Private ruling: Employee Share Scheme
Date of advice: 5 May 2017
Published: September 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: 1 July 2016

Ruling: Q2: Will a capital gain or capital loss that arises for the Trustee at the time when the employees become absolutely entitled to the entity's 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? Advice/Answers Yes


Relevant legislative provisions: Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 6-10(1) | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 section 104-75 | 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(1A) | Income Tax Assessment Act 1997 subsection 130-90(1) | Income Tax Assessment Act 1997 subsection 130-90(2) | Income Tax (Transitional Provisions) Act 1997 subsection 83A-5(1) | All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. Issue 1 | Question 1 | Will the irretrievable cash contributions by the entity to the Trustee to fund the acquisition of the entity's shares by the Trustee for the purposes of the incentive plans be assessable income of the Trust under section 6-5 or 6-10? | Detailed reasoning | Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) defines net income in relation to a trust as follows, insofar as it is relevant: | net income , in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions Subsection 6-5(1) states: | Your assessable income includes income according to ordinary concepts, which is called ordinary income. | Further, subsection 6-10(1) states: | 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. | None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, non-refundable contributions made by the entity to the Trustee will not be assessable income under section 6-10. They will only be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936 if they are assessable as income according to ordinary concepts under section 6-5. | Section 6-5 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 gave the classic definition of “income” in Australian law. Chief Justice Jordan considered that: | The word “income” is not a term of art, and 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 such receipts. | The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). The decision states that: | The fundamental relation of “capital” to “income” has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being “derived” that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description. | In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that: | To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts 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. | Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. | The contributions provided by the entity to the Trustee of the Trust are used in accordance with the terms of the Deed and the Rules of the incentive plans. The Deed states that the Trustee will hold on Trust all allocated Trust 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 the entity or its Related Body Corporate will constitute Accretions to the corpus of the Trust and will not be repaid to the entity and no Participant shall be entitled to receive such funds. Therefore, the contributions will not be assessable as ordinary income under section 6-5 as they constitute receipts of a capital nature to the Trustee. Question 2 | Will a capital gain or capital loss that arises for the Trustee at the time when the employees become absolutely entitled to the entity's 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? | Detailed reasoning | Preliminary - application of Division 83A | Division 83A will apply to ESS Interests issued on or after 1 July 2009 and also, in certain circumstances, to ESS Interests that were provided under an employee share scheme prior to 1 July 2009. | Division 83A will apply to rights provided when an offer is made under the Share Option plan on or after 1 July 2009 as they will have been acquired on or after 1 July 2009 thereby satisfying subsection 83A-5(1) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997). | When a Participant in the incentive plans becomes absolutely entitled to the entity's shares as against the Trustee, CGT Event E5 will occur and under section 104-75, the Trustee will make a capital gain or loss. However, section 130-90 may operate to disregard that gain or loss where specified conditions are satisfied. | Section 130-90 | Section 130-90 relevantly states: | Shares held to satisfy the future exercise of rights acquired under employee share schemes | 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 (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. | Employee share trust | Subsection 130-85(4) states: | An employee share trust , for an employee share scheme, is 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). | Paragraphs 130-85(4)(a) and (b) | The beneficial interest in a share received by a Participant when an ordinary share in the entity is granted to them under the terms of the Deed is an ESS interest within the meaning of subsection 83A-10(1). | Subsection 83A-10(2) defines an employee share scheme as being a scheme under which ESS interests in the entity provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. | The incentive plans are employee share schemes within the meaning of subsection 83A-10(2) because they are schemes that provide either a share in the entity or a right to acquire beneficial interests (the Rights) in ordinary shares in the entity to employees in relation to the employee's employment. | The entity has established the Trust to acquire ordinary shares in the entity and to allocate those shares to employees in order to satisfy ESS interests (the Shares and Rights) acquired by those employees under the incentive plans. | The beneficial interest in the entity's share is itself provided under an employee share scheme because it is provided under the same scheme under which the Rights are provided to the Participant in relation to the Participant's employment, being an employee share scheme as defined in subsection 83A-10(2). | Paragraphs 130-85(4)(a) and (b) are therefore satisfied because: | ● the Trust acquires shares in a company, namely the entity; and | ● the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of the entity), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those entity shares to the Participants in accordance with the Deed and the incentive plans. | Paragraph 130-85(4)(c) | Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the incentive plans. | ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c): | ● the opening and operation of a bank account to facilitate the receipt and payment of money; | ● the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee; | ● the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; | ● dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme; | ● the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares; | ● the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and | ● receiving and immediately distributing shares under a demerger. | Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental. | The Deed states that the Trustee will hold on Trust all allocated Incentive Shares and all other benefits and privileges arising from allocated Incentive Shares for the benefit of Participants on the terms and conditions set out in the Deed. | The Deed sets out the powers the Trustee has in respect of the Trust and they include the power to open bank accounts and operate bank accounts. | The Deed states that the entity and the Trustee agree that the Trust will be managed and administered in a way that satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4). | The Deed allows the Trustee to deal with shares forfeited under an employee share scheme. | Paragraph 130-85(4)(c) is satisfied as any activities undertaken by the Trustee other than the acquisition of the entity's shares and the allocation of those shares to the employees in accordance with the Deed and Rules of the incentive plans are merely incidental to operation of the incentive plans. The Trust satisfies the definition of an employee share trust in subsection 130-85(4) as: | ● the Trust acquires shares in a company (being the entity); | ● the Trust ensures that ESS interests (as defined in subsection 83A-10(1), as being shares in the entity or beneficial interests in the shares of the entity), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those entity's shares to the employees in accordance with the Deed and Rules of the incentive plans; and ● the Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to the function of administering the Trust. | Paragraph 130-90(1)(a) | CGT event E5 is the CGT event that will apply under the terms of the incentive plans at the time the Participant becomes absolutely entitled to the entity's shares as against the Trustee. Therefore, paragraph 130-90(1)(a) will be satisfied. | Paragraph 130-90(1)(b) | Subsection 995-1(1) defines a share in a company to mean a share in the capital of a company. An ordinary share in the entity held by the Trustee and to which a Participant is entitled upon vesting or exercise of a Right is a share in the capital of a company (i.e. the entity). Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph. | Paragraph 130-90(1)(c) | Paragraph 130-90(1)(c) is satisfied as a participant will have acquired a beneficial interest in a share (in the entity) by vesting or exercising a Right provided under incentive plans. | Paragraph 130-90(1)(d) | Subsection 83A-20(1) of Subdivision 83A-B states: | This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount. | Subsection 83A-10(2) defines an employee share scheme as being a scheme under which ESS interests in the entity are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. | The incentive plans are employee share schemes within the meaning of subsection 83A-10(2) because they are schemes that provide rights to acquire beneficial interests (the Rights) in ordinary shares in the entity to employees in relation to the employee's employment. Under the incentive plan rules, Participants may acquire beneficial interests for no cost or at a discount. | Subdivision 83A-B will apply to the Rights provided under the incentive plans as pursuant to subsection 83A-20(1) the ESS interests (i.e. Rights issued under the incentive plans) will be acquired under an employee share scheme (for the reasons stated in the immediately preceding paragraph) at a discount. It should be noted however that whether a Participant is ultimately taxed upfront on some or all of any discount received (under Subdivision 83A-B) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C), will depend on which of the additional requirements in Subdivision 83A-B or Subdivision 83A-C have been satisfied. Under either circumstance paragraph 130-90(1)(d) will be satisfied. | Accordingly, all the conditions in subsection 130-90(1) have been satisfied. | Provided a Participant does not acquire the beneficial interest in the entity's share for more than its cost base in the hands of the Trustee at the time that CGT event E5 happens, subsection 130-90(1) will apply. | Under these circumstances, section 130-90 operates to disregard any capital gain or loss made by the Trustee on any entity share when a Participant becomes absolutely entitled to that share. | Subsection 130-90(1A) | Subsections 130-90(1A) and 130-90(2) state: | Shares held for future acquisition under employee share schemes | 130-90(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 View history reference | (c) Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest. | 130-90(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. | Under the employee share plan (ESP), Participants are invited to acquire shares in the entity, which will make contributions to the Trustee in order to allow it to either subscribe for shares from the entity or acquire them on-market to satisfy the offers made to the eligible employees under ESP. | Subsection 130-90(1A) provides that any capital gain or loss made by an employee share trust is disregarded where it results from a CGT event if immediately before the event happens an ESS interest is a CGT asset of the trust and a beneficiary of the trust becomes absolutely entitled to the ESS interest (CGT event E5), or the trustee disposes of the ESS interest to a beneficiary of the trust (CGT event E7). | For the reasons discussed above, the ESP satisfies the definition of an employee share trust in subsection 130-85(4). | Paragraph 130-90(1A)(a) is satisfied as the shares held by the Trustee are ESS interests which are CGT assets of the ESP. | CGT event E5 is the CGT event that will apply under the terms of the ESP at the time the Participant becomes absolutely entitled to the entity's shares as against the Trustee. Therefore, paragraph 130-90(1A)(b) is satisfied. | The ESP is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest is provided to a Participant in relation to their employment in the entity in accordance with the Deed. | Subdivision 83A-C will apply to the entity's shares acquired under the ESP (refer section 83A-105). Accordingly, paragraph 130-90(1A)(c) will be satisfied. | Hence, all the conditions in subsection 130-90(1A) have been satisfied. | Provided a Participant does not acquire the beneficial interest in the entity share for more than its cost base in the hands of the EST at the time that CGT event E5 happens, subsection 130-90(1A) will apply. | Conclusion | Under the circumstances of either subsection 130-90(1) or 130-90(1A) applying, section 130-90 operates to disregard any capital gain or loss made by the Trustee on any entity share when a Participant becomes absolutely entitled to that share. | CGT Event 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. | However, section 106-50 provides that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), Part 3-1 and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it. | A Participant, on allocation of the entity shares by the Trustee, becomes absolutely entitled to those shares. In accordance with the Deed, each Participant is absolutely entitled to any entity shares held by the Trustee on their behalf once allocated, and is entitled to the same rights in respect of those shares as if he or she was the legal owner of the shares (subject to the incentive plans). | Once a Participant is absolutely entitled to the entity shares held on their behalf by the Trust, section 106-50 will deem the disposal of the entity shares by the Trustee to be done by the Participant. | Therefore, section 106-50 will apply such that, if the Trustee disposes of the entity shares under the incentive plans (by way of transfer to a Participant), the Trustee will not make a capital gain or capital loss under CGT Event E7.


Will the irretrievable cash contributions by the entity to the Trustee to fund the acquisition of the entity's shares by the Trustee for the purposes of the incentive plans be assessable income of the Trust under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Company background: The entity is listed on the Australian Securities Exchange (ASX). It is the head entity of a Tax Consolidated Group. | The entity maintains a strong focus on the retention of staff to facilitate the expected growth and expansion of the company over the long term. As such, it has in place various incentive plans which provide its employees with the opportunity to participate in equity ownership so as to provide an incentive to achieve greater success and profitability for the entity, stimulate and reward superior performance and maximise the long-term performance of the entity. | The entity has two employee option plans (collectively referred to as Incentive Plans), and an Employee Share Plan: | ● Long Term Incentive Plan (LTIP) | ● Employee Share Option Plan (ESOP) | Long Term Incentive Plan: The LTIP is a key part of the entity's executive and senior staff remuneration framework. The key objectives are to: | ● assist in the reward, retention and motivation of Participants; and | ● align the interests of Participants with shareholders of the Group. | The LTIP offer and grant of Performance Rights or Options does not automatically entitle a Participant to a share. The actual number of shares to which they may become entitled will depend on: | ● the degree to which the LTIP performance measures are satisfied; | ● satisfaction/waiver of the Vesting Conditions and Exercise Conditions; and | ● the operation of the LTIP rules. | The LTIP operates entirely at the discretion of the Board and may be terminated, suspended or amended at any time, in its entirety or in part, in relation to any or all Participants. | The entity provided the LTIP Rules. | Employee Share Option Plan (ESOP): The entity established ESOP which is governed by the ESOP Rules. | Relevant information provided in respect of the ESOP includes the following: | ● Under the ESOP, the entity will contribute funds to the Trust to provide benefits to Participants in the form of shares. It is anticipated that such contributions will be made by the entity when the Participants exercise their Options granted under the ESOP. | ● Contributions to the Trust will be a recurring outgoing which forms part of the total remuneration costs of the Participants. | The entity provided the ESOP Rules. | The entity has in place share based compensation in the form of an Employee Share Plan (ESP) whereby up to A$1,000 worth of ordinary fully paid shares are issued by the entity to each eligible employee annually for no cash consideration. | The entity provided the ESP Plan. | The entity established the Employee Share Trust (Trust) for the sole purpose of obtaining shares for the benefit of employees of the entity pursuant to the Incentive Plans. | The entity provided the Employee Share Trust Deed (the Deed).