Private ruling: Employee Share Scheme
Date of advice: 27 April 2018
Published: July 2018
Ruling period: Income tax year ended 30 June 2018 | Income tax year ended 30 June 2019 | Income tax year ended 30 June 2020 | Income tax year ended 30 June 2021 | Income tax year ended 30 June 2022 | Income tax year ended 30 June 2023
Date scheme commenced: 1 July 2017

Ruling: Q1: Will irretrievable cash contributions made by the Company to the Trustee in accordance with the Plan Rules ( Rules ) and Trust Deed ( Deed ) to fund the subscription for, or acquisition on-market or off-market of, the Company’s Shares be assessable income of the Trust ( Trust ) pursuant to section 6-5 or 6-10 of the Income Tax Assessment Act 1997 ( ITAA 1997 ) or Division 6 of Part III of the Income Tax Assessment Act 1936 ( ITAA 1936 )? | A1: No | Q2: (a) Will the Trustee of the Trust make a capital gain or loss from CGT event E5 (in section 104-75 of the ITAA 1997) when a Participant satisfies the Vesting Conditions for an Incentive Security and the Trustee allocates a Share to the Participant? (b) Will the Trustee make a capital gain or loss from CGT event E7 (in section 104-85 of the ITAA 1997) or CGT event A1 (in section 104-10 of the ITAA 1997) when the Trustee transfers legal ownership of the Shares to the Participant following allocation? | A2: (a) No (b) No | Q3: Will dividends received by the Trustee on Shares which have been allocated to a Participant under the Deed, where legal title to the Shares is held by the Trustee, be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936? | A3: Yes | Q4: Will dividends and other income received by the Trustee in respect of Unallocated Shares be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936? | A4: Yes | Q5: Will the net income of the Trust under section 95 of the ITAA 1936 be assessed to the Trustee under section 99A of the ITAA 1936 to the extent that the net income relates to income derived from the Unallocated Shares? | A5: Yes | Q6: Will the Trustee be entitled to the benefit of franking credits under Subdivision 207-B of the ITAA 1997, attached to franked distributions on Unallocated Shares? | A6: Yes

Relevant facts and circumstances: The Company established the Plan, in order to provide eligible employees with equity based compensation in the form of Incentive Securities. These Incentive Securities are performance Rights, Options and Restricted Shares. The Company established the Trust to assist with meeting its obligations regarding the Incentive Securities. Its purpose is to administer the Plan. The Trustee is an independent company that is not related to the Company. The Plan The purpose of the Plan is to establish an Employee Share Scheme as defined by Division 83A. The Plan is intended to provide employees of the Company who participate in the Plan ( Participants ) with incentives that aligns the interests of Participants with the interests of the Company and encourages their mutual interdependence. Participants of the Plan are encouraged, by the nature of their Incentive Securities, to improve the performance of the Company through the price of its shares and the return to shareholders. The Incentive Securities offered under the Plan are intended to attract and retain employees. Participants in the Plan will be Australian resident employees, including but not limited to senior executives, who directly generate assessable Australian income for the Company through the operation and management of the Company’s business activity. The Plan will be funded by the Company through a nominal initial settlement amount and periodic irretrievable contributions made as necessary. Contributions to the Trust will be made from the 2018 income year onwards. The amount of funds transferred will be determined by an estimated forecast which will review the number of Incentive Securities issued to Participants, and the likelihood of those Incentive Securities vesting and ultimately requiring the Trust to acquire and hold Shares on behalf of a Participant. Management of the Company will review forecasts and make recommendations to the Board periodically to ensure the Trust remains properly funded. The Board will provide guidance to the Trustee on how the Trustee should acquire the Shares. The Trustee will consider the instructions from the Board of the Company as well as its obligations under the Deed and the law and will act accordingly. The Trust The Trust was established by the Company for the purpose of obtaining and administering Shares for the benefit of Participants in the Plan. Contributions to the Trust will be made by the Company. It is intended that the Trust will be available to facilitate the requirements of any future equity plans that the Company may implement. The Trust can acquire Shares on-market, off-market or by subscribing for new Shares. The Trust enables the acquisition of Shares in accordance with the preferred timeline of the Company. The Company can manage its costs and share capital position by having the Trust acquire Shares before the Participants meet the vesting criteria and become entitled to the Shares. If Participants do not meet the vesting criteria, the Trust can utilise those Unallocated Shares to facilitate future grants. The Trust provides the opportunity to improve cash flow planning, as the Company can make contributions to the Trust periodically throughout the vesting period. This provides flexibility to determine the most appropriate time to make contributions. Any income the Trust receives through its acquisition and holding of Unallocated Shares will be used to buy further Shares to be held for the purposes of the Trust. The Trustee has fiduciary duty to the Participants of the Plan and is obligated to act in the interests of those Participants (beneficiaries). The Trustee’s actions to purchase Shares on market, or subscribe for new Shares in the Company will take into consideration the requirements of the Corporations Act and the Trustee Act 1925 (NSW) and at all times will make decisions in accordance with the terms of the Deed, the Plan Rules ( Rules ) and in fulfilment of the Trustee’s fiduciary duty to Participants (beneficiaries). Upon termination of the Trust, the Trustee must distribute any balance of either capital or income to Discretionary Beneficiaries as defined under the Deed to mean a Participant in any Company Plan or any charity nominated by the Trustee. Operations of the Plan The Rules and the Deed set out the requirements and circumstances under which the Company can issue Incentive Securities to Participants, as well as the Trustee’s rights and obligations in administering the Trust in execution of the Plan. Key Attributes The Trust funds (both the initial settlement and any additional contributions made) cannot be refunded, repaid or returned to the Company (or any member of the Group, defined as meaning the Company and its Related Bodies Corporate) other than by way of the Trustee paying the issue price where it subscribes for Shares in the Company. Incentive Securities are granted to Participants by the Board in its absolute discretion and upon such additional terms and vesting conditions as the Board determines. The Board may determine that vesting of the right or exercise of the option will be satisfied by the Company making cash payment instead of an allocation of Shares. For eligible Participants, vesting of their Incentive Securities is generally subject to financial and/or non-financial performance conditions as well as requirements to remain employed with the Company for a specified period of time. The amount payable upon vesting and conversion of an Incentive Security under the Plan is nil. After the vesting of the relative Incentive Securities, the Trustee will transfer ownership of the requisite number of Shares to the Participant. Participants will not be restricted in relation to their shareholding once the transfer has occurred other than in accordance with the share trading policy of the Company. The Trustee has the authority to acquire Shares as instructed by the Company, for the purpose of satisfying grants made pursuant to the Rules of the Plan by way of an on-market or off-market purchase of Shares in the Company, subscription for Shares in the Company, or through a combination of these. The Company will not have any legal or beneficial entitlement to any of the Shares forming part of the Trust at any time, and may not acquire such an interest. The Trustee can, if required, acquire and hold Shares in the Company as Unallocated Shares, i.e. Shares which are not allocated to a Trust participant and to which no participant has a beneficial entitlement to at the time of purchase. The Trustee has the discretion to use any capital receipts, dividends, distributions or other entitlements received in respect of any Unallocated Shares to acquire more Shares to allocate to Participants, or to distribute to beneficiaries of the Trust prior to final allocation of those Shares. To the extent that there is no one presently entitled to the income of the Trust, the Trustee will pay tax on this income. Shares held in the Trust are registered in the name of the Trustee. This will continue until either transfer of legal title to a participant in accordance with the Deed, or disposal on behalf of the Participant in accordance with the Deed. Transfer of the legal title to a Share held by the Trust can only occur upon the date when either transfer of legal title is required or permitted under the Rules or the Trust is terminated. The Trustee does not have the power to do anything that may cause the Trust to fail to meet the definition of an Employee Share Trust in subsection 130-85(4) of the ITAA 1997. Lapsing of the Rights A Right will lapse on the earlier of: ● The Right lapsing in accordance with a provision of the Rules; ● Failure to meet a vesting condition or any other condition applicable to the Right within the Vesting period; or ● The receipt by the Company of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Right. Lapsing of the Options An Option will lapse on the earlier of: ● five years after vesting or any other date nominated as the expiry date in the offer; ● The Option lapsing in accordance with a provision of the Rules (including in accordance with a term of an offer); ● Failure to meet a vesting condition or any other condition applicable to the Option within the vesting period; or ● The receipt by the Company of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Option. Residency ● All entities referred to are residents of Australia for income tax purposes.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 44(1) | Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 67-25(1) | Income Tax Assessment Act 1997 subsection 67-25(1B) | Income Tax Assessment Act 1997 Subdivision 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 104-10 | Income Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 section 130-85 | Income Tax Assessment Act 1997 section 130-90 | Income Tax Assessment Act 1997 Subdivision 207-B | Income Tax Assessment Act 1997 subsection 207-35 | Income Tax Assessment Act 1997 subsection 207-45 | Income Tax Assessment Act 1997 subsection 207-50 | Income Tax Assessment Act 1997 subsection 207-145

Reasons for decision: Summary: Section 6-5 provides that the assessable income of an Australian resident includes income according to ordinary concepts (called ‘ordinary income’ in subsection 6-5(1)) derived directly or indirectly from all sources, whether in or out of Australia (subsection 6-5(2)). The irretrievable cash contributions made by the Company to the Trustee will not be included in the Trustee’s assessable income under section 6-5 as ordinary income because the contributions are of a capital nature. Section 6-10 provides that a taxpayer’s assessable income also includes some amounts that are not ordinary income. These amounts, which are included in a taxpayer’s assessable income by specific provisions of both the ITAA 1997 and ITAA 1936, are called ‘statutory income’. Section 10-5 contains a list of these provisions. None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, the irretrievable cash contributions made by the Company to the Trustee will not be included in the Trustee’s assessable income under section 6-10 as statutory income. Under Division 6 of Part III of the ITAA 1936, generally the beneficiaries of a trust who are presently entitled to a share of the income of the trust include that share of the ‘net income’ of the trust in their assessable income. The trustee is generally taxed on the balance of the net income which is not included in the assessable income of a beneficiary. Subsection 95(1) of the ITAA 1936 defines ‘net income’ as follows: 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, except… Given that the irretrievable cash contributions made by the Company to the Trustee are neither ordinary income nor statutory income, they will not be included in the net income of the Trust, and hence cannot be assessed to the Trustee pursuant to Division 6 of Part III of the ITAA 1936. | Detailed Reasoning - Question 2(a): Under section 102-20, an entity can make a capital gain or loss if and only if a CGT event happens. CGT event E5 According to subsection 104-75(1), CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under). The time of CGT event E5 is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)). In this case, the Trust is neither a unit trust nor a trust to which Division 128 applies (as it does not relate to the death of an individual). If CGT event E5 happens, 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. In this case, when a Participant satisfies the Conditions for an Incentive Security, the Participant’s right to receive a Share corresponding to that Incentive Security will become unconditional. At this point, the Participant becomes absolutely entitled to the Share (a CGT asset of the Trust) as against the Trustee, and CGT event E5 happens (Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words ‘absolutely entitled to a CGT asset as against the trustee of a trust’ as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 ). However, any capital gain or capital loss that the Trustee makes from CGT event E5 is disregarded pursuant to section 130-90. To qualify under section 130-90, there must be an ‘employee share trust’ and an ‘ESS interest’. The term ‘employee share trust’ is defined in subsection 130-85(4). It states: 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). The term ‘employee share scheme’ and ‘ESS interest’ are defined in section 83A-10. The provision states: (1) An ESS interest , in a company, is a beneficial interest in: (a) a *share in the company; or (b) a right to acquire a beneficial interest in a share in the company. (2) An employee share scheme is a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of: (a) the company; or (b) *subsidiaries of the company; in relation to the employees' employment. An Incentive Security is an ‘ESS interest’ under paragraph 83A-10(1)(b). The Plan is an ‘employee share scheme’ pursuant to subsection 83A-10(2) as it is a scheme under which ESS interests in the Company are provided to employees in relation to their employment by the Company. The Trust satisfies the definition of an employee share trust in subsection 130-85(4) as: ● the Trust acquires shares in the Company; ● the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in a share in the Company or rights are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Deed and the Plan; and ● the Deed provides that the Trust will be managed and administered so that it satisfies the definition of ‘employee share trust’ for the purpose of subsection 130-85(4). Accordingly, the requirements of section 130-90 are met and any capital gain or capital loss that the Trustee makes from CGT event E5 is disregarded. | Detailed Reasoning - Question 2(b): CGT events E7 and A1 Subsection 104-85(1) provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary’s interest, or part of it, in the trust capital. CGT event A1 in section 104-10 happens when there is disposal of a CGT asset. Pursuant to section 106-50, from just after the time a beneficiary becomes absolutely entitled to a CGT asset as against the trustee of a trust, the asset is treated as being the beneficiary’s asset (instead of being an asset of the trust). This means an act done in relation to the asset by the trustee is treated (for CGT purposes) as if the act had been done by the beneficiary (instead of by the trustee). The Participants become absolutely entitled to Shares allocated to them pursuant to the Plan when the relevant conditions are met (causing CGT event E5 to happen). When the Trustee transfers the legal ownership of the Shares to a Participant following allocation of Shares, section 106-50 will deem the Shares to be an asset of the Participant. This means there would be no change in the Share ownership when the Trustee transfers the Shares to the Participant. Hence, no CGT event E7 or A1 happens and there can be no capital gain or loss when the legal title in the Shares to which a Participant is absolutely entitled as against the Trustee is transferred to the Beneficiary (Paragraph 144 of TR 2004/D25). | Detailed Reasoning - Question 3: Dividends received by the Trustee on Shares which have been allocated to a Participant under the Trust Deed, where legal title to the Shares is held by the Trustee, will be included in the calculation of the net income of the Trust under subsection 95(1) of the ITAA 1936. The Trustee holds the legal title to, and is the registered shareholder of, Shares which have been allocated to a Participant under the Deed and Unallocated Shares. Subsection 95(1) of the ITAA 1936 defines ‘net income’, in relation to a trust estate, to mean 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, except… Pursuant to subsection 44(1) of the ITAA 1936, the assessable income of a resident shareholder in a company includes dividends that are paid to the shareholder by the company out of profits derived by it from any source. Therefore, dividends received by the Trustee as the registered shareholder of both shares which have been allocated to a Participant under the Deed and Unallocated Shares, as well as other income received by the Trustee in respect of Unallocated Shares, will be included in the calculation of the net income of the Trust under subsection 95(1) of the ITAA 1936. | Detailed Reasoning - Question 4: As discussed in the answer to Question 3 (above), dividends and other income received by the Trustee in respect of Unallocated Shares will be included in the calculation of the net income of the Trust under subsection 95(1) of the ITAA 1936. | Detailed Reasoning - Question 5: Under section 99A of the ITAA 1936, the trustee of a trust estate is assessed and liable to pay tax on the net income of the trust estate at the rate declared by the Parliament (in subsection 12(9) of the Income Tax Rates Act 1986 ) for the purposes of section 99A of the ITAA 1936 on the part of the net income of the trust estate: ● that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97 of the ITAA 1936 (paragraphs 99A(4)(a) and 99A(4A)(a) of the ITAA 1936) ● in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98 of the ITAA 1936 (paragraphs 99A(4)(b) and 99A(4A)(b) of the ITAA 1936); and ● that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia (paragraphs 99A(4)(c) and 99A(4A)(c) of the ITAA 1936). The critical requirement for the application of sections 97 and 98 of the ITAA 1936 is that a beneficiary is presently entitled to a share of the income of a trust estate. In the present case, the Trustee will be assessed and liable to pay tax under section 99A of the ITAA 1936 on the part of the net income (as defined in subsection 95(1) of the ITAA 1936) of the Trust that does not fall within one of these three enumerated categories. This would include dividends received by the Trustee in respect of Unallocated Shares. Accordingly, net income of the Trust associated with Allocated Plan Shares which has been included in the assessable income of the Participant will not be assessed to the Trustee under section 99A of the ITAA 1936. | Detailed Reasoning - Question 6: Division 207 deals with the effect of receiving franked distributions. Subsections 207-35(5) and (6) provide that if a franked distribution is made to a member that is the trustee of a trust, an amount equal to the franking credit on the distribution is included in the member’s assessable income. Therefore, the Trustee will need to include the sum of its share of the franking credit on the dividend received in respect of Unallocated Shares in its assessable income. Tax offset Subsection 207-5(4) provides that a tax offset in relation to that distribution is only available to an entity (who may be a trustee) if the distribution flows indirectly to it and does not flow indirectly through it to another entity. The tax offset is equal to its share of the franking credit on the distribution. Section 207-45 provides that an entity to whom a franked distribution flows indirectly in an income year is entitled to a tax offset for that income year that is equal to its share of the franking credit on the distribution, if it is the trustee of a trust that is liable to be assessed on a share of, or all or a part of, the trust’s net income under section 99A of the ITAA 1936 for that income year. Section 207-50 sets out the circumstances when a franked distribution flows indirectly to or through an entity. Subsection 207-50(4) relevantly provides that a franked distribution flows indirectly to the trustee of a trust in an income year if: ● the distribution is made to the trustee ● the trustee is liable to be assessed on all or part of the trust’s net income for that year under section 99A, and ● the trustee’s share of the distribution under section 207-55 is a positive amount, whether or not the trustee actually receives any of that share. In the present case, the Trustee (being liable to be assessed on a part of the trust’s net income under section 99A of the ITAA 1936 – see Question 5) will be entitled to a tax offset equal to its share of the franking credit on the franked distributions made to the Trustee in respect of Unallocated Shares provided subsection 207-145(1) does not apply. Where a franked distribution is paid to an entity, subsection 207-145(1) denies a gross-up and tax offset where that entity is not a qualified person for the purposes of Division 1A of the former Part IIIAA of the ITAA 1936. The former section 160APHO of the ITAA 1936 sets out the definition of a qualified person for the purpose of Division 1A of the former Part IIIAA of the ITAA 1936. Effectively, the Trustee will be a qualified person if they hold shares on which a dividend has been paid for a continuous period of not less than 45 days, during the period beginning the day after the Trustee acquires the shares and ending on the 45 th day after the shares become ex-dividend. However, subsection 160APHO(3) of ITAA 1936 requires days during which an entity has materially diminished risks of loss or opportunities for gain in respect of the shares be excluded. An entity is taken to have a materially diminished risk on a particular day if their net position on that day is less than 30% of the risks of loss or opportunities for gain relating to the shares on that day (former subsection 160APHM(2) of the ITAA 1936). Therefore, provided the Trustee holds the shares without materially diminishing risks of loss or opportunities for gain in respect of the Unallocated Shares for the qualification period, the Trustee will be a qualified person for the purposes of Division 1A of former Part IIIAA of the ITAA 1936, and be entitled to a tax offset for any franking credits attaching to the dividends on Unallocated Shares. Limit of tax offset Subsection 67-25(1) provides that where a tax offset is available under Division 207, that tax offset is subject to the refundable tax offset rules unless otherwise stated in the section. Subsection 67-25(1B) provides that the tax offset is only subject to the refundable tax offset rules if the trustee entitled to the tax offset is not liable to be assessed under section 98 or 99A of the ITAA 1936. In the present case the Trustee is assessed on the distributions under section 99A of the ITAA 1936, and therefore the tax offsets available to the Trustee will be limited to the amount of tax payable and any excess franking tax offset will not be refundable under the refundable tax offset rules in Division 67.

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