Private ruling: Employee share trust
Date of advice: 18 March 2016
Published: May 2016
Ruling period: For the income years ending: | 30 June 2016 | 30 June 2017 | 30 June 2018 | 30 June 2019 | 30 June 2020 | 30 June 2021

Ruling: Q1: Will the irretrievable cash contributions made by Company A to Company B (the Trustee) as to the Trustee of the Company A Employee Share Trust (the Trust) be assessable income of the Trust under Division 6 Part 1-3 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will a capital gain or a capital loss arise under section 104-75 of the ITAA 1997 for the Trustee of the Trust at the time when eligible employees become absolutely entitled to the Company A shares acquired by the Trustee of the Trust? | A2: No

Relevant facts and circumstances: 1. Background Company A (the Company) is an ASX listed company which delivers online solutions to organisations of all sizes. 2. Remuneration and incentives Company A's Long Term Incentive Plan (the Plan) is aimed at rewarding employees in a manner that aligns this element of remuneration with the creation of shareholder wealth. Under the Plan, grants of Awards are made to executives, senior management and staff who are able to influence the generation of shareholder wealth and thus have direct impact on the company's performance against the relevant long term performance hurdle. Under the Plan, grants to employees are delivered in the form of performance rights to achieve alignment between comparative shareholder return and reward for executives and staff. 3. The Plan The Plan is designed to allow the Board of the Company to make Awards to Employees which provide the opportunity to acquire Shares in the Company to assist with: a) Attracting, motivating and retaining Employees; b) Delivering rewards to Employees for performance; c) Allowing Employees to become shareholders in the Company; and d) Aligning the interests of Employees with those of Company shareholders. The Board in its absolute discretion may operate the Plan may grant an Award to an Employee or invite an Employee to apply for a grant in accordance with the Rules of the Plan and the terms and conditions determined by the Board. Where an invitation to apply or grant is made the Board must provide the employee with a Grant Letter setting out the terms and conditions of the Award. An Employee is defined as any employee (including any executive director) of a Group Company or any other person so designated by the Board. A Participant is an Employee who has been granted Awards under the Plan. An Award is defined in the Rules as a performance right to acquire a Share (or to receive a Cash Equivalent Value, at the discretion of the Board), granted to a, Participant under the Plan on terms and conditions determined by the Board. A Share is a fully paid ordinary share in the capital of the Company. Awards granted under the Plan only vest if terms and conditions advised to the Participant in the Grant Letter are satisfied, subject to certain rules listed in the Plan. A sample of a Grant Letter provided with the application indicates that under the Plan no consideration is payable by the Employee on grant or vesting of the Award. If all or some of the performance rights vest, the Company must allocate, or procure the transfer of, one Share for each Award that vests or is exercisable (as relevant), to or for the benefit of the Participant. Vesting Awards may be satisfied, at the discretion of the Board, in cash rather than Shares, by the payment of the Cash Equivalent Value which is equal to the gross value of the Shares that would have been allocated or transferred to the Participant. The Board retains the discretion as to how the gross value is calculated for the purpose of this rule. Pursuant to the Plan, the Board may implement a Share Trust (an employee share trust) for the purposes of delivering and holding Shares on behalf of Participants. 4. Employee Share Trust The Company uses a trust, Company A Employee Share Trust (the Trust), to facilitate the provision of shares to employees as part of its employee incentive strategy. The Trust is used to provide greater flexibility for the Company to accommodate its long term incentive arrangements as the Group continues to expand and increase its employee numbers, to allow for increased capital management flexibility, and to assist the Company in satisfying corporate law requirements relating to a company dealing in its own shares. Company B agreed to act as the initial trustee of the Trust on the terms set out in the Trust Deed signed in June 2013. 5. The Trust Deed According to the Recitals in the Trust Deed (the Deed), the Trust was established by the Company: "for the sole purpose of obtaining Shares for the benefit of the Participants, including subscribing for or acquiring, allocating, holding and delivering Shares under the Option Plans, the Performance Rights Plan, and other employee equity plans for the benefit of the Participants" The Deed includes the following definitions: • 'Participant' means former, current or future employee or director of the Group who is participating, or who may participate in the future, under the terms of a Plan or Plans and who receives Shares to be held by the Trustee under the terms of this Deed. • 'Group' means the Company and any Related Body Corporate of the Company, but not the Trustee. • 'Plan Rules' means the rules of the relevant Plan as amended from time to time. • 'Terms of Participation' means, in respect of any Participant, the specific terms upon which the Trust Shares are held by the Trustee on behalf of the Participant under the terms of issue made in accordance with the relevant Plan Rules. • 'Trust Assets' means the property, rights and income of the Trust and includes any Accretions and Unallocated Trust Shares. • 'Trust Share' means a Share which is held by the Trustee in accordance with the terms of this Deed and includes any bonus shares issued in respect of the Trust Share under any Bonus Issue made by the Company to shareholders and any shares subscribed as part of a Rights Issue. The Trustee declares in respect of each Participant: • the Trust Shares held by the Trustee on behalf of that Participant; • the proceeds of sale arising from the sale by the Trustee of rights under a Rights Issue on behalf of that Participant; and • all other benefits and privileges related to or arising from Trust Shares held by the Trustee on behalf of that Participant will be held by the Trustee on trust for and on behalf of that Participant on the terms of the Deed and subject to the relevant Plan Rules and relevant Terms of Participation. Each Participant is, subject to the relevant Plan Rules and Terms of Participation, the beneficial owner of the Trust Shares held by the Trustee on their behalf, and absolutely entitled to all other benefits and privileges attached to, or resulting from holding, those Trust Shares. The Trustee will, in accordance with instructions received from the Company pursuant to the Plan Rules and as soon as reasonably practicable, acquire, allocate and deliver Shares for the benefit of a Participant provided that the Trustee receives sufficient payment to subscribe for or purchase Shares, and/or it has sufficient Unallocated Trust Shares available. Nothing in the Deed 'confers or is intended to confer on the Company any charges, lien or any other proprietary right to proprietary interest in the Shares acquired by the Trustee in accordance with this Deed'. At no time will any member of the Group or the Trustee have or be entitled to obtain any beneficial interest in the Trust Assets, other than the Trustee's right of indemnity. The general powers of the Trustee to do the things necessary to administer and maintain the Trust and the Trust assets are provided the Plan and include opening and operating bank accounts, the receipt of dividends and the selling and transfer of Shares. The Deed provides that the Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of section 130-85(4). The Deed provides that the Trustee is not entitled to receive any fees, commissions or remuneration in respect of the performance of its obligations as trustee of the Trust. The Company may pay to the Trustee any fees, commission or remuneration and reimburse such expenses incurred by the Trustee as the Company and the Trustee agree to from time to time. The Plan deals with the acquisition of Trust Shares and provides that: • The Board must by notice in writing instruct the Trustee to subscribe for, purchase and/or allocate a number of Shares specified in the notice, to be held by the Trustee as Trust Shares in respect of an identified Participant or Participants; • If the Trustee has received the abovementioned notice, then subject to the Trustee receiving sufficient payment or having sufficient capital, the Trustee must within seven days (or period as the Board determines) purchase the requisite number of Shares on or off market, subscribe for the requisite number of Shares or allocate Shares that are Trust Assets, or effect a combination of these alternatives; • The subscription price for each Share must be the market values of the Shares on the date on which the Shares are issued to the Trustee; • The Company must provide the Trustee any funds required by the Trustee in order to comply with its abovementioned obligations; • All funds received by the Trustee from the Company will constitute accretions to the corpus of the Trust and will not be repaid to the Company and no Participant will be entitled to receive the funds; • Funds received by the Trustee from the Company may be paid to the Company where the Trustee subscribes for Shares in accordance with this Deed, the relevant Plan Rules or relevant Terms of Participation. The Trustee must maintain a separate share account or record for each Participant, notify each Participant of Shares acquired, allocated and held on their behalf and maintain adequate books and records of the Trust. A Participant will have an absolutely vested and indefeasible entitlement to receive from the Trustee all dividends actually paid by the Company on all Trust Shares held by the Trustee in respect of the Participant and the Trustee agrees to pay any such dividends to the Participant as soon as reasonably practicable after those dividends are paid by the Company to the Trustee. Any time after the Restrictive Period, being the period during which there are restrictions on dealing with or transferring the relevant Trust Shares, the Participant may give the Trustee a Withdrawal Notice and following approval of the Board, the Trustee must transfer legal title in those Trust Shares or sell those Trust Shares in accordance with the Withdrawal Notice and transfer rules in the Deed. The Trustee may at the direction of the Participant, sell any of the Trust Shares to which the Participant is entitled and apply the proceeds of sale in payment of the brokerage fees and other expenses incurred by the Trustee and then pay the balance to the Participant. The Trustee must do all things necessary to transfer legal title in Trust Shares to a Participant, or third party as directed by the Participant, where required to do so by the Plan Rules, if the Trust is terminated, or otherwise, where the Board in its discretion determines. The Deed deals with the termination of the Trust and provides for the distribution of the Trust Assets and states that the Trustee must not pay any balance to any member of the Group. The Company will make cash contributions to the Trust equal to the fair market value of Shares to be acquired by the Trust. The Company will only make contributions to the Trust once the relevant performance rights have vested and once it is certain that the Trust will either be issued Shares or will be required to acquire Shares on-market on the Participant's behalf within a short period of time.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 95 | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Section 130-90 | Income Tax Assessment Act 1997 Section 130-85

Reasons for decision: Summary: Subsection 95(1) of the ITAA 1936 defines net income of a trust as the total assessable income of the trust calculated as if the trustee were a resident taxpayer in respect of that income, less all allowable deductions. Assessable income consists of ordinary income and statutory income. Subsection 6-5(1) provides that your assessable income includes income according to ordinary concepts, which is also called ordinary income. Section 6-10 provides that assessable income also includes some amounts that are included in assessable income by provisions about assessable income called statutory income (the relevant provisions are summarised in section 10-5). None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, irretrievable cash contributions made by the Company to the Trustee will not be assessable income under section 6-10. Accordingly, the irretrievable cash contributions will only be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936 if the amounts are assessable as income according to ordinary concepts under section 6-5. The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that: The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description. In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 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. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. The Trust was established under the Trust Deed by the Company for the sole purpose of obtaining Shares for the benefit of the Participants, including subscribing for or acquiring, allocating, holding and delivering Shares under the Plan. The Deed provides that if the Trustee receives a notice from the Board then subject to the Trustee receiving sufficient payment or having sufficient capital, the Trustee must within seven days (or period as the Board determines) purchase the requisite number of Shares on or off market, subscribe for the requisite number of Shares or allocate Shares that are Trust Assets, or effect a combination of these alternatives. The Company must provide the Trustee any funds required by the Trustee in order to comply with its obligations under the Deed. The Deed provides that all funds received by the Trustee from the Company will constitute accretions to the corpus of the Trust and will not be repaid to the Company and no Participant will be entitled to receive the funds. The Deed allows funds received by the Trustee to be paid to the Company where the Trustee subscribes for Shares in accordance with the Deed, the relevant Plan Rules or relevant Terms of Participation. Accordingly, the irretrievable contributions made by the Company to the Trustee to acquire the Shares in accordance with the Deed and Plan Rules will constitute capital receipts of the Trustee and will not be assessable income of the Trust pursuant to sections 6-5. Note: the Deed provides that whilst the Trustee is not entitled to receive any fees, commissions or remuneration in respect of the performance of its obligations as trustee of the Trust, the Company may pay to the Trustee any fees, commission or remuneration and reimburse such expenses incurred by the Trustee as the Company and the Trustee agree from time to time. Such receipts will be assessable income of the Trust in contrast to the irretrievable contributions made to facilitate the acquisition of the Shares. Section 104-75 provides that CGT event E5 happens at the time a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee. Subsection 104-75(3) provides that the trustee will make a capital gain if the market value of the asset (at the time of the event) is more than its cost base, but will make a capital loss if that market value is less than the asset's reduced cost base. Accordingly, where a Participant becomes absolutely entitled to Company A Shares as against the Trustee, CGT event E5 will occur, and pursuant to subsection 104-75(3), the Trustee will make a capital gain or loss. However, section 130-90 operates to disregard that gain or loss where specified conditions are satisfied, as follows: | Detailed Reasoning - 130-90(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. | Detailed Reasoning - 130-90(2): Subsection (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 The term 'employee share trust' referred to in subsection 130-90(1) is defined in subsection 995-1 as having the meaning given by subsection 130-85(4). Subsection 130-85(4) provides that an employee share trust for an employee share scheme (as defined in subsection 83A-10(2)) 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). An employee share scheme is a scheme under which ESS interests in a company (or subsidiaries of the company) are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2)). An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Subsection 995-1(1) defines the term 'scheme' to include any arrangement, or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest (a right to acquire a beneficial interest in a share), is provided to a Participant in relation to their employment in the Company, in accordance with Deed. The Company has established the Trust under the Deed and the Trust's sole purpose is to obtain and allocate Shares to satisfy the ESS interests (performance rights) of Participants acquired under the Plan. Therefore, paragraphs 130-85(4)(a) and (b) are satisfied. There are some incidental activities undertaken by the Trustee to manage and administer the Trust, including opening and operating bank accounts, the receipt of dividends and the selling and transfer of Shares, as provided in clause 4.1 of the Deed. Accordingly, paragraph 130-85(4)(c) is also satisfied. Therefore, the Trust is an employee share trust, as defined in subsection 995-1(1), as the activities of the Trust meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). Paragraph 130-90(1)(a) CGT event E5 is the CGT event that will apply under the terms of the Plan at the time the Participant becomes absolutely entitled to the Shares. Under the terms of the Deed, the Trustee is required to deal with the Shares in accordance with the relevant Plan Rules. The relevant Plan Rules have a number of conditions that may restrict the Participant's access to the Shares. These restrictions may affect a Participant's absolute entitlement to the Shares as against the Trustee. When the Participants are no longer restricted by any of the conditions under the Plan Rules, then the Participants will become absolutely entitled to the Shares and CGT event E5 happens, and paragraph 130-90(1)(a) will be satisfied. 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 the Company held by the Trustee and to which a Participant is entitled upon the exercise of a performance right is therefore a share in the capital of a company. Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph. Paragraph 130-90(1)(c) Paragraph130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a share (in the Company) by exercising a performance right granted under the Plan. Paragraph 130-90(1)(d) Subsection 83A-20(1) of Subdivision 83A-B states: This Subdivision applies to an *ESS interest if you acquire the interest under an *employee share scheme at a discount. As established above, the Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest (a beneficial interest in a right to acquire a beneficial interest in a Share), is provided to an employee in relation to their employment by the Company. Under the Plan no consideration is payable by the employee on the grant or vesting of the Award. Accordingly, prima facie Subdivision 83A-B will apply to performance rights acquired under the Plan as pursuant to subsection 83A-20(1) the ESS interest will be acquired under an employee share scheme at a discount. However, Subdivision 83A-B will not apply if Subdivision 83A-C applies. Whether a participant is ultimately taxed upfront on some or all of any discount received (under Subdivision 83A-B) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C), will depend on which of the additional requirements in subdivision 83A-B or subdivision 83A-C have been satisfied. Under either circumstance paragraph 130-90(1)(d) will be satisfied. Therefore, provided subsection 130-90(2) does not apply, that is the Participant does not acquire the beneficial interest in the 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) will apply. Under these circumstances, section 130-90 operates to disregard any capital gain or loss that may arise for the Trustee at the time when a Participant becomes absolutely entitled to a Share of the Company acquired by the Trustee of the Trust.

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