Private ruling: Employee Share Trust Schemes
Date of advice: 10 August 2017
Published: November 2017
Ruling period: Income tax year ended 30 June 2017 | Income tax year ending 30 June 2018 | Income tax year ending 30 June 2019 | Income tax year ending 30 June 2020 | Income tax year ending 30 June 2021 | Income tax year ending 30 June 2022
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the irretrievable payments by Company A or any Employer Entities of Company A’s income tax consolidated group headed by Company A to the Trustee to fund the acquisition of Company A shares by the Trust for the purposes of the Plans be assessable income of the Trust under sections 6-5 or 6-10 of the 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 Participants become absolutely entitled to Company A shares (capital gains tax (CGT) event E5), or when the Trustee disposes of the shares to the Participants (CGT event E7), be disregarded under section 130-90 of ITAA 1997 if the Participants 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: 1. Company A is an Australian resident company and is the head entity of the Company A income tax consolidated group. It operates employee share plans (the Plans) as part of its remuneration strategy. 2. Company B (the Trustee) is the trustee of Company A Employee Share Trust (the Trust) which will be used to acquire shares to satisfy awards of Performance Rights and Options issued under the Plans. 3. The purpose of the Plans is to reward, retain and motivate employees by providing an opportunity for them to receive shares whilst also aligning them to the long-term goals of the organisation and the creation of shareholder value. 4. The commercial reasons for establishing the Trust include: ● The use of an Employee Share Trust arrangement is sanctioned by the income tax law if the Trust is used for the sole purpose described in subsection 130-85(4) of the ITAA 1997. ● The provision of Company A shares and acquisition by the Trustee on behalf of the Trust assists Company A with meeting its Corporations Law requirements in relation to dealing in its own shares. ● Allows Company A to outsource the operation of its Plans to a licensed Trustee. ● Allows for the operation of disposal restrictions on the Company A shares that vest through the Plans. ● The Trust forms part of Company A’s wider capital management policy and provides capital management flexibility by allowing for on market purchases of shares using cash or a new issue of shares by Company A where cash is retained. ● The Trust provides Company A with an efficient mechanism for the administration and operation of any new employee incentive plans which it introduces in the future. 5. The participants in the Plans are employees and executives (Participants) of Company A and its wholly owned Australian subsidiaries (Employee Entities). 6. Employees and executives (including their associates) of Company A’s non-resident subsidiaries will not be Participants in the Plans. 7. All dealings between the Participants, Employer Entities and the Trustee which are conducted in accordance with the rules set out in the Plans and Deed are at arms-length. 8. Under the Plans, eligible employees (Participants) are granted Rights or Options to acquire Company A shares subject to certain conditions are met. 9. The Plans broadly operates as follows: ● The Plans allows Company A to grant Performance Rights and Options to eligible employees to acquire Shares for nil consideration subject to Vesting Conditions as determined by the Board in its absolute discretion and as specified in the Offer for the Performance Right or Option. ● It is at the absolute discretion of the Board of Company A to extend an invitation to grant Performance Rights or Options to eligible employees. ● Accordingly, once all conditions on the Performance Rights or Options, as determined by the Board have been satisfied, the vested Performance Rights or Options may be exercised and Company A will provide a Dealing Notice to instruct the Trustee to allocate Shares to the Participant’s share account. 10. Company A is not a beneficiary of the Trust and it has no interest in the shares held by the Trustee. 11. 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 Trust will be funded by contributions from Company A and the Employee Entities for the purchase of Company A shares in accordance with the Plans. ● The funds contributed will be used by the Trustee to acquire Company A shares either on-market or via a subscription for new shares in Company A, based on written instructions from Company A. ● 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 would 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 in future. ● A dividend on Unallocated Shares cannot be paid to Company A. ● The Trustee cannot pay dividends to participants on Unallocated Shares on the basis there is no present entitlement. 12. The contributions can be made by Company A (or the Employee Entities) to the Trust in respect to all the following scenarios: ● Before or at the same time as the acquisitions of relevant Performance Rights or Options by the Participant and for the purpose of satisfying acquisitions made in the same income year. ● Before the acquisitions of relevant Performance Rights or Options 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 Performance Rights or Options by the Participant. 13. Company A will incur various costs in relation to the implementation and on-going administration of the Trust. For example, Company A will incur costs associated with the services provided by the Trustee, including but not limited to: ● Employee plan record keeping; ● Production and dispatch of holding statements to employees; ● Provision of annual income tax return information for employees; ● Costs incurred in the acquisition of shares on market (e.g. brokerage costs and the allocation of such shares to participants); ● Management of employee termination; and ● Other trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust. 14. Company A 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 and the Trustee may agree from time to time 15. In addition to the services to be provided by the Trustee, Company A has incurred and will incur various costs, including the services provided by Company A’s accounting and legal advisors.

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 130-90

Reasons for decision: Summary: In this scheme, the irretrievable contributions provided by Company A to the Trustee of the Trust are used in accordance with the terms of the Deed and the Plans’ Rules. The Deed states that the Trustee will hold on Trust all Company A’s shares and all other benefits and privileges arising from these shares for the benefit of Participants on the terms and conditions set out in the Deed. The Deed states that all funds received by the Trustee from Company A will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee. The Trustee must apply the irretrievable contributions received for the acquisition or subscription of Company A’s shares under the Deed and the Plans. No Participant is entitled to receive such funds from the Trustee. The principle in ATO ID 2002/965 Income Tax -Trustee not assessable on employer contributions made to it under the employer's employee share scheme is applicable to the irretrievable contributions made by Company A as they will not be received as ordinary income but rather in the nature of capital receipts forming corpus of the trust. Therefore the irretrievable contributions by Company A or any subsidiary member of Company A’s income tax consolidated group headed by Company A to the Trustee to fund the acquisition of Company shares by the Trust for the purposes of the Plans will not be assessable income of the Trust under sections 6-5 or 6-10. The conditions under paragraphs 130-85(4)(a) and (b) are satisfied as the Trust acquires shares in Company A and the Trust ensures the ESS interests in Company A (beneficial interests) are provided under an ESS by allocating Company A shares to the employees in accordance with the Deed and Plans. The Trust also satisfies paragraph 130-85(4)(c) as the activities undertaken by the Trustee other than those set out in paragraphs 130-85(4)(a) and (b) are merely incidental to the operation of these Plans. A capital gain or capital loss that arises for the Trustee at the time when the Participants become absolutely entitled to Company A shares (capital gains tax (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.

Reasons for decision: All references below are to the Income Tax Assessment Act 1997 unless otherwise stated.