Private ruling: Employee share scheme
Date of advice: 23 August 2019
Published: October 2019

Ruling: Q1: Will the irretrievable payments by Company G or any subsidiary member of Company G to the Trustee to fund the acquisition of Company G shares by the Trust be assessable income of the Trust under sections 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 at the time when the employees become absolutely entitled to Company G shares (capital gains tax ('CGT') event E5), or when the Trustee disposes of the shares to the employees (CGT event E7), be disregarded under section 130-90 of ITAA 1997 if the employees acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee? | A2: Yes. The ruling applies for the following periods:

Relevant facts and circumstances: 1. Company G is an Australian resident company which operates an employee incentive plan (the Plan) as part of its remuneration strategy for employees of Company G and of any subsidiaries of Company G. The Plan is governed by the Plan Rules. 2. Employees who are eligible to participate in the Plan (Participants) will be granted with Performance Rights (Rights) to acquire shares in Company G. 3. Company G established the Trust administered by the Trustee to facilitate the acquisition, holding of and allocation of Company G shares to Participants. 4. The Plan operates as follows: · Rights with certain vesting conditions are offered by Company G to Participants for either nil consideration or if an exercise price is payable by Participants to exercise the Rights, it will not be more than the price paid for the shares by the Trustee. · Upon satisfactory completion of certain vesting conditions, Participants are eligible to exercise their vested Rights to be issued with shares in Company G · Company G or the subsidiaries will make irretrievable cash contributions to the Trust to enable the Trustee to acquire shares in Company G, to satisfy the exercise of Rights by participants · Company G shares are allocated by the Trust to Participants, and · Participants are entitled to hold or dispose of their shares in accordance with the Plan rules. 5. The Rights are subject to performance hurdles. 6. All dealings between the Participants, Company G, its subsidiaries and the Trustee which are conducted in accordance with the rules set out in the Plan and Deed are at arms-length. 7. Company G and its subsidiaries are not beneficiaries of the Trust and have no interest in the shares held by the Trustee. 8. The Trust will operate as follows: · The Trust will be managed and administered so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997). · The funds contributed will be used by the Trustee to acquire Company G shares either on-market or via a subscription for new shares in Company G, based on written instructions from Company G. · When the Trustee allocates Shares to the Participants share account, the shares will be held as Allocated Shares. At this point, the Participant becomes a beneficial owner of the Shares and is entitled to receive cash dividends in respect of the Shares held by the Trustee on behalf of the Participant. · Any dividend income received by the Trustee on Unallocated Shares will be treated as assessable income and taxed in the hands of the trustee. · The Trustee can use the after tax proceeds from dividends received on Unallocated Shares to purchase additional shares. · A dividend on Unallocated Shares cannot be paid to Company G. · The Trustee cannot pay dividends on Unallocated Shares to participants on the basis there is no present entitlement. 9. The contributions can be made by Company G (or any subsidiary of Company G) to the Trust in respect to all the following scenarios: · Before or at the same time as the acquisitions of relevant Rights s by the Participant and for the purpose of satisfying acquisitions made in the same income year. · Before the acquisitions of relevant Rights by the Participant and for the purpose of satisfying acquisitions to be made in a future income year (i.e. in excess of the number required to satisfy acquisitions made in the year of income). · After the acquisitions of relevant Rights by the Participant. 10. Company G may pay to the Trustee from its own resources any fees, commissions or remuneration and may reimburse such expenses incurred by the Trustee as Company G and the Trustee may agree from time to time. Relevant legislative provisions Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 6-10 Income Tax Assessment Act 1997 section 104-75 Income Tax Assessment Act 1997 section 104-85 Income Tax Assessment Act 1997 section 130-90 Reasons for decision All references below are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. Question 1 Summary The irretrievable payments made by Company G or any subsidiary to the Trustee to fund the acquisition of Company G shares by the Trust for the purposes of the Plan will not be assessable income of the Trust under sections 6-5 or 6-10. Detailed reasoning Sections 6-5 and 6-10 relevantly state the following: Section 6-5 Income according to ordinary concepts (ordinary income) 6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income . 6-5(2) If you are an Australian resident, your assessable income includes the * ordinary income you * derived directly or indirectly from all sources, whether in or out of Australia, during the income year. ... Section 6-10 Other assessable income (ordinary income) 6-10(1) Your assessable income also includes some amounts that are not ordinary income. Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5. ... Assessable income pursuant to subsection 6-5(1) includes amounts that are income according to ordinary concepts. The expression 'income according to ordinary concepts' is not defined by the income tax legislation, however the courts have considered a number of factors which indicate whether a receipt has the character of income according to ordinary concepts. Whether a particular receipt has the character of income or capital depends upon its quality in the hands of the recipient: Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 14 ATD 286; (1966) 10 AITR 367, GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 21 ATR 1; 90 ATC 4413. Under the present Plan and in accordance with the Trust Deed, Company G and any subsidiaries will make contributions to the Trust which will enable it to acquire shares to satisfy awards made to employees of Company G and any subsidiaries under the Plan. Whether assessable income of the Trustee The ATO-view on whether the irretrievable payments made by Company G and any subsidiary to the Trustee are characterised as income or capital receipts is set out in ATO Interpretative Decision ATO ID 2002/965 which states: The Trustee of the employee share scheme Trust will not be assessed under sections 6-5 or 6-10 of the ITAA 1997 on contributions made to it by an employer for the purpose of and under the employer's employee share scheme. ... The funds provided to the Trustee are used in accordance with the Trust Deed and Plan Rules ... The contributions constitute capital receipts to the Trustee, ... As the irretrievable payments made by Company G (or by any subsidiary of Company G) will constitute a capital receipt to the Trustee, the payments will not be included in assessable income under sections 6-5 or 6-10. Question 2 Summary A capital gain or capital loss that arises for the Trustee at the time when the Participant becomes absolutely entitled to Company G shares (CGT event E5), or when the Trustee disposes of the shares to the Participants (CGT event E7) will be disregarded under section 130-90 if the Participants acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee. Detailed reasoning Subsections 130-90(1) and 130-90(2) provide the following: 130-90(1) Disregard any capital gain or capital loss made by an employee share trust, or a beneficiary of the trust, to the extent that it results from a CGT event, if: (a) the CGT event is CGT event E5 or E7; and (b) the CGT event happens in relation to a share; and (c) the beneficiary had acquired a beneficial interest in the share by exercising a right; and (d) the beneficiary's beneficial interest in the right was an ESS interest to which Subdivision 83A-B or 83A-C (about employee share schemes) applied. 130-90(2) Subsection ... (1) does not apply if the beneficiary acquired the beneficial interest in the share for more than its cost base in the hands of the employee share trust at the time the CGT event happens. Definition of 'employee share trust' So that the Trustee may disregard any capital gain or capital loss arising from CGT Events E5 or E7 under section 130-90, the Trust must constitute an 'employee share trust' for the purposes of subsection 130-90(1). In accordance with the views set out in ATO Interpretative Decision ATO ID 2010/108, the Commissioner accepts that the Trust satisfies the definition of an 'employee share trust'. Disregarding the capital gain or capital loss Subsection 130-90(1) The Commissioner accepts in the present case that all conditions in subsection 130-90(1) will be satisfied on the basis that: · The CGT event will be CGT event E5 or E7 (paragraph 130-90(1)(a)) · The CGT event will happen in relation to a share (paragraph 130-90(1)(b)) · The beneficiary will acquire a beneficial interest in the share by exercising a right which includes the Rights and being allocated the share (paragraph 130-90(1)(c)), and · The Commissioner accepts that the performance hurdles will result in Subdivision 83A-C applying to the Rights, paragraph 130-90(1)(d)). Subsection 130-90(2) The Commissioner also accepts in the present case that subsection 130-90(2) will be satisfied on the basis that a beneficiary (or Participant) will not acquire the beneficial interest in the share for more than its cost base in the hands of the Trust at the time of CGT events E5 or E7. For some Rights, no amount is payable by employees for the acquisition of the Rights and no exercise price is payable by Participants to exercise their Rights. For other Rights, if an exercise price is payable by Participants to exercise the Rights, it will not be more than the price paid for the shares by the Trustee. Therefore, any capital gain or capital loss that the Trustee makes at the time when the Participants become absolutely entitled to the shares, by exercising Rights, will be disregarded under subsection 130-90(1).