Private ruling: Employee Share Scheme
Date of advice: 4 April 2025
Published: 16 June 2025
Ruling period: 1 January 20XX to 31 December 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: Will irretrievable cash contributions made by Company A to Company B (Trustee) as the Trustee for Company A (Trust) in accordance with the Plan Rules of the respective Plans (as defined in the relevant facts and circumstances) and the Trust Deed to fund the subscription for, or acquisition on-market of, Company A shares (Shares) be assessable income of the Trust pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) or Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | Q2: Will the Trust meet the definition of an employee share trust under section 130-85(4) of ITAA 1997? | A2: Yes. | Q3: Will a capital gain or capital loss that arises for the Trustee at the time when Participants become absolutely entitled to Shares (CGT Event E5), 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? | A3: Yes. | Q4: Will the Trustee be entitled to the benefit of franking credits under Subdivision 207-B of the ITAA 1997 attached to franked distributions on unallocated shares? | A4: Yes.

Relevant facts and circumstances: Background Company A manufactures and distributes products to retail and commercial customers in Australia. Company A is listed on the Australian Securities Exchange (ASX) and has a 31 December financial year end. Company A introduced the several incentive plans, collectively referred to as Plans to reward its employees in the short-term and long-term: • Long Term Incentive Plan (LTI Plan) • Short Term Incentive Plan (STI Plan) • Deferred Award Plan • Exempt Share Award Plan. Purposes of the Plans The purposes of the Plans are: • To attract and/or retain skilled employees; • To align employee (including key management personnel) interests with Company A's shareholders and the achievement of Company A's strategy; and • To establish Employee Share Schemes within the meaning of Division 83A of ITAA 1997. The Deferred Award Plan and Exempt Share Award Plan (collectively referred to as the Employee Share Plans) are intended to encourage broad-based employee share ownership in Company A. Under the Employee Share Plans, Restricted Shares are offered to all eligible employees. The LTI and STI are incentive arrangements intended to motivate and retain senior employees of Company A. Under the LTI and STI, Options and Rights are granted to senior employees on a regular basis. Awards granted under the LTI and STI are subject to performance hurdles or the requirement to remain employed for a specified period of time. Awards made under the Plans are a key component of the remuneration packages offered to employees (including key management personnel). Operation of the Plans Under the LTI and STI: • Offers of Options, Rights and/or Restricted Shares may be made to Eligible Employees. • Offers may be made annually or on a once-off basis. • Offers will be subject to Vesting Conditions for the STI and LTI. Where Vesting Conditions are not met, the Options and Rights will lapse. • Where the Vesting Conditions are met, each Right and Option may be converted to a Share in Company A under the terms of the relevant offer. Under the Employee Share Plans: • Restricted Shares may be acquired by employees under a salary sacrifice arrangement (up to the value of $5,000 annually) or as a free gift by Company A (up to the value of $1,000). The Restricted Shares are subject to a disposal restriction. • Once the disposal restriction has been completed, the employees are eligible to freely transact the shares (subject to applicable law and share trading policies). Cash settlement of LTI/STI awards: • Under the LTI and STI there is an ability for Company A to settle the Rights and/or Options in cash rather than shares. Any cash payments made under the LTI and STI will be paid via payroll. The employee share trust will not be involved in the payment of cash awards. Participants Participants in the Plans will be Eligible Employees (including key management personnel and the broader employee population) of Company A or its subsidiaries. The Eligible Employees, through management and conduct of Company A's business operations, directly generate assessable Australian income for Company A. The Participants are Australian tax residents who work primarily in Australia for the benefit for Company A in Australia. Funding The Plans will be funded by irretrievable cash contributions made by Company A (or a subsidiary in Company A's tax consolidated group) to the Trust as and when required. Funds transferred into the Trust must only be used to subscribe for Shares or acquire Shares on market in Company A and for the purposes of administering the Plans. The contributions will be made to the Trust in the calendar year ending 31 December 20XX and subsequent income tax years in accordance with the protocols set out below: • The amount of funds transferred will be determined based on an estimated forecast to determine if the Trust holds sufficient Shares to satisfy future potential vestings and issues. This will include a review of: ­ The quantum of outstanding Options and Rights, ­ Likelihood of the Options and Rights vesting; and ­ Estimate of the Options, Rights and/or Restricted Shares which will be issued. • Management will review these forecasts and provide recommendations to the Board periodically to ensure the Trust is properly funded. • Company A's Board will provide guidance to the Trustee on how the Trustee should acquire the Shares, whether by way of on market purchase or subscription. • The Trustee will then consider the Board's recommendations and having regard to its broader obligations under the Trust Deed and trust law will acquire the shares on market or by way of subscription. The Trust Company A established the Trust for the purpose of obtaining and administering Shares for the benefit of employees participating in Company A's Plans. The operation of the Trust is governed by the Trust Deed. All clause references in this section relate to the Trust Deed. Company A's reasons for administering the Options, Rights or Restricted Shares via the Trust include: • The Trust enables the acquisition of Shares, either on-market or by subscribing, in accordance with Company A's preferred timeline; • Company A can manage its costs and share capital position by having the Trustee acquire Shares before the employees meet the vesting criteria and become entitled to the Shares. If the employees do not meet the vesting criteria, the Trust can reallocate the Shares to fulfill future vestings; • The Trust provides the opportunity to improve cash flow planning as Company A can, if desired, make contributions to the Trust periodically throughout the vesting period. This provides Company A with flexibility to determine the most appropriate time to make contributions; • The Trust provides the most efficient mechanism for implementing and managing disposal restrictions for grants of Restricted Shares; • The Trust is the most appropriate vehicle to acquire Shares during the vesting period or Restriction Period, thus assisting Company A to meet the costs of the Options, Rights and/or Restricted Shares; and • The Trustee has a fiduciary duty to the Participants, and has the obligation to act in the interests of its beneficiaries, i.e. Participants. The Trustee of the Trust, Company B, is an independent third party. All contributions to the Trust will be made by Company A or a subsidiary member of its tax consolidated group. The Trustee's actions to purchase Shares on-market, or subscribe for new Shares take into consideration the Corporations Act 2001 requirements and the Trustee Act 1958 (VIC) requirements and at all times the Trustee will make decisions in accordance with the terms of the Trust Deed, the rules of the Plans, and in fulfilment of the Trustee's fiduciary duty to beneficiaries. Operation of the Trust Broadly, the Trust operates as follows: • The Trustee declares that the Fund is held by the Trustee for and on behalf of Eligible Participants on the terms and conditions of the Trust Deed. (Clause XX) • The Trustee acknowledges and agrees that, subject to the Trust Deed: ­ each Participant is absolutely entitled to: o any and all Plan Shares held by the Trustee on that Participant's behalf, subject to the Plan Rules; and o all other benefits, rights and privileges attached to, or resulting from holding, those Plan Shares, subject to the Plan Rules; and ­ it will only deal with or allocate Plan Shares: o in accordance with a valid direction of the relevant Participant or Company A; o subject to the Plan Rules; and o subject to any holding lock on the Shares having been lifted. (Clause XX) • The Trustee has all the powers in respect of the Trust to the maximum extent permitted by law as outlined in Clause XX. • In respect of an unallocated Share, the Trustee: ­ will hold the unallocated Share on trust for the benefit of Participants generally; ­ must not exercise any voting rights in relation to the unallocated Share; ­ may apply any capital receipts, dividends or other distributions received in respect of the unallocated Share to purchase further Shares to be held on trust for the purposes of this Trust; ­ must hold any Bonus Share issued in respect of an unallocated Share as an unallocated Share within the Fund; ­ must not participate in any issue by Company A of rights (not being by way of a Bonus Share issue) to acquire Shares or other securities in respect of the unallocated Share without the written consent of Company A; and ­ must keep an account of all unallocated Shares held by the Trustee. (Clause XX) • Clause XX provides instructions to the Trustee, some of which are outlined below: ­ In respect of Plan Shares held by the Trustee which are to be provided to, or held for, a Participant, the Trustee will hold the legal title and transfer the beneficial title in the Plan Shares to the Participant. ­ The Trustee is entitled to regard as valid, and need only observe, an instruction, consent or other authorisation given or purported to be given by Company A, which may include an instruction, consent or other authorisation to: o transfer the legal and, if applicable, beneficial title in the relevant Plan Shares to the Participant in accordance with clause XX; o remit any cash proceeds received by the Trustee in respect of the relevant Plan Shares to the Participant; o conduct the sale of the Shares on ASX; or o conduct any such other actions relating to the Shares as may be required by Company A. • Notwithstanding clause XX, the Trustee may not, at its own discretion, exercise any voting rights attaching to any of the Plan Shares or Shares it holds on trust, including in relation to any unallocated Share. • Without limiting clause XX, Company A 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 Tax Act. (Clause XX) • The Trustee must, upon direction by Company A, subscribe for or acquire Shares from time to time in accordance with the instructions contained in the written notice received from Company A referred to in clause XX, and the Trustee must do so as soon as practicable after receipt of, and in the manner directed in, the notice. (Clause XX) • The Trustee must allocate the number of Shares specified by Company A as Plan Shares to the Account established for a Participant. (Clause XX) • The Trustee must transfer or dispose of Plan Shares in accordance with the Plan Rules and any Offer, subject to any written direction from Company A to the contrary. (Clause XX) • Plan Shares allocated in accordance with clause XX (and any Cash Dividends paid on such Plan Shares) must be held on the terms of this deed by the Trustee on behalf of the relevant Participant who is the beneficial owner of the Plan Shares and allocated in the accounts of the Trustee to the relevant Participant, until such time as the Plan Shares (and any such Cash Dividends) are transferred or disposed of in accordance with this deed or forfeited by the Participant in accordance with the relevant Plan Rules. (Clause XX) • The Trustee is to do all things required to transfer legal title in Plan Shares to a Participant on whose behalf Plan Shares are held or to any third party as directed by Company A or the relevant Participant. Upon Plan Shares (and any Cash Dividends paid on the Plan Shares) being transferred to a Participant, the Participant will be legally and beneficially entitled to those Plan Shares (and any such Cash Dividends). (Clause XX) • 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 and no participant shall be entitled to receive such funds (Clause XX). • Pursuant to clause XX of the Trust Deed, the Trustee may apply any income received by the Trustee (including, but not limited to, dividends and returns of capital) to any Plan shares it holds on behalf of a participant subject to the terms of the Trust Deed and relevant Plan rules (after application by the Trustee of any capital as provided by clauses XX and XX of the Trust Deed). • If the Trust is terminated, the Trustee shall dispose of all Shares and the balance of the capital or income of the Trust to which no Participant is presently entitled in accordance with clause XX may be applied in whole or in part in accordance with clauses XX, XX or XX by the Trustee. (Clause XX) Under the Trust Deed, the Trustee has no right, authority or discretion to waive, renounce or disclaim any dividend or distribution paid by Company A on Shares. LTI Plan Rules The LTI Plan is covered under the LTI Plan Rules dated 22 February 2020. All rule references in this section relate to the LTI Plan Rules. The purposes of the Plan are to: • Assist in the reward, retention and motivation of Eligible Employees; • Encourage participation by Eligible Employees in the growth and success of Company A through equity ownership; • Align the interests of Eligible Employees more closely with the interests of shareholders in Company A by providing an opportunity for Eligible Employees to receive an equity interest in the form of Shares, Options or Rights; • Provide Eligible Employees with the opportunity to share in any future growth in value of Company A; and • Provide greater incentive for Eligible Employees to focus on Company A's longer term goals. (Rule X) The following are some of the features of the LTI Plan: • The Board may, from time to time, select from among the Eligible Employees those Eligible Employees to whom Shares, Rights or Options will be offered via an invitation. (Rule XX) • The Board has discretion to issue invitations on a differential basis to Eligible Employees as well as determine the timing and frequency of invitations. (Rule XX) • Unless otherwise determined by the Board at the time of an Invitation, all Shares issued (or transferred) pursuant to the Invitation will rank equally with existing Shares on and from their Date of Grant. (Rule XX) • The Board may offer Shares with such conditions relating to Disposal or forfeiture of the Shares as determined by the Board from time to time. (Rule XX) • The Board may, at its discretion, by notice to the Participant, reduce or waive the Share Vesting Conditions attaching to Shares in whole or in part at any time and in any particular case. (Rule XX) • Subject to the LTI Plan Rules, and unless otherwise determined by the Board and specified in the Invitation, each: ­ Option entitles the Participant, on the vesting and exercise of the Option to receive by way of issue or transfer (at the discretion of the Board) on Share at the Exercise Price (if any) or a cash payment in lieu of the issue or transfer of a Share; and ­ Right entitles the Participant, on vesting and exercise of the Right, to receive one Share by way of issue or transfer (at the discretion of the Board) one Share at the Exercise Price (if any) or a cash payment in lieu of the issue or transfer of a Share. (Rule XX) • Shares issued or transferred to a Participant on the exercise of Options or Rights will rank equally in all respects with existing Shares from the date of issue or transfer (as applicable) except for any rights attaching to the Shares by reference to a record date prior to the date of their issue or transfer (as applicable). (Rule XX) • In relation to Vesting Conditions attaching to Options or Rights: ­ Prior to an Invitation being made, the Board will determine and specify in the Invitation any Vesting Conditions attaching to Options or Rights. ­ The Board may at its discretion reduce or waive the Vesting Conditions attaching to Options or Rights in whole or in part at any time and in any particular case, subject to any requirements under Applicable Law (including shareholder approval). (Rule XX) • A Participant has no right or interest in a Share the subject of an Option or Right held by the Participant unless and until the Option or Right is exercised and a Share is issued or transferred. Nor does the holder of a Right have any rights to dividends, rights to vote or rights to the capital of Company A as a shareholder as a result of holding an Option or Right. Subject to Applicable Law, a Participant will not, as a holder of an Option or Right, have any right to attend a vote at general meetings of holders of Shares. (Rule XX) • The Board determine whether Company A will, with respect to each Vested Option or Vested Right that is exercised: ­ Allot and issue, or transfer, one Share to the Participant (Equity Settled); or ­ Pay a cash amount to the Participant equivalent to the Market Value of a Share as at the date of vesting of the Option or Right in accordance with the calculation in Rule XX (Cash Settled) in exercise of the discretion (if any) conferred on the Board in the Invitation with respect to cash settlement of the Vested Options or Vested Rights. (Rule XX) • Where the Board determines that any Vested Options or Vested Rights will be Cash Settled in accordance with Rule XX, the cash payment to be made to a Participant will be equal to the aggregate Market Value of the Shares which would otherwise have been allotted and issued or transferred to the Participant if the Options or Rights had been Equity Settled, as at the date of vesting of the Options or Rights. (Rule XX). • The Shares acquired under this Plan pursuant to exercise of Options or Rights may be subject to restriction on disposal (Restricted Shares). (Rule XX) • A holder of Restricted Shares must not Dispose of any of those Restricted Shares or any interest in those Restricted Shares while those Restricted Shares are held in the Plan and subject to these Rules. (Rule XX) • The Board may, at its discretion, by notice to the Participant, reduce or waive the period in which Restricted Shares are subject to restriction on disposal. (Rule XX) STI Plan Rules The STI Plan is covered under the STI Plan Rules. All rule references in this section relate to the STI Plan Rules. The purpose of the Plan is to reward Eligible Employees for strong performance levels and contributions to the Group over a specified Performance Period. (Rule X) The following are some of the features of the STI Plan: • The Board may select from among the Eligible Employees those Eligible Employees to whom participation in the STI Plan will be offered. (Rule XX) • Prior to an Invitation being made, the Board will determine and specify in the Invitation the form of Award to which a Participant may become entitled under the Plan. An Award may be made to a Participant in the form of: ­ a cash payment in accordance with Rule XX; ­ an issue of Rights subject to, and in accordance with Rule X; ­ an issue of Shares subject to an in accordance with Rule XX; or ­ any combination of (i), (ii) and (iii), subject to these Rules and the terms of the Invitation. (Rule XX) • Notwithstanding any other provision of these Rules, the Board may at any time, in its absolute discretion, prior to the grant of an Award: ­ vary or waive one or more Performance Conditions applicable to the assessment of an Award; ­ adjust the amount of an Award; and/or ­ vary the form(s) in which an Award will be satisfied, to take into account any unbudgeted extraordinary items or other circumstances that the Board determines warrant such treatment. (Rule XX) • Where an Award is granted to a Participant wholly or partly in the form of a cash payment, Company A will use reasonable endeavours to pay such amount to the Participant as soon as reasonably practicable after the Board determines that the Participant is entitled to receive the Award. (Rule XX) • A Participant has no right or interest in a Share the subject of a Right held by the Participant unless and until the right is exercised and a Share is issued or transferred, nor does the holder of a Right have any rights to dividends, rights to vote or rights to the capital of Company A as a shareholder as a result of holding a Right. Subject to Applicable Law, a Participant will not, as a holder of a Right, have any right to attend a vote at general meetings of holders of Shares. (Rule XX) • The Board will from time to time determine whether Company A will with respect to each Vested Right: ­ allot and issue, or transfer, one Share to the Participant (Equity Settled); or ­ pay a cash amount to the Participant equivalent to the Market Value of a Share as at the date of vesting of the Right in accordance with the calculation in Rule XX (Cash Settled) in exercise of the discretion (if any) conferred on the Board in the Invitation with respect to cash settlement of the Vested Rights. (Rule XX) • Unless otherwise determined by the Board at the time of an Invitation, all Shares issued (or transferred) pursuant to the Invitation will rank equally with existing Shares on and from their Date of Grant. (Rule XX) • The Board may, at its discretion, by notice to the Participant, reduce or waive the Share Vesting Conditions attaching to Shares in whole or in part at any time and in any particular case. (Rule XX) • A Participant will have a vested and indefeasible entitlement to any dividends declared and distributed by Company A on the Shares which, at the books closing date for determining entitlement to those dividends. (Rule XX) • A Participant may exercise any voting rights attaching to Shares registered in the Participant's name. (Rule XX) Employee Share Plan Rules The Employee Share Plan is covered under the Employee Share Plan Rules. The purposes of the Employee Share Plan are to: • encourage participation by Eligible Employees in the growth and success of Company A through equity ownership; and • align the interests of Eligible Employees more closely with the interests of shareholders in Company A by providing an opportunity for those Eligible Employees to receive a direct or indirect equity interest in the form of Shares. (Rule X) The following are some of the features of the Employee Share Plan: • The Board may, from time to time, select from among the Eligible Employees those Eligible Employees to whom participation in an Award under the Plan will be offered. (Rule XX) • In relation to Deferred Awards, Company A may offer, issue or transfer Shares under a Deferred Award to Eligible Employees: ­ who elect to receive Shares funded through Salary Sacrifice contributions (but no more than $5,000 Market Value worth of Shares per financial year); or ­ by Company A in its discretion, in addition to their wages, salary and remuneration at an Acquisition Price which is a discount to the Market Value of a Share. (Rule XX) • The Restricted Period for a Deferred Award will expire on the earlier of: ­ when the relevant Eligible Employee ceases employment within the meaning of section 83A-330 of the Tax Act; ­ when the Board, in its discretion, agrees to end the Restriction Period; ­ in the case of a Deferred Award of Shares, 3 years from the date of issue or transfer of the Shares. (Rule XX) • Company A may offer, issue or transfer Shares under an Exempt Share Award to Eligible Employees for no consideration or at an Acquisition Price which is a discount to the Market Value of a Share. (Rule XX) • Exempt Share Awards may only be issued or transferred to Eligible Employees under the Plan in accordance with section 83A-35 of the Tax Act. (Rule XX) • The Restriction Period for Exempt Share Awards will expire on the earlier of: ­ 3 years from the date of issue or transfer of the Shares (or such other period as may be required for the purposes of section 83A-35 of the Tax Act); and ­ The time when the relevant Eligible Employee ceases employment with a Group Company. (Rule XX) ­ Exempt Share Awards will not be subject to risk of forfeiture. (Rule XX) • Deferred Awards and Exempt Share Awards are separate schemes for the purposes of Division 83A of the Tax Act. (Rule XX) • A Share issued or transferred under the Plan will rank equally in all respects with Shares already on issue on the date of issue or transfer of the Share, except for entitlements which had a record date before the date of issue or transfer of the Share. (Rule XX) • A Share issued or transferred to a Participant under this Plan will be a Restricted Share for the purposes of these Rules until any applicable Restriction Period has elapsed or been waived by the Board in accordance with these Rules. (Rule XX) • Any Shares that a Participant acquires in respect of Restricted Shares pursuant to a rights issue or bonus share issue by Company A will also be deemed to have the same Restriction Period attached, unless otherwise determined by the Board. (Rule XX) • The Board may at any time waive or shorten the Restriction Period applicable to a Share, subject to any requirements under Applicable Law (including shareholder approval). (Rule XX) • A Participant may, by written notice to the Board, request to terminate a prior Salary Sacrifice arrangement and their participation in the Plan at any time. (Rule XX) Costs Company A incurs costs in relation to the on-going administration of the Plans and Trust. These costs primarily consist of the following: • Tax compliance fees for the Trust; • Audit fees for the Trust; • Fees paid to the external trustee for the on-going management of the Trust.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1936 former Division 1A of Part IIIAA | Income Tax Assessment Act 1936 former section 160APHO | 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 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | 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-105(1) | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 subsection 104-75(1) | Income Tax Assessment Act 1997 subsection 104-75(2) | Income Tax Assessment Act 1997 subsection 104-75(3) | Income Tax Assessment Act 1997 Division 128 | 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 Subdivision 207-B | Income Tax Assessment Act 1997 section 207-45 | Income Tax Assessment Act 1997 subsection 207-150(1)

Reasons for decision: Summary: The irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of, Shares in accordance with the Plan Rules and the Trust Deed will not be assessable income of the Trust under sections 6-5 or 6-10 or Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936). | Detailed Reasoning - Detailed reasoning: Assessable income includes both ordinary income and statutory income according to sections 6-5 and 6-10. Ordinary income is income according to ordinary concepts. Statutory income is income that is not ordinary income but is included in assessable income because of a specific provision of the ITAA 1997 or ITAA 1936. As Chief Justice Jordan noted in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 (Scott) : .. what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of receipts. | Detailed Reasoning - Ordinary income: Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. The expression "income according to ordinary concepts" is not a defined term. However, case law has identified certain factors which may assist in determining whether a receipt is properly characterised as income according to ordinary concepts. As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In GP International Pipecoaters v. Federal Commissioner of Taxation [1990] HCA 25 (Pipecoaters) , the High Court of Australia found that: To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. The contributions made by Company A to the Trustee to fund the acquisition of, or subscription for Shares will constitute accretions to the corpus of the Trust (Clause XX of the Trust Deed) that will be applied for the sole purpose of acquiring, holding and transferring shares for the benefit of the Participants in accordance with the Plans (Recitals and Clause XX of the Trust Deed). The cash contributions received by the Trustee are therefore of a capital character. It is irrelevant that, from Company A's perspective, the cash contribution may be deductible under section 8-1 because whether a receipt is income or capital depends on its objective character in the hands of the recipient, rather than the payer. This is made clear in Pipecoaters , where the High Court held that: ...although the amount expended on the construction of the plant was a capital expenditure, it does not follow that the taxpayer's receipt of the establishment costs was a receipt of capital. From the Trustee's perspective, the irretrievable cash contributions made by Company A are capital in nature and therefore not assessable to the Trust under section 6-5. | Detailed Reasoning - Statutory income: Section 10-5 provides a list of provisions of assessable income for section 6-10 purposes. None of the provisions apply to a cash contribution made by an employer to a trust established under an employee share scheme (ESS). Therefore, the irretrievable cash contributions made by Company A to the Trustee of the Trust to fund the subscription for, or acquisition of, Shares are also not assessable income of the Trust pursuant to section 6-10 (see also, ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme). | Detailed Reasoning - Division 6 of ITAA 1936: As the irretrievable cash contributions made by Company A to the Trustee are neither ordinary income or statutory income, they will not be included in the net income of the Trust, and hence cannot be assessed to the Trustee pursuant to Division 6 of Part III of the ITAA 1936. | Summary: The Trust will meet the definition of an employee share trust under subsection 130-85(4). | Detailed Reasoning - Detailed reasoning: Subsection 130-85(4) defines an employee share trust as 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 ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Shares that are purchased by the Trustee to satisfy its obligation under the Plans, and subsequently allocated to Participants pursuant to the Plans, are ESS interests for the purposes of subsection 83A-10(1). An ESS 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 Plans each constitute an ESS because each is a scheme under which ESS interests in Company A are provided to the employees of Company A in relation to their employment with Company A. Therefore, paragraphs 130-85(4)(a) and (b) of the definition of an employee share trust are satisfied because: • The Trustee acquires shares in a company, namely Company A; and • The Trustee ensures that ESS interests as defined in subsection 83A-10(1) are provided under an employee share scheme by allocating those shares to the employees of Company A in accordance with the Trust Deed and the Plans. Paragraph 130-85(4)(c) of the definition of an employee share trust provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'. The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'? (TD 2019/13). Whilst the relevant trust documents may include powers and/or duties that are broad reaching, the mere existence of those powers or duties in the trust document does not, of itself, mean that the trustee has breached the requirements to be an employee share trust. In examining whether the requirements of subsection 130-85(4) are met, it is necessary to examine the actual activities that the trustee has undertaken (paragraph 6 of TD 2019/13). The Trust Deed contains only powers and/or duties that are merely incidental, as required by paragraph 130-85(4)(c). Therefore, the Trust established pursuant to the Trust Deed satisfies the definition of an employee share trust in subsection 130-85(4). While the original Trust Deed did provide the Trustee with broad discretionary powers in relation to matters other than solely purchasing and selling shares to satisfy its obligations under the Plans, the applicant confirmed in writing that Trustee did not in fact exercise any of the broad discretionary powers during the relevant period before the Trust Deed was amended to remove those powers. As the rights granted under the Plans will be acquired by the employees at a discount, they are ESS interests to which Subdivision 83A-B applies. Accordingly, the Trust will meet the definition of an employee share trust under subsection 130-85(4). | Summary: A capital gain or capital loss that arises for the Trustee at the time when Participants become absolutely entitled to the shares (CGT Event E5) will be disregarded under section 130-90, if the employees 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 can make 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. The time of the event is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)). According to subsection 104-75(3), if CGT event E5 happens, the trustee may make a capital gain if the market value of the asset, at the time of the event, is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base. In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128. 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 (TR 2004/D25) explains the principles set out in the leading English trust law case of Saunders v. Vautier (1841) 49 ER 282 in relation to 'absolutely entitled' as follows: ... if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustees to transfer the trust property to them or at their direction, even though the trust deed contains a contrary intention. The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway. Pursuant to Clause XX of the Trust Deed, a Participant is absolutely entitled to the Plan Shares held by the Trustee on their behalf. In accordance with Clauses XX and XX, where the Plan Rules stipulate that the Shares are to be held by the Trustee on behalf of Participants, the Trustee will hold the Shares in respect of an identified Participant (i.e. on an allocated basis). Once allocated to and held by the Trustee on behalf of the Participant, the Participant (i.e. the beneficiary) will become absolutely entitled to the allocated shares (i.e. a CGT asset of the Trust) as against the Trustee. Accordingly, pursuant to subsection 104-75(1), CGT event E5 happens. If CGT event E5 happens, any capital gain or loss that the Trustee makes is disregarded if section 130-90 applies. Section 130-90 provides as follows: (1A) Disregard any *capital gain or *capital loss made by an *employee share trust to the extent that it results from a *CGT event, if: (a) immediately before the event happens, an *ESS interest is a *CGT asset of the trust; and (b) either of the following subparagraphs applies: (i) the event is CGT event E5, and the event happens because a beneficiary of the trust becomes absolutely entitled to the ESS interest as against the trustee; (ii) the event is CGT event E7, and the event happens because the trustee *disposes of the ESS interest to a beneficiary of the trust; and (c) Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest. (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. (2) Subsection (1A) or (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. To qualify for the exemption in section 130-90, there must be an 'employee share trust' and an 'ESS interest'. As outlined in Question 2, the Trust will meet the definition of an employee share trust under subsection 130-85(4). As such, a capital gain or capital loss that arises for the Trustee at the time when Participants become absolutely entitled to the shares (under CGT Event E5) will be disregarded under section 130-90, if the employees acquire the Shares for the same or less than the cost base of the Shares in the hands of the Trustee. | Summary: The Trustee will be entitled to a tax offset for the franking credits attached to the franked dividend on the unallocated Shares under Subdivision 207-B. | Detailed Reasoning - Tax offset: Section 207-45 provides that trustees, who are liable to be assessed under section 99A of the ITAA 1936 and to whom a franked distribution flows indirectly, are entitled to a tax offset for that income year equal to its share of franking credit attached to the distribution. Pursuant to subsection 207-50(4), a franked distribution will be taken to flow indirectly to the trustee of a trust where, relevantly, the trustee is liable to be assessed on all or part of the trust's net income for that year under section 99A of the ITAA 1936. As determined above, the Trustee will be liable to be assessed under section 99A of the ITAA 1936 in relation to dividends received by the Trustee in respect of unallocated Shares. Therefore, the requirements of section 207-45 are satisfied and the Trustee will be entitled to a tax offset equal to its shares of the franking credits attached to the dividends. | Detailed Reasoning - Qualified Person: However, subsection 207-150(1) denies a tax offset otherwise available under section 207-45 where the person is not a qualified person for the purposes of Division 1A of the former Part IIIAA of the ITAA 1936. Broadly, a person will be taken to be a qualified person in respect of a dividend paid on shares if the shares are held at risk for a period of 45 days and the person or an associate does not make a related payment in respect of the dividend (former section 160APHO of the ITAA 1936). It is accepted that no related payment will be made by the Trustee in respect of the dividend. It is also accepted that the Trustee will hold the unallocated Shares at risk for a period of not less than 45 days during the period beginning the day after the Trustee acquires the unallocated Shares and ending on the 45th day after the unallocated Shares become ex-dividend. Therefore, it is accepted by the Commissioner that the Trustee will be a 'qualified person' for the purposes of Division 1A of former Part IIIAA of the ITAA 1936. Accordingly, the Trustee will be entitled to a tax offset under Subdivision 207-B equal to the franking credits attached to the franked dividends received in respect of unallocated Shares.