Private ruling: Employee share trust
Date of advice: 18 August 2021
Published: October 2021

Ruling: Q1: Will the irretrievable payments by Company A to the Trustee to fund the acquisition of Company A 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 A 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

Relevant facts and circumstances: Company A is an Australian listed company which undertakes its primary business activities through a number of wholly owned subsidiaries. Company A's remuneration strategy and framework has been designed to align the interests of employees with shareholder interests. Company A is committed to developing and maintaining a strategy and framework which is designed to attract, retain, motivate and reward employees of the business. In addition to wages and salaries, Company A offers its employees cash bonuses and equity based short term incentives and long term incentives to encourage loyalty and prolonged employee excellence. Performance Rights Plan The Performance Rights Plan is designed to provide a long-term incentive to eligible employees to acquire Performance Rights and ultimately Shares. Selected eligible employees are provided with an invitation to participate in the Performance Rights Plan. A Performance Right represents an unrenounceable right, subject to vesting, to be issued, transferred or allocated one Share. Eligible employees, at their discretion, may accept the invitation constituted by an offer, in whole or in part. Upon the issue of a Performance Right to an eligible employee, that eligible employee becomes a Participant and is bound by the rules of the Performance Rights Plan. Except where a Performance Right has been transferred under the Performance Rights Plan Rules, Performance Rights held by a Participant are personal to the Participant and may not be exercised by any other person. A Participant shall have no interest in a Share which is the subject of a Performance Right held by the Participant unless and until the Share is issued or transferred to that Participant. Furthermore, a Participant will not have any right to attend or vote at general meetings of Shareholders, by virtue of holding that Performance Right. Performance Rights granted to a Participant under the Performance Rights Plan may not be transferred, mortgaged, charged or otherwise dealt with by a Participant, other than in accordance with the terms of the Performance Rights Plan. Any such dealing will not be recognised by Company A unless the Plan Committee consents to such action or the assignment or transfer occurs by legal operation upon the death or legal incapacity to a Participant's legal personal representative. Performance Rights may be exercised: • at any time commencing on the first Exercise Date and ending on the last Exercise Date for that Performance Right (Exercise Period) • when the Exercise Conditions (i.e. performance, vesting and/or other conditions applicable) specific to those Performance Rights are determined by the Plan Committee to be satisfied, reached or met. The Plan Committee may, at its discretion, by notice to the Participant reduce or waive the Exercise Conditions attaching to a Performance Right in whole or in part at any time and in any particular case, and • when the Participant delivers a signed Notice of Exercise and pays the Performance Right Exercise Price (if applicable) to or as directed by Company A, at any time prior to the last Exercise Date to exercise the Performance Right. Upon Exercise of a Performance Right: • the Trustee must subscribe for, or acquire the relevant number of Shares to be held for and on behalf of the Participant, as relevantly set out in the Notice of Exercise, and • Company A may issue a Certificate stating the remaining Performance Rights held by that Participant. All Shares issued, transferred and/or allocated upon the exercise of Performance Rights will rank equally in all respects with all existing Shares on issue. A Share may not be transferred, mortgaged, charged or otherwise dealt with by a Participant, other than in accordance with the terms of the Performance Rights Plan. Subject to satisfaction of any condition and/or Disposal Restriction, a Participant may submit a Withdrawal Notice to the Plan Committee in respect of some or all of the Shares the Trustee holds on behalf of a Participant. At this point, if the Plan Committee approves the Withdrawal Notice, the Trustee must transfer legal title of the Shares to the Participant in accordance with the terms of the approved Withdrawal Notice. Where the Trustee holds Shares on behalf of a Participant following the exercise of the Performance Right: • the dividends payable on those Shares will be paid to the Trustee, and the Trustee will then pay any such dividends to the Participant, and • the Participant may exercise any voting rights attaching to those Shares held by the Participant (or the Trustee for and on behalf of the Participant). If a Participant, ceases to be an employee and has any Performance Rights which remain unvested, those unvested Rights will lapse, as determined by the Plan Committee. Where a Participant ceases to be an employee and has Shares held by the Plan, the Plan Committee in its discretion, may specify to the Participant how their Shares will be treated. This will vary depending on the circumstances in which the Participant's employment ceases. Subject to applicable laws, in the event of a reorganisation of the issued capital of Company A (whether before or during the Exercise Period) then the Performance Rights of a Participant (including the number of Performance Rights to which each Participant is entitled or the Exercise Price) will be changed to the extent necessary to comply with the Listing Rules applying to a reorganisation of capital at the time of the reorganisation. Performance Rights are granted for nil consideration, unless otherwise determined by the Plan Committee. Incentive Plan The Incentive Plan is designed to provide Participants with the opportunity to acquire Shares, for nil consideration, as part of the remuneration for their services as eligible employees. Selected eligible employees are provided with an invitation to participate in the Incentive Plan whereby eligible employees are invited to acquire Shares for nil cost. Shares are then allocated to a Participant to be held on their behalf in the Trust subject to restriction, until such time as the Vesting Conditions attaching to the Shares have been satisfied. After such time, the Trustee will transfer the legal title of the Shares to the Participant. Eligible employees, at their discretion, may accept the invitation constituted by an offer, in whole or in part. Upon the allocation of Shares to an eligible employee that eligible employee becomes a Participant and is bound by the rules of the Incentive Plan. Unvested Shares granted to a Participant under the Incentive Plan may not be transferred, mortgaged, charged or otherwise dealt with by a Participant. Any such dealing will be treated as void, unless the Plan Committee consents to such action or the assignment or transfer occurs by legal operation upon the death or legal incapacity to a Participant's legal personal representative. From the date of issue, the Shares will entitle the Participant to the same benefits as other Shareholders, such as distributions and voting rights. Subject to the Incentive Plan Rules, Participants may direct the Trustee to exercise any rights and benefits attached to the Shares. Shares allocated under the Incentive Plan may be subject to an ongoing holding lock even where the Shares vest (Holding Lock). If the Shares are subject to a Holding Lock, once the Holding Lock has been lifted, the Shares will be released and a Participant will be free to deal with the Shares in accordance with the Incentive Plan Rules. The Holding Lock can be lifted in certain limited circumstances. Shares will become vested if: • the Vesting Conditions and/or other conditions applicable to those Shares have been determined by the Plan Committee to be satisfied, deemed to be satisfied or are not required to be satisfied under the Incentive Plan Rules • If the offer for Shares held by a Participant did not specify any Vesting Conditions, the Shares will become vested on and from the vesting date specified in the offer (or any earlier date determined by the Plan Committee). Within a reasonable period after the Shares become vested, the Plan Committee must give the Participant a Vesting Notice advising that the Shares have become Vested. Upon receipt of a Vesting Notice, Company A will instruct the Trustee to transfer the legal title to the Shares to the Participant and will procure that Company A's share registrar issues a holding statement to the Participant in respect of the Shares. In the event the Vesting Conditions have not been satisfied, the Unvested Shares will be forfeited. Where a Participant ceases employment, Unvested Shares will remain on foot unless the Plan Committee (in its sole and absolute discretion) determines otherwise in the offer or any time before or after cessation of employment of the Participant within the Group. Subject to the terms specified in the offer and unless otherwise determined by the Plan Committee (at any time), some or all of any Unvested Shares held by a Participant that have not otherwise been forfeited under the Plan Rules, will be forfeited upon the earliest to occur of: • if, and with effect from the date on which the Participant ceases employment, where the Plan Committee determines the Participant's Unvested Shares should be forfeited because of the circumstances in which the Participant's employment ceased • where a Corporate Control Event occurs. Subject to the Incentive Plan Rules and Applicable Laws, where a Change of Control Event (defined in the Incentive Plan Rules) occurs, the Plan Committee may determine the manner in which any or all of a Participant's Unvested Shares will be dealt with • 10 years after the Date of Grant for the Share, or any other date nominated as the expiry date in the offer. Exempt Employee Plan The Exempt Plan is designed to provide eligible employees with the opportunity to acquire Shares as part of the remuneration for their services. The Exempt Plan in its terms and operation, and Shares acquired by Eligible Employees under the Plan, shall satisfy the Exemption Conditions so as to permit the application of section 83A-35(1) to Participants to whom section 83A-35(2)(b) applies. Without limiting the foregoing, the Plan shall be operated and offers must be issued on a non-discriminatory basis within the meaning of section 83A-35(6). Selected eligible employees are provided with an invitation to participate in the Exempt Plan whereby eligible employees are invited to acquire Shares to the approximate value of $1,000 to recognise Company A's performance in the last financial year. Eligible employees, at their discretion, may accept the invitation by providing a duly completed application to the Plan Committee by the Final Acceptance Date. Upon the allocation of Shares to an eligible employee, that eligible employee becomes a Participant and is bound by the rules of the Exempt Plan. Shares are then allocated to a Participant to be held on their behalf by the Trustee during the Restriction Period. The Restriction Period will run from the Date of Allocation until the earlier of: • three years from the Date of Allocation; and • the date on which the Participant ceases employment with Company A. After such time, the Company must direct, in writing, the Trustee to release the relevant Shares and transfer the legal title of the Shares to the Participant. From the Date of Allocation, Participants are entitled to the same benefits as other Shareholders in Company A, such as distributions and voting rights. Subject to the Exempt Plan Rules, Participants may direct the Trustee to exercise any rights and benefits attached to the Shares. Shares allocated to a Participant under the Exempt Plan may not be transferred, mortgaged, charged or otherwise dealt with by a Participant, other than in accordance with the terms of the Exempt Plan, unless the Plan Committee consents to such action or the assignment or transfer occurs by legal operation upon the death or legal incapacity to a Participant's legal personal representative. Employee Share Trust The Trust was established as a sole purpose trust for obtaining Shares for the benefit of participants in Employee Share Plans and any Future Plans. The Trust provides Company A with greater flexibility to accommodate the incentive arrangements of Company A both now and into the future as the group continues to expand its operations. The Trust provides capital management flexibility, in that the Trust can use the contributions made by Company A either to acquire Shares on market, in an off-market transaction or alternatively to subscribe for new Shares in Company A. The Trust provides an arm's length vehicle through which Company A Shares can be acquired and held on behalf of employees. This allows Company A to satisfy the requirements contained in the Corporations Act 2001 relating to companies dealing in their own shares. The Trustee of the Trust is an independent third party. Company A will pay the Trustee's costs of operation to the extent they relate to the operation of the Trust which will facilitate the Plans. The Trustee is required to comply with the rules of the Plans and holds the Settlement Sum and all other property including but not limited to money or Shares (Fund) that may be paid, transferred or credited to the Trust, on trust for all Participants in accordance with the Trust Deed. The Trust is funded by contributions from Company A (i.e. for the purchase of Shares in accordance with the terms of the Plans). The Trustee uses the Funds to subscribe for, or acquire Company A Shares, based on notification from the Plan Committee. The Trustee is required to allocate Shares to Participants and hold these on trust on their behalf in accordance with the terms of the Plans. Company A may instruct the Trustee to subscribe for, or acquire a number of Shares to be held by the Trustee on an unallocated basis on trust for participants generally. If Shares are held by the Trustee on behalf of a Participant, the Trustee may apply any income it receives (including, but not limited to, dividends, distributions and returns of capital) in the manner directed by the Participant or as otherwise provided in the rules of the Plans. During any Restriction Period, the Trustee and the Participant must not assign, transfer, sell or grant an Interest in or over, or otherwise deal with Shares, without the express consent of the Boards or Plan Committee in accordance with the relevant rules of the Plans. The Trustee can sell Shares on behalf of a Participant where permitted to do so by the Participant. The Trustee may exercise voting rights on behalf of a Participant who has Shares held in the Trust, where directed to do so. Company A must ensure the Trustee has the necessary funds to do any act requested by the Board/Plan Committee and to enable the Trustee to pay any costs and expenses incurred in accordance with the Trust Deed. Company A is not permitted to be a beneficiary of the Trust (nor may it become a beneficiary), nor does it have any proprietary right or interest in any of the Shares acquired by the Trustee. Contributions to the Trust Company A does not and will not pay cash contributions to the Trustee prior to the issue of Performance Rights or Shares under the Plans to Participants. Company A will wait until vesting and to receive the Notice of Exercise from Participants before providing the Trustee with the cash contributions necessary to satisfy the acquisition/ subscription of Shares. However, where it makes commercial sense to do so, Company A may make cash contributions to the Trust prior to vesting.

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: Summary: The irretrievable payments made by Company A to the Trustee to fund the acquisition of Company A 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. | Detailed Reasoning - Detailed reasoning: Sections 6-5 and 6-10 relevantly state the following: | Detailed Reasoning - 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. ... | Detailed Reasoning - 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. ... Pursuant to subsection 6-5(1), assessable income 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 Plan Rules and in accordance with the Trust Deed, Company A makes and will make contributions to the Trustee which will enable the acquisition of Shares to satisfy awards made to employees of Company A under the Plan. The Commissioner's view on whether the irretrievable payments made by Company A 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 which Company A makes constitute capital receipts to the Trustee, the payments will not be included in assessable income of the Trust under sections 6-5 or 6-10. | Summary: A capital gain or capital loss that arises for the Trustee at the time when the Participants become absolutely entitled to Company A 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 - Detailed reasoning: Pursuant to section 102 - 20, an entity makes a capital gain or loss if, and only if, a CGT event happens. 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. Under subsection 104-85(1), CGT Event E7 happens if a trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest in the trust capital. In order 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). Subsections 130 - 90(1) and 130 - 90(2) provide the following: | Detailed Reasoning - 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' Based on the information provided in the Relevant facts and circumstances in the Notice of private ruling, and in accordance with the views set out in Taxation Determination TD 2019/13, 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 (Participant) will acquire a beneficial interest in the share) by exercising a right which includes the Performance Rights and being allocated the Share (paragraph 130-90(1)(c)), and • As the Performance Rights are provided at a discount and are subject to performance hurdles, the Commissioner accepts that the Performance Rights will be subject to Subdivision 83A-B or Subdivision 83A-C (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, as the beneficiary (Participant) does not acquire the beneficial interest in a Share for more than its cost base in the hands of the Trust at the time of CGT events E5 or E7. We note that for Performance Rights under the Performance Rights Plan, no amount is payable by Participants for the acquisition of the Performance Rights and no exercise price is typically payable by employees to exercise their Performance Rights. Any capital gain or capital loss that the Trustee makes at the time when the Participants become absolutely entitled to the Shares by exercising Performance Rights, will be disregarded under subsection 130 - 90(1).

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