Private ruling: Employee share scheme
Date of advice: 5 August 2021
Published: October 2021
Ruling period: Year Ended 30 June 20XX | Year Ended 30 June 20XX | Year Ended 30 June 20XX | Year Ended 30 June 20XX | Year Ended 30 June 20XX
Date scheme commenced: The scheme commences in the income year ending 30 June 20XX

Ruling: Q1: Will amounts contributed to the trustee by employees for the acquisition of additional employee units constitute assessable income of the Trust? | A1: No | Q2: Will amounts contributed by the Employer to the Trust for the benefit of employees constitute assessable income of the Trust? | A2: No | Q3: Will the general anti-avoidance provisions under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the scheme described? | A3: No

Relevant facts and circumstances: This scheme description incorporates, and should be read with, the draft Trust Deed (Trust Deed) and Employee Manual. The Company group is an Australian based company group. The Company group (Company Group) consists of the Company (the Employer), who acts as the head company, and XX wholly owned subsidiary companies. The Company Group has decided to introduce an Employee Share Plan (the Plan) as a mechanism for rewarding, retaining and motivating its employees. The Company Group has the following reasons for introducing the Plan: • Provide a mechanism for rewarding staff for their loyalty and effort in a structured, equitable and transparent manner; • Provide benefits for existing employees and attract new employees; • Assist to engender responsibility for the performance of our business throughout our employees and provide a mechanism that rewards staff for our collective and individual contributions. The Company Group will operate the Plan through a Trust (the Trust). Description of the Plan and terms of the Trust Deed The Trust is used to acquire fully paid ordinary shares in the capital of the Employer (Shares) for employees of the Company Group pursuant to the Plan. The Trust provides an arm's-length vehicle through which Shares can be acquired and held on behalf of employees providing the liquidity of employee held Shares in a simple flexible manner compared to the Employer buying back Shares from employees. In effect, this aspect allows the Employer to satisfy corporate law requirements relating to companies dealing in their own shares. The Trust provides the following benefits to the Employer: • Allows key shareholders to keep control over company ownership. • Registration of shares in the Trustee's name provides control over identity of shareholders, preventing a sale to unrelated persons. • If the Employer is sold, it is easier to "mop-up" employee shareholders. • Enables the Disqualification Event and Redemption and Disqualification Discount provisions (as defined) to be enforced in a simple manner through the Trust. From the commencement of the Plan, annual contributions are made to the Trust by the Employer in accordance with a formula established by the Employer for the subscription or acquisition of Shares for the purposes of the Plan. The Trustee, at the direction of the Employer, uses any money contributed by the Employer and any residual amounts to purchase Shares from the existing shareholders of the Employer, although a small amount is retained to provide for the administration of the Plan. The Trust Deed allows for the Employer to direct the Trustee to subscribe for Shares, but it is not the Employer's current intention for the Trustee to use this method to acquire Shares. The Trust Deed does not allow, and under no circumstances may, the Trustee repay to the Employer or any Associated Company any amount received as contributions for the subscription or acquisition of Shares. The Employer and its Associated Companies have no proprietary right or interest, charge or lien in the Company shares acquired by the Trustee under the Trust Deed. No member of the Group (the Company and its Associated Entities) has, or is able to acquire, a beneficial interest in the assets of the Trust. The Employer and its Associated Companies do not have any right to the income or capital of the Trust. The Trustee will only invest in shares in the Employer. The Trustee is not permitted to make any loans or provide any other form of financial assistance. Additional funds that are derived through unallocated Shares need to be applied for the purpose of the Trust i.e. to acquire shares and allocate them to Participants or to pay administration costs of the Trust. If the Trust terminates, any residual income or capital amounts must be applied to an employee of the Company, a Participant, a complying superannuation fund or a charity nominated by the Employer. On termination of the Trust, no amount can be paid to the benefit of the Employer or any associate. The Trustee will not borrow any money for a purpose other than meeting the administration costs of the Trust. There will be no security provided on such loans and interest will not be more than arm's length commercial rates. The equity made available for purchase by the Trustee under the terms of the Trust Deed is XX% of the issued Shares. This will be reviewed every two years. Shares will be held by the Trustee as Unallocated Shares until such Shares are allocated to Eligible Employees who become Participants in the Plan. The Employer will be entitled under the Trust Deed to nominate and invite Eligible Employees to participate in the Plan. Eligibility to participate in the Plan is based upon an independently assessed set of criteria. To be eligible to benefit from any contributions subsequent to the initial contribution (and any residual amounts of capital after the application of Disqualifying Events or Disqualifying Discounts) an employee must have been continuously employed as a permanent employee of the Employer for three years excluding any breaks in employment (e.g. leave without pay). Subject to a demonstrated commitment to Company (determined by the exercise of the Directors discretion) and meeting the expectations of their current role (demonstrated by having no significant performance issues), the Employer will invite Eligible Employees to participate in the Plan by owning Units. Clause 3 of the Trust Deed states, that notwithstanding anything else express or implied in the Trust Deed, the Plan must be available to at least seventy-five (75) percent of the permanent employees of the Employer who have completed as least 3 years of service (whether continuous or noncontinuous) with the employer. The beneficial interest of the Shares in the Trust Fund is divided into Units. The Trust Deed is expressly made with the intention that the Units in the Trust Fund confer to the Participants a beneficial interest in the Shares in the Employer. The invitation will include the terms and conditions upon which the Units will be issued. Following receipt of an invitation, an Eligible Employee who wishes to participate in the Plan will return the completed application form. Upon acceptance of the application by the Employer, Eligible Employees become Participants in the Plan. The Employer will then instruct the Trustee to allocate a specific number of Units to the Eligible Employee and to designate one Share to each Unit (Allocated Share). The Trustee shall ensure such designation is recorded in the books and records of the Trust. Eligible Employees may make a contribution toward the acquisition of a Unit. An Eligible Employee may participate in a salary sacrifice arrangement in relation to the acquisition of Units in accordance with the Plan. The Units provided to the Participants are substantially the same rights in respect of the Shares which are allocated to the Units as if the Participants were the legal owners of the Shares. Subject to the provisions of the Trust Deed, a Unitentitles the Participants to: • receive the income deriving from the Allocated Shares including dividends declared by the Directors at their discretion in respect of the Shares • to the extent that voting rights are attached to the Shares, direct the Trustee on how it should be exercised in any manner permitted by the Trustee, and • receive the Employee Redemption Amount on redemption. The Units may be issued to an associate of an Eligible Employee (and the associate will be a Participant under the Plan). The number of Units issued to a Participant will be determined by the Trustee with reference to the following factors: • role/responsibility- reflected by consideration of current role, with key metric including current base salary level (FTE), and • performance/KPIs an individual performance KPIs will be agreed and reviewed annually. The Trustee shall keep and maintain an up-to-date register of all Unit Holders. Units cannot be transferred or assigned or otherwise dealt with in favour of any person nor can any equitable, contingent, future or partial interest or other security interest be created in a Unit. Where the Shares are allocated to a particular Participant, any dividends that the Trustee receives as the result of holding those Shares in the Trust will flow-through to the relevant Participant. Where Shares remain unallocated in the Trust any dividends that the Trustee receives as the result of holding those Shares in the Trust will be retained as part of the capital of the Trust. The Trust Deed provides that if a Disqualifying Event occurs, the relevant Participant will forfeit any right or interest in the Units acquired for the benefit of the Participant under the Plan. "Disqualifying Event" is defined in the Trust Deed. Redemption clause The redemption clause provide that, subject to the Trust Deed, a Participant is only entitled to have their Units redeemed on the first to occur of the following events (or otherwise direct the Trustee to transfer the relevant Allocated Shares in accordance with the Trust Deed): a) the Participant or, if the Participant is an Associate, the relevant Eligible Employee, ceases to be employed by or otherwise providing services to the Company or any Associated Company (this only arises if the cessation of employment or provision of services does not give rise to the forfeiture of Units under the Trust Deed); b) the 15th anniversary of the acquisition of those Units by the Participant; and c) an Exit Event other than a Share Sale (noting that in the event of a Share Sale, the relevant Participant or Eligible Employee is entitled to the cash value of the Allocated Shares referable to their Units sold, net of any costs in relation to the selling of those Allocated Shares) An Exit Event means: a) a Listing - an initial public offering of an IPO Entity (as defined) to the official list of ASX Limited or another recognised stock exchange; b) a Business Sale - a sale to a third party purchaser of all (or substantially all) of the assets and business undertaking of the Group (including by way of a sale of shares of the Company's directly or indirectly owned Subsidiaries) provided that no sale or transfer undertaken to effect a corporate reorganisation of the Group will constitute a Business Sale; or c) a Share Sale - the sale by Shareholders (in one transaction or a series of connected transactions) to a third-party purchaser of all of the issued Shares provided that no sale or transfer undertaken to effect a corporate reorganisation of the Group will constitute a Share Sale. Upon redemption of such Unit the relevant Disqualification Discounts (if any) will apply to the Units redeemed, rounded up to the nearest whole number. 'Remaining Units' means the Units held by a Participant after the application of the Disqualification Discounts (if any). The Participant will be entitled to the rights and interests in the Remaining Units, and will forfeit any rights or interests in the Units that the Participant would, but for the application of the disqualification Discounts, have been entitled to. However, no Disqualifying Discounts are applicable to any Units: whose issue was funded by the Participant wholly by way of Employee's Contribution; or in the event that there is an Exit Event other than a Share Sale (that is there is accelerated vesting where the relevant redemption trigger is an Exit Event other that a Share Sale). Further, where an Exit Event that is a Share Sale occurs, then the Participant is entitled to the cash value of the Allocated Shares referable to their Units sold ignoring any Disqualification Discount that would otherwise arise in the event of a redemption at that time and net of any costs in relation to the sale of those Allocated Shares (that is, there is also accelerated vesting where the relevant redemption trigger is a an Exit Event by way of Share Sale). The holder of the Remaining Units in the event of cessation of employment or provision of services or in the event that the redemption trigger is the 15 th anniversary of the issue date of the relevant Units shall be entitled to direct the Trustee to either: (a) sell the Allocated Shares referable to the Remaining Units or Units held by the Trustee on behalf of the Participant and receive from the Trustee the Employee Redemption Amount (the cash value of the Allocated shares referable to the Remaining Units sold, net of any costs in relation to the selling of those Allocated Shares); or (b) transfer the Allocated Shares referable to the Remaining Units or Units held by the Trustee to the Eligible Employee or the Participant. (c) Continue to hold their Remaining Units. The Plan is operated in accordance with the above clause so that a participant may request delivery of the Shares or request that the Shares are sold on their behalf. However, the Shares or Employee Redemption Amount will not be transferred/paid until a 12 month period (bad leaver period) has passed and the employee is not found to be a bad leaver (e.g. an employee who within 12 months of cessation of their employment with the Employer commences employment with a competitor of the Employer). Disqualification Discounts are defined in the Trust Deed Entitlement Percentage are defined in the Trust Deed. Assumptions An Exit Event is not anticipated at the time of acquisition of the Units by Participants.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 6-10(1) | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1936 Subsection 177D(2) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Section 95

Reasons for decision: Summary: Amounts contributed to the Trustee by employees for the acquisition of additional employee units constitute capital receipts to the Trustee and are not included in the calculation of the net income for the Trust under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936). | Detailed Reasoning - Detailed reasoning: Section 95 of the ITAA 1936 defines net income in relation to a trust as follows, insofar as it is relevant: net income , in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions Assessable income includes both ordinary income and statutory income according to sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997). Ordinary income is income according to ordinary concepts. Statutory income is income that is not ordinary income but is included in assessable income because of a specific provision of the ITAA 1997 or ITAA 1936. | Detailed Reasoning - Ordinary income: Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. The expression " income according to ordinary concepts " is not a defined term. However, case law has identified certain factors which may assist in determining whether a receipt is properly characterised as income according to ordinary concepts. As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In GP International Pipecoaters v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 64 ALJR 392; (1990) 93 ALR 193; (1990) 21 ATR 1; 90 ATC 4413; [1990] HCA 25 ( Pipecoaters ), the High Court of Australia found that: To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt 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. The contributions made by employees to the Trust forms part of the corpus of the Trust that will be applied for the sole purpose of acquiring, or subscribing for, shares for the benefit of the Participants under the Plan. The contributions received by the Trustee are therefore of a capital character. | Detailed Reasoning - Statutory income: Section 10-5 provides a list of provisions of assessable income for section 6-10 purposes. None of the provisions apply to a cash contribution made by employees to a trust established under an employee share scheme (ESS). Therefore, the contributions made by the employees to the Trustee of the Trust to fund the acquisition or subscription to Shares are also not assessable income of the Trust pursuant to section 6-10 of the ITAA 1997. [1] In conclusion, the contributions made by employees for the acquisition of additional employee units constitute capital receipts to the Trustee and are not included in the calculation of the net income of the Trust under section 95 of the ITAA 1936. | Summary: Amounts contributed by the the Employer to the Trust for the benefit of employees constitute capital receipts to the Trust and are not included in the calculation of the net income of the Trust under section 95 of the ITAA 1936. | Detailed Reasoning - Detailed Reasoning: See Question 1 for detailed reasoning. Contributions by the Employer to the Trust pursuant to the Trust Deed constitute capital receipts to the Trust and are not included in the calculation of the net income of the trust estate under section 95 of the ITAA 1936. | Summary: Provided that the scheme is implemented as described in this ruling the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any tax benefit derived by the Trustee as a result of his participation in the Plan as described. | Detailed Reasoning - Detailed Reasoning:: A consideration of all the factors referred to in subsection 177D(2) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to participants in a form that promotes the Employer's business objectives, rather than to obtain a tax benefit. Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any tax benefit derived by any of the participants including the Trustee as a result of their participation in the Plan as described. [1] This view is consistent with ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme, which found that: ' The funds provided to the Trustee are used in accordance with the Trust Deed and Plan Rules for the sole purpose of and under the employee share scheme. The contributions constitute capital receipts to the Trustee, and are not assessable under sections 6-5 or 6-10 of the ITAA 1997'.

This ruling applies for the following period periods :