Private ruling: Employee Share Scheme
Date of advice: 16 June 2017
Published: October 2017
Ruling period: Income year ending 30 June 2017 | Income year ending 30 June 2018 | Income year ending 30 June 2019 | Income year ending 30 June 2020 | Income year ending 30 June 2021
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the irretrievable cash contributions by the Company to the Trustee to fund the acquisition of, or subscription for, shares in the Company by the Trust be assessable income of the Trust under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will a capital gain or capital loss that arises for the Trustee of the Trust at the time when either CGT Event E5 or E7 happens in relation to the Company be disregarded under section 130-90 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: The Company is an Australian tax resident company listed on the Australian Stock Exchange (ASX). The Company maintains two Employee Share Plans (Plans) for the benefit of its employees. The Company has established an independent Trust to acquire ordinary shares in the Company and to allocate those shares to employees in order to satisfy Rights (being ESS interests) acquired by those employees under the Plans. Employee Share Plans Each Plan broadly operates to provide eligible employees with the opportunity to receive Rights for generally nil consideration. In order to receive shares, the participant must satisfy the vesting criteria outlined in the relevant Plan Rules. Some rights are exercised automatically on vesting, while some rights are exercised automatically after a deferred period. On exercise of a Right, the participant will be entitled to one ordinary share in the Company for generally nil consideration. Under one of the Plans, the Company’s Board has the discretion to satisfy the exercise of some Rights by shares, cash or a combination of both. The shares can be procured from an employee share trust. Each Right issued under the either Plan is a Right to which Subdivision 83A-B of the ITAA 1997 or Subdivision 83A-C of the ITAA 1997 will apply. Employee Share Trust The Trust is an independent legal entity and not a part of the Company’s income tax consolidated group. It was established as a sole purpose trust to administer and maintain the Plans. The Company cannot be a beneficiary of the Trust and cannot receive any income or capital from the Trust. The Trust Deed allows the Trustee to subscribe for, purchase or otherwise acquire shares of the Company for the purposes of administering the Plans, and to do all things incidental to this activity. The Trust Deed does not allow the Trustee to provide any additional benefits other than those that arise from the relevant Plan Rules. The Trust is funded by contributions from the Company, including for the acquisitions of shares in Company shares at market value either on-market or by a subscription for new shares. Shares will be held by the Trust on trust for the benefit of the participants of the Plans and employees generally, until they are allocated or transferred to an employee (on vesting and/or exercise of the relevant Rights). The Trust cannot exercise voting rights in relation to unallocated shares. Contributions to the Trust The Company does not intend to make cash contributions to the Trust prior to the issue of Rights to participants. The Company will make contributions to the Trust when Rights vest, or where it makes commercial sense to do so. For example, it may make cash contributions to the Trust prior to the vesting and/or exercise of the Rights to ensure the Trust has the cash necessary to acquire shares to satisfy the acquisition or subscription of shares related to those Rights.

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 Division 83A | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 section 104-75 | 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(1A) | Income Tax Assessment Act 1997 subsection 130-90(1) | Income Tax Assessment Act 1997 subsection 130-90(2)

Reasons for decision: Summary: No, the irretrievable cash contributions by the Company to the Trustee to fund the acquisition of, or subscription for, shares in the Company by the Trust will not be assessable income of the Trust under section 6-5 or 6-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 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. Accordingly, non-refundable contributions will only be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936 if they are assessable as ordinary income under section 6-5. In G.P. International Pipecoaters Pty Ltd v. Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1, the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In the present case, the Trust Deed requires the Trustee to hold on trust all allocated shares in the Company and all other benefits and privileges arising from these shares for the benefit of Plan participants. Unallocated shares are to be held on trust for and on behalf of the participants and employees as general beneficiaries. The Trust Deed also provides that all funds received by the Trustee from the Company or a subsidiary of the Company will constitute accretions to the trust capital and will not be repaid to the Company or a subsidiary of the Company. The Trust Deed does not allow the Trustee to pay any funds to participants. The Trust Deed also requires that contributions provided by the Company to the Trustee will be used in accordance with the Trust Deed and relevant Plan Rules for the sole purpose of, and under, the relevant employee share scheme. Accordingly, such contributions will constitute receipts of a capital nature to the Trustee and will not be assessable as ordinary income under section 6-5 or section 6-10. This is consistent with the decision in ATO ID 2002/965. | Detailed Reasoning - Question 2: Will a capital gain or capital loss that arises for the Trustee of the Trust at the time when either CGT Event E5 or E7 happens in relation to shares of the Company held by the Trustee be disregarded under section 130-90 of the ITAA 1997? | Summary: Yes, a capital gain or capital loss that arises for the Trustee of the Trust at the time when either CGT event E5 or CGT event E7 happens in relation to the Company will be disregarded under section 130-90 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 130-90 applies to disregard any capital gain or capital loss made by an employee share trust where certain criteria are met. Subsections 130-90(1) and (2) state: (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. Employee share trust In order for section 130-90 to apply, the Trust must be an 'employee share trust’ as defined in subsection 130-85(4): 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 interest 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). | Detailed Reasoning - Paragraphs 130-85(4)(a) and (b): The beneficial interest in a Company share received by a Participant of either Plan when an ordinary share in the Company is granted to them under the terms of the Trust Deed is an 'ESS interest’ within the meaning of subsection 83A-10(1). Subsection 83A-10(2) defines 'employee share scheme’ as a scheme under which ESS interests in a company (or its subsidiaries) are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees’ employment. Each Plan is an 'employee share scheme’ within the meaning of subsection 83A-10(2) because it is a scheme that provides rights to acquire beneficial interests in ordinary shares in the Company to employees in relation to the employee’s employment. The Trust Deed provides that the Trust was established for the sole purpose of facilitating the Plans, including acquiring, holding and transferring shares in the Company in order to satisfy Rights (being ESS interests) acquired by those employees under the Plans . A beneficial interest in a Company share is itself provided under an employee share scheme because it is provided under the relevant Plan. Accordingly, paragraphs 130-85(4)(a) and (b) are satisfied because: ● the Trust acquires shares in the Company; and ● the Trust ensures that ESS interests are provided under an employee share scheme by allocating shares in the Company to participating employees in accordance with the Trust Deed and the Plans. | Detailed Reasoning - Paragraph 130-85(4)(c): Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the Plans. ATO Interpretative Decision ATO ID 2010/108 Income Tax – Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities sets out a number of activities which are 'merely incidental’ for the purposes of paragraph 130-85(4)(c). Activities that the Commissioner considers not to be merely incidental include: ● any activities that are not a necessary function of managing an employee share scheme or administering a trust; and ● any activities which result in employees being provided with additional benefits (for example, the provision of a loan to acquire shares). The Trust Deed allows the Trustee to subscribe for, purchase or otherwise acquire shares of the Company for the purposes of administering the Plans, and to do all things incidental to this activity. In this regard, the Trust Deed does not provide for the Trustee to participate in any activities that are not considered to be merely incidental to the function of administering the Trust. Accordingly, paragraph 130-85(4)(c) is satisfied because any activities undertaken by the Trustee other than the acquisition of shares in the Company and the allocation of those shares to the employees in accordance with the Trust Deed and the Rules of the Plans will be merely incidental to the operation of these Plans. It follows that the Trust is an employee share trust within the meaning in subsection 130-85(4). Paragraph 130-90(1)(c) Each Right will be exercised automatically either upon vesting or within 90 days after vesting. Accordingly, paragraph 130-90(1)(c) will be satisfied as the Participant will have acquired a beneficial interest in a share in the Company by the exercise of a Right provided under the relevant Plan. Paragraph 130-90(1)(d) Each Right issued under the 2015 Plan is a Right to which Subdivision 83A-B of the ITAA 1997 or Subdivision 83A-C of the ITAA 1997 will apply. Accordingly, all the conditions in subsection 130-90(1) will be satisfied to disregard a capital gain or capital loss that arises for the Trustee when either CGT Event E5 or E7 happens in relation to shares of the Company held by the Trustee. Subsection 130-90(2) Subsection 130-90(2) provides that subsection 130-90(1) will not apply if a Participant acquires the beneficial interest in the Company share for less than or equal to its cost base in the hands of the Trustee at the time of the relevant CGT event E5. In the present case, subsection 130-90(2) will not apply because the beneficiary will not pay anything to acquire or exercise the Rights and therefore cannot have paid more to acquire the shares than the Trustee did at the time of the relevant CGT event.

Reasons for decision: All legislative references are to the ITAA 1997 unless stated otherwise. | Question 1: Will the irretrievable cash contributions by St Barbara to the Trustee to fund the acquisition of, or subscription for, St Barbara shares by the Trust be assessable income of the Trust under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?