Private ruling: Employee share trust
Date of advice: 30 March 2023
Published: 15 May 2023

Ruling: Q1: Will any capital gain or loss that arises for the Trustee, at the time an employee, director or individual service provider (Eligible Participant) becomes absolutely entitled to ordinary shares in Company (Shares) under the Plan under Capital Gains Tax (CGT) event E5 in section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997), be disregarded under section 130-90 of the ITAA 1997, if the Eligible Participant acquires the Shares for the same or less than the cost base of the Shares in the hands of the Trustee? | A1: Yes.

Relevant facts and circumstances: Company is a public company and is the head company of a tax consolidated group (TCG). The Plan Company established the Plan to: a) assist in the reward, retention and motivation of Eligible Participants b) align the interest of Eligible Participants with the interests of the shareholders of Company c) encourage participation of Eligible Participants in the growth and success of Company through share ownership d) promote the long-term success of Company (and its associated entities). The Plan was approved by the Company Board in [MONTH] 20XX. The Plan allows Company to grant Shares and rights to Shares to Eligible Participants by way of either issue or transfer. Eligible Participants are employed or otherwise directly engaged by Company or members of the TCG. Invitation The Board may invite any Eligible Participant to participate in the Plan. The Invitation must be made in writingand may state the following, including: An Invitation under the Plan is personal and can only be accepted by, and Plan Shares may only be granted or allocated to, the Eligible Participant to whom the Invitation is made. An Eligible Participant may accept the Invitation by giving to Company a validly completed Application and Ancillary Documentation (as required) within the time period specified in the Invitation. Where an Eligible Participant applies for Performance Rights under the relevant Invitation Letter, the Eligible Participant must pay to Company (in the manner set out in the Invitation Letter) the Issue Price (if any) within the period specified in the Invitation. Following receipt of a completed and signed Application from an Eligible Participant, Company may accept the Application in whole or in part by granting or allocating the Plan Shares the subject of the Application, and the Eligible Participant becomes a Participant in the Plan. Salary Sacrifice Shares An Invitation made to an Eligible Participant to acquire Salary Sacrifice Shares under the Plan will set out matters including: If Company accepts an Application from an Eligible Participant, Company will allocate the relevant number of Salary Sacrifice Shares in accordance with a Salary Sacrifice Arrangement. Delivery of Salary Sacrifice Shares The Board must procure, at the relevant Grant Date(s) using the Salary Sacrifice Amounts sacrificed up to the relevant Grant Date, that the relevant number of Salary Sacrificed Shares are: Restriction on dealing with Salary Sacrifice Shares All Salary Sacrifice Shares allocated to a Participant will be subject to restrictions on dealing for a period outlined in the Invitation (Restriction Period) and be classified as Restricted Salary Sacrificed Shares. The holder of Restricted Salary Scarified Shares must not engage in any dealing with the Restricted Salary Sacrificed Shares or interest in Restricted Salary Sacrificed Shares for the duration of the Restriction Period. Company must place a Holding Lock on all Restricted Salary Sacrificed Shares to prevent dealings. Upon expiry of the Restriction Period, Company must lift the Holding Lock on any Restricted Salary Sacrificed Shares and notify the Participant of the lifting. Termination of a Salary Sacrifice Arrangement A Salary Sacrifice Arrangement is terminated when: Discounted Shares If the Company accepts an Application for Discounted Shares, Company will allocate Discounted Shares in accordance with the Salary Contribution Arrangement that is agreed to it by the Eligible Participant as part of their Application. Delivery of Discounted Shares The Board must, following the acceptance of a Participant's Application for Salary Contribution Shares, procure the relevant number of Discounted Shares at the relevant Grant Date. The relevant number of Discounted Shares to be procured is determined by reference to the amount of after-tax Remuneration that has been contributed by the Participant at the relevant Grant Date. The relevant number of Discounted Shares are to be: Restriction on Dealing in relation to Discounted Shares All Discounted Shares allocated to a Participant will be subject to restrictions on dealing for a period outlined in the Invitation (Discounted Shares Restriction Period) and be classified as Restricted Discounted Shares. The holder of Restricted Discounted Shares must not engage in any dealing with the Restricted Discounted Shares or interest in Restricted Salary Sacrificed Shares for the duration of the Discounted Shares Restriction Period. Company must place a Holding Lock on all Restricted Discounted Shares to prevent dealings. Upon expiry of the Discounted Shares Restriction Period, Company must lift the Holding lock on any Restricted Discounted Shares and inform the Participant of the lifting. Termination of a Salary Contribution Arrangement A Salary Contribution Arrangement is terminated when: Performance Rights If Company accepts an Application for Performance Rights from an Eligible Participant, it must grant the Eligible Participant the relevant number of Performance Rights that is agreed to it by the Eligible Participant as part of their Application. A Performance Right may be subject to Vesting Conditions as determined by the Board and set out in the Invitation Letter. A Performance Right will vest once a Vesting Notice is given to a Participant. The Board has the absolute discretion to vary or waive Vesting Conditions, deem if a Vesting Condition has been met or determine a new First or Last Exercise Date. A Performance Right may only be Exercised if it is vested and is Exercised before the Last Exercise Date. Where a Participant has been given a Vesting Notice in relation to a Performance Right, the Participant may exercise that Vested Performance Right in the manner set out in the Plan Rules. Subject to Plan Rules, where a valid Exercise or deemed Exercise of a Vested Performance Right by a Participant in accordance with the Plan Rules, Company must either issue or cause the transfer of the number of Shares to which Participant is entitled to. Unless the Board determines otherwise, Company is not obliged to issue or transfer Shares on Exercise of Vested Performance Rights until the payment of any Exercise Price has been received. Unless otherwise determined by the Board, an Unvested Performance Right will lapse when: The Trust On [DATE] 20XX, Company established the Trust under a deed entered into between Company and the Trustee. The Trust does not form part of the TCG and the TCG is not a beneficiary of the Trust. The Trust Deed states that Company established the Trust for the sole purpose of managing employee share schemes of Company, which includes obtaining and managing Shares (including subscribing for, acquiring, allocating, holding and delivering Shares) for the benefit of Participants who are, or will become entitled to acquire Shares under those schemes. The Trustee has powers to: 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) of the ITAA 1997. Subject to the Trust Deed, neither the Trustee nor Company or any of its Associated Entities may grant a Security Interest over any Share. Company shall not obtain any Security Interest, proprietary right or proprietary interest in Shares acquired by the Trustee under the Trust Deed. Acquisition and transfer of Plan Shares If directed by the Board, the Trustee must acquire: Funding Company must provide the Trustee with any funds required by the Trustee to comply with its obligations to acquire Shares under the Trust Deed. The Trustee must hold the Shares acquired on trust in accordance with the Trust Deed. The funds provided by Company to the Trustee will form part of Trust Property held by the Trustee for the purposes of the Trust Deed, and may only be paid to Company as consideration for Shares acquired by the Trustee under the terms of the Trust Deed. Cash contributions made by Company are irretrievable and will constitute an increase to corpus of the Trust and are not repayable to Company. Where an amount paid by Company to the Trustee is in excess of the amount required, Company may require the Trustee to: The Trust will not be used to satisfy any cash bonuses to which a Participant may become entitled with any such cash bonuses to be satisfied through the funds of Company. Company must pay all Trust Expenses which means all expenses, outgoings, costs and charges incurred by the Trustee in establishing and operating a Plan and the Trust and any amount of income or other Tax payable by any Group Company and/or the Trustee in relation to a Plan and the costs of the audit of the Trust, but excludes any costs directly related to selling and transferring Allocated Plan Shares or exercising Share Rights on behalf of a Participant. Unallocated Plan Shares The Trustee will hold Unallocated Plan Shares on trust for the benefit of Participants in accordance with the Trust Deed. Where a Participant forfeits its right or interest in Allocated Plan Shares, those shares become Forfeited Shares and must be held by the Trustee as though they were Unallocated Plan Shares until it receives notice from the Board directing the Trustee to reallocated them to one or more other Participants. The balance of the Net Income of the Trust to which no Participant is presently entitled may be accumulated by the Trustee as an Accretion to the Trust. Rights attaching to Allocated Plan Shares Subject to Applicable Law, the Rules and the terms of the relevant Invitation, a Participant with Allocated Plan Shares is presently entitled to so much (if any) of the Net Income of the Trust for a Financial Year which is attributable to:


Reasons for decision: Detailed Reasoning - Detailed Reasoning: Pursuant to section 102-20, an entity can make a capital gain or loss if, an only if, a CGT event happens. | Detailed Reasoning - CGT event E5: Under 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. The time of the event is when a beneficiary becomes absolutely entitled to the asset according to subsection 104-75(2). If CGT event E5 happens, the trustee may make a capital gain or loss if the market value of the asset, at the time of the event, is more than its cost base or less than the asset's reduced cost base respectively (subsection 104-75(3)). In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 applies. Draft Tax 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 explains the principles set out in the leading English trust case of Saunders v Vautier (1841) 49 ER 282 in relation to 'absolutely entitled' as follows: ... if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustees to transfer the trust property to them of at the direction, even though the trust deed contains a contrary intention. The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway. An Eligible Participant will become absolutely entitled to the Shares and Performance Rights in accordance with the Plan when those rights have vested and been exercised (if applicable), and the restrictions in respect of the Shares have ceased or no longer apply. Upon the cessation of all the restrictions, the Participant has the right to request the Trustee to transfer the Shares into their name and deal with the Shares at their own will. At this point the Participant will become absolutely entitled to the Shares as against the Trustee, and CGT event E5 happens pursuant to subsection 104-75(1). However, any capital gain or loss that a Trustee makes from CGT event E5 is disregarded if section 130-90 applies. | Detailed Reasoning - Shares held for the future acquisition under employee share scheme: 130-90(1A): Subsection 130-90(1A) applies to disregard any capital gain or capital loss made by an employee share trust to the extent that it results from a CGT event if: | Detailed Reasoning - Shares held to satisfy the future exercise of rights: 130-90(1): Subsection 130-90(1) applies to disregard any capital gain or loss made by an employee share trust if all of the following apply: | Detailed Reasoning - Employee share trust: In examining whether the requirements of an employee share trust in subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that are relevant. To qualify as an employee share trust, a trustee's activities must be limited to: Paragraph 130-85(4)(a) is satisfied because the activities of the Trust include obtaining shares or rights in a company, namely the Company. Paragraph 130-85(4)(b) is satisfied because the Trust has been established to acquire Shares and to allocate those Shares to Participants to satisfy Shares and Performance Rights acquired by Eligible Participants under the Plan which subsequently vest and, if applicable, are exercised (with each Share Right constituting an ESS interest as defined in subsection 83A-10(1)). The Plan is an ESS within the meaning of subsection 83A-10(2) as it is a scheme under which shares and rights to acquire Shares are provided to employees, or associates of employees in relation to the employees' employment. In respect of paragraph 130-85(4)(c), the phrase 'merely incidental' 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 of 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'? Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental. In the present case, the Trust Deed provides that the Trust has been established for the sole purpose of managing employee share schemes of Company and the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4), including paragraph 130-85(4)(c) as the other activities undertaken by the Trustee are merely incidental to managing the Plan. | Detailed Reasoning - Paragraph 130-90(1A)(a): Paragraph 130-90(1A)(a) is satisfied as the shares held by the Trustee are ESS interests (as defined by paragraph 83A-10(1)(a)) which are CGT assets of the Trust. | Detailed Reasoning - Paragraph 130-90(1A)(b): 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 as against the Trustee. Therefore paragraph 130-90(1A)(b) is satisfied. | Detailed Reasoning - Paragraph 130-90(1A)(c): The Plan is an employee share scheme for the purpose of Division 83A as it is an arrangement under which an ESS interest is provided to a Participant in relation to their employment by the Company in accordance with the Trust Deed. Therefore, Subdivision 83A-B or 83A-C can apply to the Shares acquired under the Plan and paragraph 130-90(1A)(c) will be satisfied. Accordingly, all conditions in subsection 130-90(1A) have been satisfied. | Detailed Reasoning - Paragraph 130-90(1)(a): CGT event E5 will apply under the terms of the Plan when the Participant becomes absolutely entitled to the Shares as against the Trustee. Therefore, paragraph 130-90(1)(a) will be satisfied. | Detailed Reasoning - Paragraph 130-90(1)(b): Subsection 995-1(1) defines a share to mean a share in the capital of a company. A Share held by the Trustee and to which an Eligible Participants is entitled upon the vesting (or exercise if applicable) of a Performance Right is a share in the capital of a company. According, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share. | Detailed Reasoning - Paragraph 130-90(1)(c): Paragraph 130-90(1)(c) is satisfied as an Eligible Participant will have acquired a beneficial interest in a Share by being taken to have exercised a Performance Right under the Plan once the Performance Right has vested in accordance with the Plan. | Detailed Reasoning - Paragraph 130-90(1)(d): Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states: This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount. As stated above, each Share or Performance Right constitutes an 'ESS interest' as defined in subsection 83A-10(1), and the Plan is an ESS within the meaning of subsection 83A-10(2). The Performance Rights acquired through the Plan are an ESS interest within the meaning of subsection 83A-10(2) because it is a scheme under which rights to acquire beneficial interests in Shares in Company are provided to Eligible Participants in relation to their employment. Each Performance Right is acquired for no cost. Therefore, Subdivision 83A-B or 83A-C applies to the Shares and Performance Rights granted under the Plan. Accordingly, all the conditions in subsection 130-90(1) have been satisfied. | Detailed Reasoning - Subsection 130-90(2): Subsections 130-90(1A) or 130-90(1) do not apply if the beneficiary acquired the beneficial interest in the shares for more than its cost base in the hands of the employee share trust at the time the CGT event happens (subsection 130-90(2)). Provided a 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, subsections 130-90(1) or 130-90(1A) will apply to disregard any capital gain or loss that arises for the Trustee as a result of CGT event E5 happening.

whether, and the manner in which, the Eligible Participant may apply for: | if the Eligible Participant is invited to apply for Plan Shares (being Salary Sacrifice Shares or Discounted Shares): | the number of Plan Shares for which that Eligible Participant may apply or how that number will be calculated | the Acquisition Price or how such price will be calculated | whether the Plan Shares will be held by a Trustee under a Trust for and behalf of the Eligible Participant | the dates on which Salary Sacrifice Amounts or Salary Contribution Amounts will be used to acquire Salary Sacrifice Shares or Discounted Shares | the terms and conditions of the Salary Sacrifice Arrangement or Salary Contribution Arrangement that must be entered into and signed by the Eligible Participant. | if the Eligible Participant is invited to apply for Performance Rights: | the number of Performance Rights for which that Eligible Participant may apply | the Issue Price payable (if any) for the grant of each Performance Right | the Grant Date of the Performance Right | the Exercise Period applicable to the Performance Right | the Vesting Conditions to which the Performance Right will be subject | whether each Performance Right, upon vesting, needs to be Manually Exercised (and, if so, how to do so) or whether it will be Automatically Exercised | the circumstances in which the Performance Right will lapse | the Exercise Price (if any) payable to Exercise each Performance Right | whether a minimum number of Performance Rights must be applied for by the Eligible Participant. | any restrictions (including the period of any restriction) on dealing attachment to the applicable Plan Shares | where Subdivision 83A-C of the ITAA 1997 requires a statement that deferred taxation applies, such wording as appropriate. | the maximum amount of the Eligible Participant's pre-tax Remuneration that may be sacrificed by the Eligible Participant in any Financial Year (Total Salary Sacrifice Amount) | the number of Salary Sacrifice Shares to be allocated to the Eligible Participant at each Grant Date and the total dollar amount of the relevant Salary Sacrifice Amounts. | transferred or issued to the Participant or the Trustee to be held on their behalf, or | acquired for or on behalf of the Participant using a combination of transfer and issue methods as determined by the Board. | a Participant submits notice to the Board requesting the Arrangement be terminated | the Participant ceases to be engaged with Company | if there is a change of control event or if one determined by the Board to likely occur in the near future or if the Board wishes to terminate the Salary Sacrifice Arrangement for any other reason. | transferred or issued to either the Participant or the Trustee to be held on their behalf, or | transferred or issued to either the Participant or the Trustee using a combination of transfer and issue methods as determined by the Board. | if there is a change of control event or if one determined by the Board to likely occur in the near future or if the Board wishes to terminate the Salary Contribution Arrangement for any other reason. | the Participant is a Good or Bad Leaver | the Vesting Conditions are not met before the date determined by the Board | there is a material breach of the Plan Rules by the Participant that is not remedied within 20 business days of receiving notice from Company. | the Last Exercise Date has passed | there is a Change of Control Event where the Board determines that under the Plan Rules that the Unvested Performance Rights will lapse | any other circumstances determined by the Board and set out in the Invitation that will result in the lapse of Unvested Performance Rights | the Participant provides written notice to Company that they are voluntarily forfeiting a Performance Right. | enter into and execute all agreements, deeds and documents | subscribe for, purchase or otherwise acquire and to sell or otherwise dispose of property, rights or privileges which the Trustee is authorised to acquire or dispose of on such terms and conditions it sees fit | open bank accounts, retain on current or deposit account at any bank any money which it considers proper | take and act upon the advice or opinion of any legal practitioner, or other professional person | do all acts, matters or things which it may deem necessary or expedient for the purpose of giving effect to, and carrying out, the trusts, powers and discretions conferred on the Trustee by the Trust Deed or the law. | Shares in the ordinary course of trading on the market | Shares by way of an off-market transaction at market value | new Shares issued by Company. | apply such amount to subscribe for, acquire or allocate (or both) and deliver Shares in accordance with the Trust Deed, the Plan or relevant terms of participation | deposit the funds into any account opened and operated by the Trustee in accordance with the Trust Deed. | the Participant's Allocated Plan Shares | the proceeds of sale arising from the sale of Share Rights or Allocated Plan Shares by the Trustee on behalf of the Participant | transactions or events related to any Allocated Plan Shares or property related to, or arising from, those Allocated Plan Shares. | immediately before the event happens, an ESS interest is a CGT asset of the trust, and | either of the following subparagraphs applies: | the event is CGT event E5, and the event happens because a beneficiary of the trust becomes absolutely entitled to the ESS interest as against the trustee | the event CGT event E7, and the event happens because the trustee disposes of the ESS interest to a beneficiary of the trust, and | Subdivision 83A-B or 83A-C applies to the ESS interest. | the CGT event is CGT event E5 or E7 (paragraph 130-90(1)(a)) | the CGT event happens in relation to a share (paragraph 130-90(1)(b)) | the beneficiary had acquired a beneficial interest in the share by exercising a right (paragraph 130-90(1)(c)) | 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 (paragraph 130-90(1)(d)). | obtaining shares or rights in a company (paragraph 130-85(4)(a)) | ensuring that ESS interest in the company that are beneficial interests in those shares or rights are provided under the ESS to employees or to associates of employees, of the company or a subsidiary of the company (paragraph 130-85(4)(b)) | other activities that are merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and (b) (paragraph 130-85(c)).