Private ruling: Employee share scheme
Date of advice: 22 March 2019
Published: June 2019
Ruling period: Income tax year ended 30 June 20XX to 30 June 20XX

Ruling: Q1: Will the irretrievable contributions made to the Trustee of the Employee Share Trust (the Trust) established by the to fund the subscription for, or acquisition on-market of Company shares by the Trust to satisfy the Awards granted under the Company employee share plan (Plan) be assessable income of the Trust under section 6-5 or 6-10 of Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will a capital gain or capital loss that arises for the Trustee of the Trust at the time when either CGT event E5 or E7 happens in relation to Company held by the Trustee be disregarded under section 130-90 of the ITAA 1997 if the Eligible Employees acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee? | A2: Yes.

Relevant facts and circumstances: The Company is an Australian public listed company and the head company of tax consolidated group. The Company employee share Plan allows it to make offers to eligible employees (Participants) to acquire securities in the Company and to otherwise incentivise employees. The Plan The Plan is set out in the Plan Rules and broadly operates as follows: ● Eligible employees are invited to apply and participate in the Plan through the issue of a valid Offer by the Board, and ● The Board will advise each Participant of the information in connection with the Offer such as the type and number of Awards being offered, vesting conditions that apply, when the Awards may vest, the procedure for exercising an Option (including any exercise price that will be payable), circumstances in which Rights and/or Options will lapse, be forfeited or extinguished. Grant of Awards Unless the Board determines otherwise, no payment is required for the grant of the Awards. The Awards may not be registered in any name other than that of the Participant (or in the Trustee’s name in the case of Restricted Shares). The Awards will vest subject to the vesting conditions stipulated in the Offer. Subject to Plan Rule, as soon practicable following the Vesting of a Right, the Board must issue to, procure the transfer or automatic exercise to, or procure the setting aside for the Participant of the number of Shares in respect of which Rights have Vested. No further action is required on the part of the Participant. Subject to Plan Rules, as soon as practicable following the exercise of an Option, the Board must issue to, procure the transfer to, or procure the setting aside for the Participant of the number of Shares in respect of which Options have been exercised. No further action is required on the part of the Participant. Pursuant to Plan Rules, a Right will lapse upon the earliest to occur of: (a) the Right lapsing in accordance with a provision of these Rules (including in accordance with a term of an Offer) (b) failure to meet a Vesting Condition or any other condition applicable to the Right within the Vesting Period, or (c) 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. Pursuant to Plan Rules, an Option will lapse upon the earliest of: (a) 7 years after Vesting or any other date nominated as the expiry date in the Offer (b) the Option lapsing in accordance with a provision of these Rules (including in accordance with a term of an Offer) (c) failure to meet a Vesting Condition or any other condition applicable to the Option within the Vesting Period, or (d) 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. Restricted Share becomes a share (i.e. vests) where the vesting conditions are met or otherwise waived by the Board, and the Company notifies the Participant that the restrictions is respect of the Restricted Shares have ceased or no longer apply. Where a Restricted Share held by the Trustee on behalf of a Participant ceases to be a Restricted Share, the Trustee will continue to hold the share on trust on behalf of the Participant until such time as the Participant or the Company on behalf of the Participant, directs the Trustee to transfer the share into the Participant’s name or otherwise dispose of the share. Pursuant to Plan Rules, a Restricted Share will be forfeited upon the earliest of: (a) the Restricted Share being forfeited in accordance with a provision of the Plan Rules (including in accordance a term of an Offer) (b) failure to meet a vesting condition or any other condition applicable to the Restricted Share within the vesting period, or (c) the receipt by the Company of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Restricted Share. The Trust The Company established a trust (the Trust) under the Company Employee Share Trust Deed (the Trust Deed) and The Trustee was appointed to administer the Trust. Background A of the Trust Deed states that the Trust was established for the purpose of acquiring, holding and transferring Shares in connection with equity incentive plans established by the Company for the benefit of participants in the Plan. Clause 3.1 of the Trust Deed states that the Trustee must hold a Participant’s Allocated Shares, the proceeds arising from any sale by the Trustee of rights under a Rights Issue relating to a Participant’s Allocated Shares and all other benefits and privileges related to or arising from a Participant’s Allocated Shares on trust for and on behalf of the Participant under the terms of the Trust Deed. Clause 4.3 of the Trust Deed states that the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration for operating or administering the Trust. However, clause 4.3 of the Trust Deed recognises that the Company must pay to the Trustee from Company’s own resources any such fees, commission or other remuneration and may reimburse such expenses incurred by the Trustee as agreed from time to time by the Company and the Trustee. Clause 4.9 of the Trust Deed states 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 subsection 130-85(4) of the ITAA 1997. Clause 5.1 of the Trust Deed states that the Board ● May by notice in writing (Dealing Notice) instruct the Trustee from time to time to: - Subscribe for, purchase or allocate a number of Shares specified in the Dealing Notice to be held by the Trustee as Allocated Shares in respect of an identified Participant or Participants - Subscribe for, purchase or allocate a number of Shares specified in the Dealing Notice to be held by the Trustee as Unallocated Shares - Participate in any Rights Issue in respect of a Trust Share - Dispose of any rights issued under any Rights Issue in respect of a Trust Share. ● Must in a Dealing Notice requiring the Trustee to incur costs in connection with the relevant dealing: - Offer to have one or more members of the Group provide funding (whether by capital contribution, loan or otherwise) to the Trust for the purpose of meeting such costs - Require the Trustee to apply some of the available capital of the Trust for the purpose of meeting such costs - Effect a combination of the above. Clause 5.2 of the Trust Deed states that if the Trustee on receiving a Dealing Notice has received sufficient funds or has sufficient capital then it must: ● Purchase the requisite number of Shares on behalf of the relevant Participant or Participants or beneficiaries of the Trust generally ● Subscribe for the requisite number of Shares on behalf of the relevant Participant or Participants or beneficiaries of the Trust generally ● Allocate any Unallocated Shares to one or more Participants, or ● Participate in any Rights Issues in respect of a Trust Share, or ● Dispose of any rights issued under any Rights Issue in respect of a Trust Share, or ● Effect a combination of the above. Clause 7.4 of the Trust Deed states that if the Trustee subscribes for Shares, on behalf of a Participant, the Trustee must hold those Shares as Allocated Shares for that Participant. Clause 9.3 of the Trust Deed states that the Trustee must do all things required by it to transfer some or all of a Participant’s Allocated Shares to the relevant recipient and pay to the Participant any other monies held on the account for the Participant: ● On receipt of a valid Withdrawal Notice that has been approved by the Board ● Where required to do so by the LTIP Rules and Terms of Participation ● If the Trust is terminated, or ● If the Trustee so determines following a written instruction from the Board. Clause 10 of the Trust Deed states that upon the sale of any Allocated Shares the Trustee must apply the proceeds of sale: ● First, in payment of any brokerage and other third party costs and expenses of the sale incurred or to be incurred by the Trustee, and ● Second, the balance (if any) in payment to the relevant Participant. Clause 13 of the Trust Deed states that the Company indemnifies the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in the execution or purported execution of powers, authorities or discretions vested in the Trustee under the Trust Deed.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 95 | 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 1997 Division 83A | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 subsection 83A-20(1) | Income Tax Assessment Act 1997 subsection 104-75(3) | Income Tax Assessment Act 1997 subsection 104-85(3) | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 paragraph 130-85(4)(a) | Income Tax Assessment Act 1997 paragraph 130-85(4)(b) | Income Tax Assessment Act 1997 paragraph 130-85(4)(c) | Income Tax Assessment Act 1997 section 130-90 | Income Tax Assessment Act 1997 subsection 130-90(1) | Income Tax Assessment Act 1997 paragraph 130-90(1)(b) | Income Tax Assessment Act 1997 paragraph 130-90(1)(c) | Income Tax Assessment Act 1997 paragraph 130-90(1)(d) | Income Tax Assessment Act 1997 subsection 130-90(2) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Section 95 of the Income Tax Assessment Act 1936 (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 … Under subsection 6-5(1), assessable income includes income according to ordinary concepts, which is called ordinary income. 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. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. Under subsection 6-10(1), assessable income also includes some amounts that are not ordinary income. These are included by provisions about assessable income listed under section 10-5. None of the provisions listed in section 10-5 are relevant in the present circumstances. In ATO Interpretative Decision ATOID 2002/965, Income Tax – Trustee not assessable on employer contributions made to it under the employee share scheme, the Commissioner has expressed a view that the funds provided to the trustee of the employee share scheme trust constitute capital receipts to the trustee, and not assessable under sections 6-5 or 6-10. Therefore, the irretrievable cash contributions made by the Company to the Trustee to fund the acquisition of the shares in accordance with the LTIP Rules and the Trust Deed will not be assessable income pursuant to section 6-5 or 6-10. | Detailed Reasoning - Shares held to satisfy the future exercise of rights acquired under ESS: Subsection 130-90(1) applies to 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. Subsection 130-90(2) states that 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. In determining whether subsection 130-90(1) applies to the Trust, it is necessary to consider whether the Trust is an ‘employee share trust’ as defined under subsection 130-85(4). | Detailed Reasoning - Employee Share Trust: The term ‘employee share trust’ referred to in section 130-90 is defined in subsection 995-1(1) as having the same meaning given by subsection 130-85(4). Under subsection 130-85(4), an employee share trust, for an employee share scheme (having the meaning given by 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 defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employee’s employment. The Plan in this case is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which the right to acquire shares in the Company is provided to Participants in relation to their employment with the Company. An ‘ESS interest’ in a company is defined in subsection 83A-10(1) as a beneficial interest in a share in the company or a right to acquire a beneficial interest in the company. Under the terms of the Trust Deed, the Trust was established by the Company for the sole purpose of obtaining Company shares to satisfy the exercise of vested Awards and for the benefit of Participants, including acquiring, holding and transferring of Company shares under the Plan for the benefit of the Participants. All Participants are employees of the Company. Therefore, the Awards are ‘ESS interests’ within the meaning provided in subsection 83A-10(1). Accordingly, paragraphs 130-85(4)(a) and (b) are satisfied because: ● the employee share trust acquires shares in Company, and ● the employee share trust ensures that ESS interests as defined in subsection 83A-10(1), being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2), by allocating those shares to the employees in accordance with the LTIP Rules and the Trust Deed. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) will require the Trustee to undertake incidental activities that are a function of managing the Plans and administering the 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 merely incidental. ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c): ● the opening and operation of a bank account to facilitate the receipt and payment of money ● the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee ● the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme ● dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme ● the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares ● the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries and ● receiving and immediately distributing shares under a demerger. In this case, pursuant to Clause 4.1 of the Trust Deed, the Trustee has the power to do all other activities, which the Trustee considers necessary or expedient to administer and maintain the Trust and the Trust Assets. These other activities include, for example to open and operate a bank account; to receive dividends or distributions on shares; to employ, remove or suspend custodians, trustees, managers, employees or other agents; and to take and act upon the advice of legal or professional adviser. Under clause 4.9 of the Trust Deed, 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). On this basis, the Trust is an employee share trust, as defined in subsection 995-1(1), as the activities of the Trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and (b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). | Detailed Reasoning - CGT event E5 or CGT event E7 happens in relation to a share: CGT event E5 happens where a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee, the trustee will make a capital gain or capital loss under subsections 104-75(3). CGT event E7 happens where the trustee of the trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary’s interest in the trust capital, the trustee will make a capital gain or capital loss under subsection 104-85(3).’ Subsection 995-1(1) defines a ‘share’ in a company to mean a share in the capital of a company. A share in the Company held by the Trustee and to which a Participant is entitled upon vesting or exercise of an Award is a share in the capital of the Company. Accordingly, paragraph 130-90(1)(b) is satisfied. | Detailed Reasoning - The beneficiary acquired a beneficial interest in the share by exercising a right: Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a share in the Company by exercising an Award granted under the Plan. | Detailed Reasoning - 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: 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. The term ‘employee share scheme’ is defined in subsection 83A-10(2) as follows: 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 For the purposes of subsection 83A-10(2), subsection 995-1(1) defines the term ‘scheme’ as follows: Scheme means: (a) any arrangement; or (b) 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 that is an Award to acquire a beneficial interest in a share of the Company is provided to Participants in relation to their employment by the Company. The Awards are acquired under the Plans at no cost and will vest into shares subject to satisfaction of Vesting Conditions. Subdivision 83A-B will apply to Awards acquired under the Plan as pursuant to subsection 83A-20(1) the ESS interests, (Awards issued under the Plan), will be acquired under an employee share scheme at a discount. It should be noted however that 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 this circumstance, subparagraph 130-90(1)(d) will be satisfied. Accordingly, all the conditions in subsection 130-90(1) have been satisfied. Provided that the beneficiary does not acquire the beneficial interest in the Company share for more than its cost base in the hands of the Trustee at the time that CGT event E5 or E7 happens, subsection 130-90(1) will apply to disregard the capital gains or losses that arises for the Trustee.

Reasons for decision: Legislative references in this Ruling are to provisions of the ITAA 1997, unless otherwise indicated.