Private ruling: Employee share schemes
Date of advice: 31 July 2020
Published: September 2020
Ruling period: Year ending 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx

Ruling: Q1: Will the irretrievable cash contributions made by Company A to the Trustee to fund the acquisition of Company A shares by the Trust for the purposes of the Existing PRP and New PRP (collectively as Performance Rights Plan (the "PRP")) 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 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: This ruling is based on the facts stated in the description of the scheme that is set out below, including the following documents, or relevant parts of them, which are to be read with the description: · Trust Deed · Amended Trust Deed · Incentive Plans · Invitation letter templates. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Company A is an Australian listed company and is the head company of the Company A tax consolidated group ("GCG"). Company A's overall remuneration strategy adopts the use of fixed remuneration and variable remuneration comprising short term incentives ("STIP") (such as cash bonuses and performance rights) and long-term incentives of performance rights ("LTIP"). The STIP is delivered by the New PRP. The LTIP is delivered by Existing PRP. The establishment of the Trust provides Company A greater flexibility to accommodate its incentive arrangements. Incentive Plans The objective of Company A's executive remuneration framework is to ensure reward for performance is competitive and appropriate for the results delivered. Additionally, in its ongoing efforts to maintain a productive and motivated work environment, the Board believes that the implementation of incentive plans will serve a number of purposes, including: · To act as a key retention tool; and · To focus attention on future shareholder value generation. Company A's overall remuneration strategy adopts the use of fixed remuneration and variable remuneration comprising short term incentives (such as cash bonuses and performance rights) and long-term incentives of performance rights. The PRP is a key part of Company A's executive remuneration framework for key management personnel in Australia. The grant of Incentives does not automatically entitle an Incentiveholder to a Share. The actual number of Shares to which the Incentiveholder may become entitled will depend on the satisfaction of one or more of the Vesting Conditions (as determined by the Board), during the relevant performance period and the operation of the PRP rules. 1. Existing PRP Rules The Existing PRP was approved by Shareholders and then amended by resolution of the Board. The Existing PRP Rules provide the terms and conditions under which the Performance Rights are governed. Broadly, the Existing PRP Rules operate as follows: · Unless the Board otherwise determines, no payment is required for a grant of the Incentives. Incentive means the right to receive shares. · Incentiveholders (as defined as an Eligible Employee of the Company A Group or their nominee to whom Incentives have been granted under the PRP) are issued Invitations by the Board (at their absolute discretion), to apply for up to a specified number of Incentives with Exercise Price of zero. If the Board grants Incentives with exercise price of $0, then those Incentives may be referred to as 'Performance Rights'. These Performance Rights vest according to performance criteria (also referred to as "Vesting Conditions") · The satisfaction of the Vesting Conditions shall determine the proportion of Incentives which vest and become exercisable to the Incentiveholder. An Incentive will vest when a Vesting Notice in respect of that Incentive is given or is deemed to be given to the Incentiveholder. Thereafter, in the case of manual exercise, the Participant must deliver an exercise notice to the Company, specifying the number of vested Incentives being exercised and this exercise notice must be accompanied by payment of the Exercise Price (if any). In the case of automatic exercise of an Incentive, that Incentive will be deemed to be automatically exercised on the first Business Day following the date of provision of the Vesting Notice (subject to the prior payment of the Exercise Price, if any). · As soon as practicable after an Incentive under the PRP has been exercised, the Company must allot and issue to the Incentiveholder or their personal representative (as the case may be) the number of Shares in respect of which the Incentive has been exercised. · All Shares allotted will rank equally with the other shares then on issue. · If there is a Change of Control event, a winding-up of the Company, or upon an Incentiveholder having their employment terminated by consent, redundancy or death, the PRP rules dictate how to deal with the Incentiveholders' Incentives, regardless of whether Vesting Conditions have been met. · Incentives can lapse in a number of ways. Lapsing can occur by the Incentive not being exercised by its Expiry Date, or by the Incentiveholders failure to meet the Vesting Conditions in the prescribed period. The Incentives could also lapse according to another provision of the Existing PRP Rules. · Invitations may provide that Shares issued, allocated or transferred on exercise of Incentives are subject to restrictions as to the disposal or other dealing by an Incentiveholder. In this situation, and even if there are no restrictions, all Incentiveholders must comply with the securities trading policy of the Company at all times. · An Incentive (other than a Performance Right) is only transferrable in certain circumstances. · Incentives acquired under the terms of the Existing PRP are under a scheme to which Subdivision 83A-C of the ITAA 1997 applies. 2. New PRP The terms and conditions of the New PRP are the same as the Existing PRP except for the following: · Incentive means the right to receive Plan Shares or cash. The Board may determine that the exercise of an Incentive will be satisfied by Company A making a cash payment instead of allocating Plan Shares. · The terms and conditions of an Invitation will prevail over any New PRP Rules. · Where Incentives held by or on behalf of an Eligible Employee who is a Director, exercised Incentives must be satisfied by Company A shares that have been purchased on market, unless no shareholder approval is required or shareholders have approved the Director's participation in the New PRP under the Listing Rules. · Where an Exercise Price is payable for an Incentive, an Invitation may specify that an Incentiveholder may elect to pay the Exercise Price per Incentive by setting off the total Exercise Price against the number of Plan Shares (or cash payment) they are entitled to receive upon exercise ("Cashless Exercise Facility"). · Incentives can lapse in a number of ways. Lapsing can occur by the Incentive not being exercised by its Expiry Date, or by the Incentiveholders failure to meet the Vesting Conditions in the prescribed period. The Incentives could also lapse according to another provision of the New PRP rules. Contributions will not be made prior to any offer of rights albeit they may be at a time when they still constitute "indeterminate rights". If the granted rights vest over a period of 1 - 4 years, funds may be contributed progressively over that 1-4 year period to acquire shares on market or subscribe for shares, having regard to specific circumstances of the company and the broader economy at points in time. However, Company A will not make large upfront payments to the Trust prior to Performance Rights being granted. All performance rights issued after the 2020 AGM will be under the New PRP. The Trust Company A established the Trust for the sole purpose of obtaining shares for the benefit of employees of Company A. Company B is an external trustee acting in an independent capacity on behalf of the beneficiaries of the Trust. If there is any inconsistency between the Trust Deed and the PRP Rules, the Trust Deed prevails. The Trust operates as follows: · The Trust will be managed and administered so that is satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4) of the ITAA 1997. The powers of the Trustee are listed in the Trust Deed. · Subject to the PRP Rules, neither Trustee nor any company in the Group may grant an Encumbrance over any Plan Shares. · The Trust will be funded by contributions from the Company (i.e. for the purchase of shares in accordance with the PRP). All funds received by the Trustee from Company A will constitute Accretions to the corpus of the Trust and will not be repaid to Company A (or any other company in the Group) and no Participant will be entitled to receive such funds. · These funds will be used by the Plan Trustee to acquire the shares in Company A either on-market, off-market or via a subscription for new shares in Company A based on directions of the Board. · Immediately following exercise of a Share Right, a Participant will have an absolute vested and indefeasible entitlement to receive from the Plan Trustee any Cash Dividends (defined in the Trust Deed) paid subsequently in respect of that Share Right. · On termination of the Trust, the Allocated Plan Shares are transferred to the relevant Participant and there will be no payment of any balance to a company in the Company A Group. · Company A is not a beneficiary of the Trust. · The Trust Deed does not confer on Company A any Encumbrance, proprietary right or proprietary interest in the Shares acquired by the Trustee. · The balance of the Net Income of the Trust for a Year of Income to which no Participant is presently entitled may be accumulated by the Trustee as an Accretion to the Trust. · The Plan Trustee may only distribute income or capital to the Participant where it is properly attributable to the Participant's Allocated Plan Shares · The structure of the Trust and the PRP is such that Plan Shares may be dealt with in the following manner: - Shares allocated to each Participant will generally be transferred into the name of the Participant or to a nominated associate by the Board (i.e. legal title) on receipt of a direction by the Board to do so; - The Plan Trustee can sell shares on behalf of the Participant, where permitted to do so by the Participant and with the approval of the Board, resulting in a Cashless Exercise for the Participant. That is, the Participant receives proceeds on the sale of the shares by the Trust less any brokerage costs; or - In the case of a Forfeited Share, if directed by the Board, a Forfeited Share should be reallocated to one or more other Participants or to, or for the benefit of any PRP as directed by Company A. · The Trustee may pay Trust Expenses from dividends received for Unallocated Shares and interest earned on funds held in the Trust. · On-going administration costs of the Trust that will be reimbursed by Company A include: - 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 (for example, brokerage costs and the allocation of such shares to participants); - Procedural and administrate activities in relation to Employee Share Scheme ("ESS") interests held in the trust where employee ceases employment with Company A; and - Other trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust. In summary, the commercial benefits of using the Trust for Company A include: · Greater flexibility for Company A to accommodate the incentive arrangements both now and into the future as Company A continues to expand operations and therefore employee numbers. · Capital management flexibility for Company A, in that the Trust can use the contributions made by Company A either to acquire shares in Company A on market, or alternatively to subscribe for new shares in Company A. · Providing an arm's-length vehicle through which shares in Company A can be acquired and held on behalf of the relevant employee. This assists Company A to satisfy Corporations Act requirements relating to a company dealing in its own shares.

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 10-5 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Section 104-85 | Income Tax Assessment Act 1997 Section 106-50 | Income Tax Assessment Act 1997 Section 130-90 | Income Tax Assessment Act 1997 Section 130-85 | Income Tax Assessment Act 1936 Section 95

Reasons for decision: Summary: The total assessable income of a trust estate is calculated as if the trustee were a resident taxpayer in respect of that income (subsection 95(1) of the Income Tax Assessment Act 1936 ("ITAA 1936") ). The assessable income of a taxpayer includes income under ordinary concepts (section 6-5) or statutory income (section 6-10). None of the provisions listed in section 10-5 (list of provisions about assessable income that is not ordinary income) are relevant in the present circumstances. The irretrievable cash contributions made by Company A to the Trustee of the Trust will therefore not be included in the assessable income of the Trustee under section 6-10. The contributions made by Company A are irretrievable and non-refundable to it in accordance with the Trust Deed as all contributions provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repaid to Company A. The funds provided to the Trustee are used in accordance with the Trust Deed and the PRP Rules for the sole purpose of the employee share scheme ("ESS"). Therefore, the contributions constitute capital receipts to the Trustee, and are not assessable under sections 6-5 or 6-10. (ATO Interpretative Decision ATO ID 2002/965 Income Tax -Trustee not assessable on employer contributions made to it under the employer's employee share scheme ). | Detailed Reasoning - E5: CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee, subject to some exceptions (subsection 104-75(1)). The time of CGT event E5 is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)). As no exceptions apply in this case, if CGT event E5 happens, the trustee of a trust makes a capital gain or capital loss if the market value of the asset (at the time of the event) is more than its cost base or less than the asset's reduced cost base respectively. On satisfying any Vesting Conditions, a Participant will have an unconditional right to receive a Company A share. At this point, the Participant will be absolutely entitled to that share (being a CGT asset of the Trust) as against the Trustee and CGT event E5 will happen (Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax assessment Act 1997 ). However, any capital gain or capital loss made by the Trustee from CGT event E5 may be disregarded pursuant to subsection 130-90(1), if the Performance Right is an ESS interest, the PRP is an ESS and the Trust is an 'employee share trust'. A Performance Right issued under the Existing PRP is an ESS interest under paragraph 83A-10(1)(b) because it is a beneficial interest in a right to acquire a share in the company. When the Board determines that Performance Right granted under the New PRP will be satisfied by the provision of a Company A share, then that Performance Right will also become an ESS interest. Once determined, section 83A-340 operates to treat the Performance Rights granted under the New PRP as though they had always been rights to acquire beneficial interests in shares. The PRP is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests in Company A are provided to employees of Company A in relation to their employment with Company A. The Trust satisfies the definition of an 'employee share trust' in subsection 130-85(4) because: · The Trust acquires shares in a company, namely Company A; and · The Trust ensures that ESS interests as defined in subsection 83A-10(1) are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust Deed and the PRP; and · the Trust Deed provides that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purpose of subsection 130-85(4). Accordingly, the requirements of section 130-90 are satisfied and any capital gain or capital loss that the Trustee will make from CGT event E5 will be disregarded. | Detailed Reasoning - E7: Subsection 104-85(1) provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. CGT event A1 happens when there is disposal of a CGT asset (section 104-10). Pursuant to section 106-50, from just after the time a beneficiary becomes absolutely entitled to a CGT asset as against the trustee of a trust, the asset is treated as being the beneficiary's asset (instead of being an asset of the trust). This means an act done in relation to the asset by the trustee is treated (for CGT purposes) as if the act had been done by the beneficiary (instead of by the trustee). A Participant becomes absolutely entitled to a share allocated to them pursuant to the Trust Deed when Vesting Conditions (if any) are satisfied (causing CGT event E5 to happen). When the Trustee of the Trust transfers the legal ownership of the share to a Participant following allocation of the share, section 106-50 will deem the share to be an asset of the Participant. This means that there would be no change in the ownership when the Trustee transfers the share to the Participant. Hence, no CGT event E7 or A1 will happen and there can be no capital gain or loss when the legal title in a share to which a Participant is absolutely entitled as against the Trustee is transferred to that Participant (Paragraph 144 of TR 2004/D25).

Reasons for decision: All legislative references are to provisions of the Income Tax Assessment Act 1997 , unless otherwise indicated.