against the Trustee, immediately upon acquisition by the Trustee; and • were not subject to any restriction period or forfeiture conditions. Where the Trustee elected to participate in the Sale Facility in respect of the Company A Shares it held on behalf of a Participating Employee, the Entity B Securities were first issued to Company A (as nominee for the Trustee), immediately transferred to the Trustee and subsequently transferred by the Trustee to the Sale Agent. The Entity B Securities will be sold on behalf of the Participating Employee under the Sale Facility, and the proceeds of sale remitted to them. Otherwise, as soon as practicable following acquisition, the Trustee, at the direction of the Participating Employee, either: • sold the Entity B Securities on behalf of the Participating Employee; or • transferred the Entity B Securities to the Participating Employee. The Entity B Securities received by the Trustee in respect of Unallocated Company A Shares will, as soon as practicable following the Demerger, be sold by the Trustee.

Relevant legislative provisions: Income Tax Assessment Act 1936 6(1) | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 83A-320 | Income Tax Assessment Act 1997 104-10 | Income Tax Assessment Act 1997 104-10(1 ) | Income Tax Assessment Act 1997 104-10(2) | Income Tax Assessment Act 1997 104-10(4) | Income Tax Assessment Act 1997 104-75 | Income Tax Assessment Act 1997 104-75(1) | Income Tax Assessment Act 1997 104-135 | Income Tax Assessment Act 1997 104-135(1) | Income Tax Assessment Act 1997 104-135(3) | Income Tax Assessment Act 1997 104-135(4) | Income Tax Assessment Act 1997 106-50 | Income Tax Assessment Act 1997 106-50(1) | Income Tax Assessment Act 1997 106-50(2) | Income Tax Assessment Act 1997 109-5 | Income Tax Assessment Act 1997 110-25(2) | Income Tax Assessment Act 1997 110-25(2)(a) | Income Tax Assessment Act 1997 110-25(2)(b) | Income Tax Assessment Act 1997 110-55(2) | Income Tax Assessment Act 1997 130-85(2) | Income Tax Assessment Act 1997 130-85(4) | Income Tax Assessment Act 1997 130-85(4)(c) | Income Tax Assessment Act 1997 197-50 | Income Tax Assessment Act 1997 975-300 | Income Tax Assessment Act 1997 975-300(3)

Reasons for decision: Detailed Reasoning - Subsection 130-85(2): Subsection 130-85(2) provides that Division 83A, Part 3-1 and Part 3-3 apply as if you are absolutely entitled to a share or right 'from the time of acquisition of the ESS interest' and 'until you no longer have an ESS interest in the share or right'. Under Subdivision 83A-B, the 'time of acquisition' for the purposes of section 130-85(2) is the time you acquire the ESS interest. | Detailed Reasoning - Section 106-50: Section 106-50 states: 106-50(1) For the purposes of this Part and Part 3-3 (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust). 106-50(2) This Part, Part 3-3 and Subdivision 328-C apply, from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), to an act done in relation to the asset by the trustee as if the act had been done by you (instead of by the trustee). | Detailed Reasoning - Subsection 104-135(1): Subsection 104-135(1) states: CGT event G1 happens if: (a) a company makes a payment to you in respect of a share you own in a company (except for CGT event A1 or C2 happening in relation to the share); and (b) some or all of the payment (the non-assessable part ) is not a dividend, or an amount that is taken to be a dividend under section 47 of the Income Tax Assessment Act 1936); and (c) the payment is not included in your assessable income. CGT event G1 did not happen to the Trustee when it received a return of capital on the Demerger Date in respect of Allocated Company A Shares it held on behalf of a Participating Employee under the Company A Share Plan as the requirements for CGT event G1 to apply were not met, as explained below. | Detailed Reasoning - Paragraph 104-135(1)(a) not satisfied - payment in respect of Allocated Company A Shares that a Participating Employee is treated as owning: Under the Demerger, Company A makes a payment (being a return of capital satisfied by the provision of Entity B Securities) to the Trustee in respect of Allocated Company A Shares that the Trustee holds legal title in. Due to the operation of section 106-50, the Allocated Company A Shares that a Trustee holds on behalf of a Participating Employee under the Company A Share Plan will be treated as assets of the Participating Employee (and not assets of the Trustee) for CGT purposes from the time the Company A shares are allocated to the Participating Employee, as the date of allocation is the time the Participating Employee acquires, and therefore becomes absolutely entitled to those Company A shares (see section 130-85(2)). As a consequence, the payment of a return of capital satisfied by the provision of Entity B Securities under the Demerger will not result in CGT event G1 happening to the Trustee as the Participating Employee, not the Trustee, is considered to be the owner (for CGT purposes) of the Allocated Company A shares. However, even though the Participating Employee is considered to be the owner of the Allocated Company A Shares, CGT event G1 will not happen to them as the essential (and first) requirement for CGT event G1 to apply, that a 'payment' be made by Company A to a Participating Employee, is not made out in respect of the Demerger. This essential requirement is not satisfied because: • under the terms of the Trust Deed a return of capital and the Entity B Securities were considered to be an 'Accretion' that arises in respect of a share other than by way of 'Cash Dividend', 'Bonus Share' or 'Rights'. The Trust Deed provides that in these circumstances: ….the Trustee may in its absolute discretion decide to transfer, or provide the benefit of, all or such part of the Accretion as the Trustee determines to the Participant, unless to do so would cause an exemption condition in section 139CE of the Income Tax Assessment Act 1936 not to be satisfied… The Commissioner accepts that the reasonable effect of the Trust Deed is that a return of capital and Entity B Securities were not received by the Trustee on behalf of, for the benefit of, or at the direction of, the Participating Employee (that is, a Participating Employee was not automatically absolutely entitled to the Entity B Securities by reason of their absolute entitlement to the Allocated Company A Shares - see further bullet point immediately below). A Participating Employee therefore had no interest in the Entity B Securities and no right to receive Entity B Securities, unless and until the Trustee made a determination pursuant to the Trust Deed to allocate the Entity B Security to the Participating Employee. • being absolutely entitled to an Allocated Company A Share at the time of the Demerger was not sufficient for CGT event G1 to happen to the Participating Employee when the Trustee received Entity B Securities in respect of Allocated Company A Shares it held on behalf of the Participating Employee. Absolute entitlement to the Allocated Company A Shares at the time of their allocation to the Participating Employee does not change the legal rights of trustee and beneficiary that may otherwise exist in relation to the Trust Deed. Significantly in the present case, the Participating Employee was not automatically absolutely entitled to the payment of an Accretion (a return of capital paid in the form of Entity B Securities) which arose in relation to the Allocated Company A Shares (as would be the case in an absolute entitlement trust) as a result of the operation of the Trust Deed. A Participating Employee's entitlement to an Entity B Security therefore arose by virtue of a separate exercise of discretion by the Trustee under the terms of the Trust Deed to allocate and make the relevant Participating Employee absolutely entitled to the Entity B Security. The allocation of the Entity B Security did not, in these circumstances amount to a payment by Company A in respect of a share the Participating Employee held in Company A. Accordingly, for the reasons provided above, the payment of a return of capital under the Demerger, satisfied by the provision of Entity B Securities, did not result in CGT event G1 happening to the Trustee or the Participating Employee as the requirement in paragraph 104-135(1)(a), was not satisfied. | Detailed Reasoning - Question 2: No amount will be assessable to the Trustee in respect of a return of capital satisfied by the provision of Entity B Securities under the Demerger as a return of capital is not a dividend or otherwise assessable to the Trustee as ordinary income and a return of capital does not cause any CGT event to happen to the Trustee. Return of capital is not ordinary income The Capital Reduction Portion received in respect of Allocated Company A Shares (in the form of Entity B Securities held by the Trustee) will be a distribution that is capital in the hands of the Trustee. Accordingly, a return of capital is not a dividend under section 6(1) or otherwise assessable to the Trustee as ordinary income under section 6-5. No CGT event happens to the Trustee As set out in Question 1 above, CGT event G1 does not happen (nor does any other CGT event happen) to the Trustee in respect of a return of capital because the Trustee is deemed not to be the owner of the Allocated Company A Shares for the purposes of the Demerger. | Detailed Reasoning - Question 3: Section 110-25 is headed 'General rules about cost base'. Subsection 110-25(2) states: 110-25(2) The first element is the total of: (a) the money you paid, or are required to pay, in respect of *acquiring it; and (b) the *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). Similarly, subsection 110-55(2) states: 110-55(2) All of the elements (except the third one) of the reduced cost base of a *CGT asset are the same as those for the *cost base Accordingly, pursuant to subsection 110-55(2) you must use the meaning of first element of cost base in subsection 110-25(2) to determine the first element of cost base for the purposes of calculating your reduced cost base under subsection 110-55(2). | Detailed Reasoning - First element of the cost base:: As in this case the Trustee did not receive cash (see subsection 110-25(2a)) but instead received property in the form of Entity B Securities in respect of the Allocated Company A Shares it held, subparagraph 110-25(2)(b) must be applied to determine the first element of the cost base of Entity B Securities (that is, the market value of the Entity B Securities at the time of their acquisition must be determined). For the purposes of the Demerger the applicant has advised that the value of the return of capital is equal to the market value of the relevant Entity B Securities, and is determined having regard to the Volume Weighted Average Price of Entity B Securities over a five day trading period following the Effective Date of the Demerger. | Detailed Reasoning - Acquisition date: The acquisition date for the purposes of subparagraph 110-25(2)(b) is the date the Trustee acquired its Entity B Securities which is the date the Entity B Securities were distributed to it (see item 1 of the table in section 109-5), being the Demerger Date. Accordingly, the acquisition date of the Entity B Securities by the Trustee will be the Demerger Date and the first element of the cost base and reduced cost base of each of the Entity B Securities acquired by the Trustee in respect of Allocated Company A Shares will be the market value of the return of capital. | Detailed Reasoning - Question 4: Section 104-75(1) provides that CGT event E5 happens when a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee. The time of the event is when the beneficiary becomes absolutely entitled to the asset (see subsection 104-75(2)). Accordingly, CGT event E5 happened when a Participating Employee became absolutely entitled to Entity B Securities as against the Trustee. A Participating Employee became absolutely entitled to the Entity B Securities on the Demerger Date, which was the time the Trustee resolved, pursuant to the discretion in the Trust Deed, to immediately allocate them to the Participating Employee upon acquiring them (see the Trust Deed). On this basis, CGT event E5 occurred on the Demerger Date, being the time the Entity B Securities were issued to Company A as nominee for the Trustee under the Scheme, and subsequently allocated by the Trustee to the Participating Employee in accordance with the terms of the Trust Deed. | Detailed Reasoning - Question 5: Subsection 104-75(3) provides that: The trustee makes 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. For the reasons set out in respect of Question 3 above the Trustee's cost base of an Entity B Security acquired on behalf of a Participating Employee was equal to the market value of the Entity B Security on the Demerger Date. This is because a return of capital was determined under the Scheme to be an amount based on the average VWAP of the Entity B Securities received by a Company A Shareholder. CGT event E5 occurred on the Demerger Date, immediately after the time Entity B Shares were issued to Company A as nominee for the Trustee under the Demerger (that is, immediately upon acquisition of the Entity B Securities by the Trustee (refer to question 4 above). As the Trustee's cost base and the market value of the Entity B Securities at the time of the E5 event are identical, no capital gain or loss arose to the Trustee at the time CGT event E5 happened. | Detailed Reasoning - Entity B Securities an asset of a Participating Employee: Section 104-10 states: | Detailed Reasoning - 104-10(1): CGT event A1 happens if you *dispose of a *CGT asset. | Detailed Reasoning - 104-10(2): You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. For CGT purposes, the Entity B Securities will be treated as assets of the Participating Employee from immediately after the time that they are acquired by the Trustee. This is because a Participating Employee will be absolutely entitled to the Entity B Securities, and CGT event E5 will happen, upon the Entity B Securities being acquired by the Trustee and then immediately allocated to the Participating Employee on the Demerger Date under the terms of the Trust Deed (refer to discussion above in respect of Question 4). Section 106-50 of the 1997 Act provides as follows: For the purposes of [Part 3-1] and Part 3-3 (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust). The effect of section 106-50 is that CGT event A1 does not happen when the Trustee transfers the Entity B Securities to the Participating Employee, as no 'change of ownership' has occurred (see section 104-10(2). For the avoidance of doubt, the Commissioner accepts that section 106-50 also has the effect that if the Trustee sold the Entity B Securities on behalf of the Participating Employee, CGT event A1 would happen to the Participating Employee, and not to the Trustee as explained immediately below. | Detailed Reasoning - Entity B Securities sold under the Sale Facility: CGT event A1 did not happen to the Trustee when Entity B Securities acquired by the Trustee in respect of the Allocated Company A Shares it held on behalf of a Participating Employee were subsequently sold under the Sale Facility. Where the Trustee elected to participate in the Sale Facility in respect of the Allocated Company A Shares it held on behalf of a Participating Employee: • the Entity B Securities were first issued to Company A as nominee for the Trustee and subsequently transferred to the Trustee; • the Participating Employee became absolutely entitled to the Entity B Securities immediately following acquisition by the Trustee, upon the allocation by the Trustee to the Participating Employee (refer to clauses 6.15 and 6.16 of the Trust Deed); • the Entity B Securities were subsequently transferred by the Trustee to the Sale Agent on behalf of the Participating Employee; and • the Entity B Securities were sold on behalf of the Participating Employee under the Sale Facility, and the proceeds of sale remitted to them. CGT event A1 did not therefore happen when the Trustee transferred the Entity B Securities to the Sale Agent as no 'change of ownership' occurred (see section 104-10(2)). Accordingly section 106-50 has the effect that CGT event A1 will happen to the Participating Employee, and not to the Trustee, when the Sale Agent sells the Entity B Securities on behalf of the Participating Employee under the Sale Facility. | Detailed Reasoning - Question 7: Subsection 104-135(1) states: | Detailed Reasoning - 104-135(1): CGT event G1 happens if: (a) a company makes a payment to you in respect of a *share you own in the company (except for *CGT event A1 or C2 happening in relation to the share); and View history reference (b) some or all of the payment (the non-assessable part ) is not a *dividend, or an amount that is taken to be a dividend under section 47 of the Income Tax Assessment Act 1936 ; and View history reference (c) the payment is not included in your assessable income. View history reference The payment can include giving property: see section 103-5. | Detailed Reasoning - Subparagraph 104-135(1)(a) satisfied - Payment is made to the Trustee in respect of a Company A Share that the Trustee owns: The Capital Reduction Portion, satisfied by the provision of Entity B Securities, is being paid to the Trustee in respect of Unallocated Company A Shares that the Trustee holds on trust for the beneficiaries of the Trust. As Unallocated Company A Shares have not been allocated to any Participating Employee, Participating Employees do not have an interest in the Trust which corresponds to particular Unallocated Company A Shares. This means that an Unallocated Company A Share is not an 'ESS interest' acquired by a Participating Employee under an 'employee share scheme' (refer sections 83A-10 and 83A-320). For this reason, the deeming provision in section 130-85(2) cannot apply to treat a Participating Employee as being absolutely entitled to an Unallocated Company A Share. Further, no beneficiary of the Trust will have an absolute entitlement under the Trust Deed to any Unallocated Company A Shares held by the Trustee. For these reasons, the deeming provision in section 106-50 does not apply to treat the Unallocated Company A Shares as assets of a beneficiary. Subparagraphs 104-135(1)(b) and (c) satisfied - Payment is not a dividend or an amount that is taken to be a dividend or otherwise assessable to the Trustee The term 'dividend' is defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and includes a distribution made by a company to any of its shareholders. However, paragraph (d) of the definition of 'dividend' excludes a distribution that is debited against an amount standing to the credit of the share capital account of the company. 'Share capital account' is defined in section 975-300 as an account which the company keeps of its share capital, or any other account created on or after 1 July 1998 where the first amount credited to the account was an amount of share capital. Subsection 975-300(3) states that an account is not a share capital account, except for certain purposes, if it is tainted. The return of capital (Capital Reduction Portion) will be recorded as being wholly debited to Company A's share capital account. As Company A's share capital account is not tainted within the meaning of section 197-50, paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 applies. Accordingly, the distribution of Entity B Securities, or the proceeds from the Sale Facility, will not be (nor taken to be) a dividend as defined in subsection 6(1) of the ITAA 1936 or otherwise assessable as ordinary income of the Trustee. As such, CGT event G1 happened to the Trustee on the Demerger Date (being the date that Company A Shareholders received their Capital Reduction Portion under the Demerger) in respect of Unallocated Company A Shares as all the requirements for CGT event G1 to apply were met. | Detailed Reasoning - Question 8: The consequences to the Trustee from the happening of CGT event G1 in respect of Unallocated Company A Shares will be consistent with those consequences to ordinary shareholders of Company A. Subsections 104-135(3) and (4) state: | Detailed Reasoning - 104-135(3): You make a capital gain if the amount of the non-assessable part is more than the *share's *cost base. If you make a *capital gain, the share's *cost base and *reduced cost base are reduced to nil. | Detailed Reasoning - Note 1:: You cannot make a capital loss | Detailed Reasoning - Note 2:: A capital gain under former section 160ZL of the Income Tax Assessment Act 1936 is also taken into account for the purposes of this subsection: see section 104-135 of the Income Tax (Transitional Provisions) Act 1997 . | Detailed Reasoning - 104-135(4): However, if the amount of the non-assessable part is not more than the *share's *cost base, that cost base and its *reduced cost base are reduced by the amount of the non-assessable part. | Detailed Reasoning - Note:: Cost base adjustments are made only under Subdivision 125-B if there is a roll-over under that Subdivision for CGT event G1 happening as a result of a demerger. CGT event G1 will happen to the Trustee when Company A makes the distribution of a return of capital as a return of capital to the Trustee in respect of any Unallocated Company A Shares it held at the Demerger Date. Accordingly, the Trustee will make a capital gain if the value of a return of capital is more than the cost base of each of the Trustee's Unallocated Company A Shares. The amount of the capital gain is equal to that excess (subsection 104-135(3)). If the Trustee makes a capital gain from CGT event G1 happening, the cost base and reduced cost base of each of the Unallocated Company A Shares is reduced to nil. The Trustee cannot make a capital loss from CGT event G1 happening (subsection 104-135(3)). If the value of a return of capital is equal to or less than the cost base of each of the Unallocated Company A Shares at the Demerger Date, the cost base and reduced cost base of each of the Unallocated Company A Shares will be reduced by the value of the return of capital (subsection 104-135(4)). | Detailed Reasoning - Question 9: For the reasons provided at question 3 above the acquisition date of the Entity B Securities by the Trustee will be the Demerger Date and the Trustee will be taken to have a first element of cost base and reduced cost base in each of the Entity B Securities equal to a return of capital in accordance with subsections 110-25(2) and 110-55(2). | Detailed Reasoning - Question 10: The Entity B Securities received by the Trustee in respect of Unallocated Company A Shares will, as soon as practicable following the Demerger, be sold by or on behalf of the Trustee. CGT event A1 will happen to the Trustee when the Trustee disposes of the Entity B Securities received in respect of Unallocated Company A Shares. Subsection 104-10(4) states: You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. The Trustee will make a capital gain if the capital proceeds that it receives from the sale of the Entity B Securities are more than its cost base in the Entity B Securities. The Trustee will make a capital loss if the capital proceeds that it receives from the sale of the Entity B Securities are less than its reduced cost base in the Entity B Securities. | Detailed Reasoning - Question 11: Subsection 130-85(4) states that: 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 paragraph (a) and (b). Immediately before the Demerger, the activities of the Trust satisfy subsection 130-85(4). At the time of the Demerger, the Trustee will receive Entity B Securities under the Demerger. The Trustee will distribute or sell those Entity B Securities as soon as practicable following their receipt, as described in the facts under the heading 'What happened to Entity B Securities received by the Trustee'. The activities that the Trustee undertakes in respect of Entity B Securities received under the Demerger fall within paragraph 130-85(4)(c) as activities that are merely incidental to managing an employee share scheme and administering the Trust. This view is consistent with the views of the Commissioner as set out in ATO ID 2010/108. In that ATO ID the Commissioner states that for the purposes of paragraph 130-85(4), activities which are merely incidental includes: • receiving and immediately distributing shares under a demerger. On this basis, following the Demerger the Trust will not fail the sole activities test and will continue to be an 'employee share trust' within the meaning of subsection 130-85(4).

Reasons for decision: All references are to the Income Tax Assessment Act 1997 unless otherwise stated