Private ruling: Trustee activities
Date of advice: 19 November 2021
Published: February 2022

Ruling: Q1: Are the activities of operating bank accounts and the engagement of brokers by the trustee of the Company Trust (the Trustee) for the purposes of providing employee share scheme (ESS) interests and complying with ESS reporting obligations, merely incidental for the purposes of paragraph 130-85(4)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Are activities undertaken by the Trustee to consult with advisors on: • the ability to make ESS (having the meaning given by subsection 83A-10(2) of the ITAA 1997) offers under various plans to Australian resident employees (as defined in section 83A-325 of the ITAA 1997) of the Company group (Participants) • the interpretation of plan terms • the structure and the documentation of making offers to Australian employees • the implications for the Trustee of a transaction that affects any shares held by the Trustee in trust for employees that have been granted under share plans or unallocated shares, and • the acquisition or disposal of shares by the Trustee under various plans merely incidental for the purposes of paragraph 130- 85(4)(c) of the ITAA 1997? | A2: Yes, to the extent that the activities are a direct incident or consequence of the Trustee acquiring, holding, and providing shares under the Plans. | Q3: Is the activity of consulting on the: • ability to make offers, interpretation of plan terms, the structure and the documentation of making offers to international employees, and the acquisition or disposal of shares by the Trustee, and • implications for the Trustee of a transaction that affects any shares held by the Trustee in trust for employees that have been granted under share plans or unallocated shares merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997? | A3: Yes, to the extent that the activities are a direct incident or consequence of the Trustee acquiring, holding, and providing shares under the Plans. | Q4: Are activities undertaken by the Trustee to engage and consult with advisors to prepare and lodge tax registrations in international jurisdictions for the purpose of providing ESS interests to International Employees, merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997? | A4: Yes | Q5: Are activities undertaken by the Trustee to consult with legal and other advisors on: • preparing and lodging securities filings, and • foreign exchange registrations and other regulatory filings to fulfil its reporting obligations to regulatory authorities required to make offers to and implement an ESS for employees in international jurisdictions merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997? | A5: Yes | Q6: Are activities undertaken by the Trustee to engage and consult with advisors for the purpose of preparing and reviewing correspondence to Participants on the offer, allocation, vesting of shares and general taxation information in various jurisdictions, including any taxation information included in documents provided to Participants generally or otherwise associated with the relevant offering and vesting of interests, merely incidental for the purposes of sub-section 130-85(4)(c) of the ITAA 1997? | A6: Yes | Q7: Are activities undertaken by the Trustee to engage and consult with advisors to determine metric testing for Performance Rights (both during the performance period and then at the conclusion of the relevant performance period to determine the vesting outcomes for Participants) merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997? | A7: Yes | Q8: Are activities undertaken by the Trustee to obtain Fair Market Value Calculations of instruments granted to enable the Trustee to recover the tax and any costs associated with the sale of shares under the various plans in accordance with the Trust Deed, merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997? | A8: Yes | Q9: Are activities undertaken by the Trustee to engage and consult with advisors in respect to the operation of Trust, merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997? | A9: Yes

Relevant facts and circumstances: The Trust The Trust was established to give employees selected by the Board (Participants), the opportunity to have greater involvement with, and share in the future growth and profitability of, the Group. The Trust Deed establishes various employee equity plans collectively, referred to as 'the Plans'. The Trustee holds shares in relation to the plans on the terms and conditions set out in the Trust Deed. An employee who is invited to participate in the plan makes their offer to participate to the Trustee and not Company. The Trustee accepts the offer to participate. For all Plans, it is the Trustee that grants the employee their equity interests under the relevant equity plan. It is also the Trustee that is primarily responsible for administering the employee equity plans. Due to the complexity in operating the various plans, jurisdictions in which the employees are located and performance hurdles included in some of the Plans, consultants are used to assist in the administration of the Plans. The Trust Deed provides that the Trustee is authorised to procure the sale on the Participants behalf, of shares acquired for Participants, that the Trustee determines is necessary to recover tax and costs associated with the sale of those shares. Activities of the Trustee The Trustee undertakes a number of activities for the purposes of, and in connection with, providing ESS interest including: • holding and operating a bank account for the purposes of the Trust • accepting employees' offers to participate, purchasing shares on market for the purposes of the various Plans, granting the employee their equity interests under the relevant Plans • engaging share registry and administration services in respect of shares held by the Trust for the purposes of the various Plans • determining the ability to make ESS offers under various plans to Participants, preparing the relevant Plan documentation • acquisition or disposal of shares by Trustee with respect to various Plans • seeking advice on the interpretation of Plan terms (e.g. in connection with a participant ceasing employment) • to fulfil the Trustee's reporting obligations to regulatory authorities • engaging and consulting with advisors for the purpose of preparing and reviewing correspondence to Participants on the offer, allocation, vesting of shares and notifying them that the Trustee has sold shares on their behalf to meet the tax liability, and • seeking advice regarding compliance with the Trust Deed. Other matters • Company is the only entity that makes contributions to the Trust. No subsidiary of Company makes any contribution of funds to the Trust • there are no recharge arrangements in place with the subsidiaries • the portion of Company's funds that are used to purchase shares offered to offshore employees are treated as non-deductible to Company as the expense does not relate to generating Australian taxable income. The Company undertakes an apportionment based on an identification of funds allocated to offshore employees. • it is only employees of Company and its 100% owned subsidiaries that receive shares under the various share plans. This means for Australian subsidiaries; the entities are all part of the Company TCG. This ruling is limited to whether certain activities undertaken by the Trustee are merely incidental for the purposes of paragraph 130-85(4)(c), not whether the Trust satisfies the definition of an employee share trust as defined in subsection 130-85(4).


Reasons for decision: Summary: Subsection 130-85(4) provides: 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 paragraphs (a) and (b). Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase 'merely incidental' in paragraph 130-85(4)(c) takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'. 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). When testing whether a trustee of a trust (in that particular capacity) meets the requirements of subsection 130-85(4), it is necessary to examine the actual activities that the trustee has undertaken (paragraph 6 of TD 2019/13). Activities are merely incidental under paragraph 130-85(4)(c) if they are a natural incident or consequence of the trust obtaining, holding and providing shares or rights under an ESS (paragraph 11 of TD 2019/13). Activities that result in employees being provided with additional benefits over and above the delivery of ESS interests or resulting shares and any dividend equivalent payment that accrues directly from the employee's interest (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental (paragraph 13 of TD 2019/13). TD 2019/13 at paragraph 12 provides examples of the types of activities that are merely incidental under paragraph 130-85(4)(c) including but not limited to activities that involve: • the opening and operation of a bank account to facilitate the receipt and payment of money • bookkeeping, preparation of financial, tax and regulatory statements and other record-keeping and administrative actions necessary to operate the trust and undertake the activities described in paragraphs 130-85(4)(a),(b) and (c) • the receipt of dividends in respect of shares held by the trustee on behalf of participating employees and distributions to employees • borrowing money for the purpose of acquiring shares or rights in the employer company where no security is provided over the assets and interest payable is at arm's length rates • the receipt of dividends in respect of unallocated shares and interest from bank accounts and using those funds to ­ acquire additional shares for the purposes of the ESS ­ pay necessary and incidental costs of administering the trust and undertaking the activities described in paragraphs 130-85(4)(a), (b) and (c), for example costs relating to the audit of the trust, fees for professional services provided to the trustee in relation to the trust ­ pay interest on loans provided for the acquisition of shares or rights in the employer company, where the interest payable does not exceed arm's length commercial rates • paying a dividend equivalent payment to a participating employee under the rules of the ESS, where ­ the amount paid is equal to or less than the amount of dividends paid to the trustee (net of tax paid by the trustee on the dividends), in relation to the number of shares being received by the participating employee, during the accumulation period, and ­ the payment is made at or around the time, and because, the shares vest or are transferred to the participating employee (as required by the ESS) • dealing with shares forfeited under an ESS including the sale of forfeited shares and using the proceeds of sale for activities permitted under subsection 130-85(4) • the transfer of shares to participating employees, or the sale of shares on behalf of such employees and the transfer to the employee of the net proceeds of the sale of those shares, when required under the rules of the ESS, and • receiving and immediately distributing shares under a demerger or actions in order to participate in a takeover or restructure covered by section 83A-130. In the present case the following activities are carried out by the Trustee for the purposes of providing ESS interests to participants and to comply with ESS reporting obligations: • holding and operating a bank account for the purposes of the Trust • engaging providers of registry and administration services in respect of shares held by the Trust for the purposes of the various Plans • the Trustee purchasing shares on market for the purposes of the various Plans. Under Division 392 of Schedule 1 to the Taxation Administration Act 1953 , employee share scheme providers are required to report information via an annual report to the Commissioner following the end of the financial year in a form approved by the Commissioner. From the 2018 financial year onwards, intermediaries as authorised by the ESS Reporting Party (an entity that provides an ESS to employees) or Reporting Parties are able to test and lodge their electronic ESS file via the Online services for agents or Business Portal when a data file has been prepared and stored locally. An intermediary may be an ESS administrator, computer service provider, trustee company, tax agent, accountant or employee of an ESS provider. Having regard to the above, the activities of operating bank accounts and engaging of brokers by the Trustee for the purposes of providing ESS interests and complying with ESS reporting obligations are considered to be merely incidental for the purposes of paragraph 130-85(4)(c) as: • they are a natural incident or consequence of the Trust acquiring, holding and providing shares or rights under the Plans, and • they do not involve providing additional benefits to participants over and above the delivery of the ESS interests or resulting shares that accrues directly from the participant's ESS interest. The Trust acquires, holds and disposes shares under the various Plans and the Trustee engages legal and consulting firms to assist the Trustee to determine its ability to make ESS offers under various Plans, provide advice regarding interpretation of the Plans or offer terms, provide advice upon the structure and the documentation to be used for making offers, provide advice on a transaction that affects any shares held by the Trustee under the Plans, and provide advice on the acquisition or disposal of shares under the Plans by the Trustee. Consistent with the analysis in Question 1 above, and provided the activities are a direct incident or consequence of the Trustee acquiring, holding and providing shares under the Plans then these activities are considered to be merely incidental activities for the purposes of paragraph 130-85(4)(c) as: • they are a natural incident or consequence of the Trust acquiring, holding and providing shares or rights under the various Plans, and • they do not involve providing additional benefits to participants over and above the delivery of the ESS interests or resulting shares that accrues directly from the participant's ESS interest. Employee equity awards are offered to employees in Company's 100% owned overseas subsidiaries. The Trustee acquires, holds and disposes shares under various Plans in respect of these employees. The Trustee engages legal and consulting firms to assist the Trustee to determine its ability to make ESS offers under various Plans, assist the Trustee with the interpretation of the terms of the various Plans, advise upon the structure and the documentation of making offers, advise on a transaction that affects any shares held by the Trustee under the Plans, and advise on the acquisition or disposal of shares under the Plans by the Trustee. Paragraph 130-85(4)(b) refers to ESS interests provided to employees of the company or a subsidiary of the company. 'Subsidiary' is defined in section 995-1 as follows: the question whether a company is a subsidiary of another company is to be determined in the same way as the question whether a corporation is a subsidiary of another corporation is determined under the Corporations Act 2001 . Section 46 of the Corporations Act 2001 (Corporations Act) states that a subsidiary is: A body corporate (in this section called the first body ) is a subsidiary of another body corporate if, and only if: (a) the other body: (i) controls the composition of the first body's board; or (ii) is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or (iii) holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or (b) the first body is a subsidiary of a subsidiary of the other body. In the present case, Company's 100% owned subsidiaries each constitute a subsidiary for the purposes of paragraph 130-85(4)(b). International Employees employed by these subsidiaries may receive an offer to participate in the various Plans. Consistent with the analysis in Question 1 above, and provided the activities are a direct incident or consequence of the Trustee acquiring, holding and providing shares under the Plans then these activities are considered to be merely incidental activities for the purposes of paragraph 130-85(4)(c) as: • they are a natural incident or consequence of the Trust acquiring, holding and providing shares or rights under the various Plans, and • do not involve providing additional benefits to participants over and above the delivery of the ESS interests or resulting shares that accrues directly from the participant's ESS interest. The Trustee offers employee equity plans to employees of Company's 100% owned subsidiaries in international jurisdictions. The Trustee engages consultants to advise on tax to be submitted to the foreign tax authorities in relation to ESS interests, calculation of how much tax is to be paid, including whether the Trustee needs to be directed to sell shares to cover the tax liability, tax on the vesting of ESS interest, reporting obligations of the Trustee in each of the relevant foreign jurisdictions, and attending to the necessary foreign jurisdiction registrations and lodgement requirements on behalf of the Trustee. Consistent with the analysis in Question 1 above, the activity of engaging legal and consulting firms to prepare and lodge tax statements to assist the Trustee in meeting its' foreign legal and tax obligations for the purpose of providing ESS interests is considered to be merely incidental for the purposes of paragraph 130-85(4)(c) as: • they are a natural incident or consequence of the Trust acquiring, holding and providing shares or rights under the various Plans, and • do not involve providing additional benefits to participants over and above the delivery of the ESS interests or resulting shares that accrues directly from the participant's ESS interest. Due to the complexity in administering these awards and complying with all regulatory requirements, the Trustee obtains advice and assistance from legal and other advisors to assist the Trustee to: • fulfil its obligations in preparing and lodging securities filings required under foreign securities laws that are required in order to make an offer to, and implement, an ESS for employees in those foreign jurisdictions, and • fulfill its obligations in preparing and lodging foreign exchange registrations and other regulatory filings in respect of the Plans. For example, in China, in addition to obtaining legal advice, the Trustee engages an agent to provide advice in relation to, and to register, the ESS with the State Administration of Foreign Exchange. Consistent with the analysis in Question 1 above, these activities are considered merely incidental for the purposes of paragraph 130-85(4)(c) as: • they are a natural incident or consequence of the Trust acquiring, holding and providing shares or rights under the various Plans, and • do not involve providing additional benefits to participants over and above the delivery of the ESS interests or resulting shares that accrues directly from the participant's ESS interest. The Trustee engages external consultants to assist it with the drafting or review of letters or communication provided to Participants in relation to various Plans as follows: • review of letters provided to Participants on the offer, allocation, vesting of shares • review of letters provided to Participants notifying them that the Trustee has sold shares on their behalf to meet the foreign tax liability, and • obtaining advice as to whether exiting Executives retain shares under the Plans. The letters will typically detail the number of shares offered or allocated, the timing of receiving Employee Share Statements, general taxation information in various jurisdictions, including any taxation information included in documents provided to Participants generally or otherwise associated with the relevant offering and vesting of ESS interests under the Plans. Consistent with the analysis in Question 1 above, it is considered that this activity is merely incidental for the purposes of paragraph 130-85(4)(c) as this activity is: • a natural incident or consequence of the Trust acquiring, holding and providing shares or rights under the various Plans, and • do not involve providing additional benefits to participants over and above the delivery of the ESS interests or resulting shares that accrues directly from the participant's ESS interest. The Trustee engages consultants to assist in performing the performance metric testing for various Plans (Report). This testing can occur at different times including during the performance period and then at the conclusion of the relevant performance period to determine the vesting outcome and to determine the number of shares that vest as part of the relevant Plan. The Trustee advised that the obtaining of the Report is fundamental to the Trustee for the purpose of determining the number of instruments that can vest and the Trustee cannot administer the ESS terms if it does not have the Report. Consistent with the analysis in Question 1 above, this activity is considered to be merely incidental for the purposes of paragraph 130-85(4)(c) as this activity: • is a natural incident or consequence of the Trust acquiring, holding and providing shares or rights under the various Plans, and • does not involve providing additional benefits to participants over and above the delivery of the ESS interests or resulting shares that accrues directly from the participant's ESS interest. In certain jurisdictions, a merchant banker is required to provide a valuation report for the fair market value of the shares. This value is used to determine the taxable value and therefore the number of shares the Trustee is required to sell in accordance with the Trust Deed to satisfy tax obligations. In certain jurisdictions in which the Trustee has a Participant, the value of Company shares from the Australian Securities Exchange cannot be used to determine the taxable value of the shares. A merchant banker is required to provide a valuation report for the fair market value of the shares. This value is used to determine the taxable value and therefore the number of shares the Trustee is required to sell in accordance with the Trust Deed to satisfy tax obligations. Consistent with the analysis in Question 1 above, this activity is considered to be merely incidental for the purposes of paragraph 130-85(4)(c) as this activity: • is a natural incident or consequence of the Trust acquiring, holding and providing shares or rights under the various Plans, and • does not involve providing additional benefits to participants over and above the delivery of the ESS interests or resulting shares that accrues directly from the participant's ESS interest. The Trustee engages consultants from time to time to ensure the activities of the Trust are consistent with the legislative requirements of employee share trusts and in particular the sole activities test in subsection 130-85(4). Consulting advice is also obtained by the Trustee to ensure consulting fees which arise from these activities are appropriately billed to either the Trustee or Company in a manner which is consistent with the legislative requirements of employee share trusts and in particular the sole activities test in section 130-85(4). The Trustee may further engage consultants to obtain advice on ATO regulatory developments as they arise in the area of the employee share trusts and employee share schemes and the impact of these developments to Company's ESS plans and their terms. Consistent with the analysis in Question 1 above, this activity is considered to be merely incidental for the purposes of paragraph 130-85(4)(c) as this activity: • is a natural incident or consequence of the Trust acquiring, holding and providing shares or rights under the various Plans, and • does not involve providing additional benefits to participants over and above the delivery of the ESS interests or resulting shares that accrues directly from the participant's ESS interest.