Private ruling: Implementation of an Employee Share Trust
Published: August 2011
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: During the year ended 30 June 2012

Ruling: Q1: Will the non-refundable cash contributions to the Trustee of the Employee Share Trust (EST) be assessable income in accordance with Part 1-3, Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Upon the beneficiary having absolute entitlement under the terms of the Plan, will any capital gain or capital loss made by the Trustee under Capital Gains Tax (CGT) event E5 be disregarded because of the operation of section 130-90 of the ITAA 1997? | A2: Yes. | Q3: Will section 106-50 of the ITAA 1997 apply such that if the Trustee disposes of the shares under the Plan, the Trustee will not make a capital gain or capital loss under CGT event E7? | A3: Yes.

Relevant facts and circumstances: 1. Company A will amend its current Employee Share Scheme (the Plan) to facilitate the establishment of a Employee Share Trust (EST). 2. The trustee of the EST will be Company B (the Trustee), an external trustee acting in an independent capacity on behalf of the employee beneficiaries 3. The Plan allows the board of directors of the company to invite employees to participate in the Plan by offering them options. 4. The eligible employee may exercise their options during the option period by making payment of the full amount of the exercise price. 5. When the eligible employee exercises their options, Company A must direct the Trustee to subscribe for, acquire or allocate to the eligible employee one share for each option exercised and hold those shares in the EST on behalf of the eligible employee. 6. The trust deed requires Company A to provide non-refundable cash payments to the Trustee in order for the Trustee to subscribe for and or acquire shares to be held on behalf of the eligible employees. 7. The Plan ensures that all shares allotted, transferred or allocated upon the exercise of options will be of the same class and rank with other shares in the company. 8. The EST is being established for the sole purpose of obtaining shares for the benefit of employees of Company A pursuant to the Plan that is described in the ruling request. 9. The trust deed states all funds received by the Trustee from Company A will constitute accretions to the corpus of the trust and will not be repaid to the company and no participant shall be entitled to receive such funds. 10. Shares acquired by the Trustee will be immediately allocated to the relevant participants, and held on their behalf. Assumption The Trustee holds all Company A shares pursuant to the Plan on capital account. The Trustee will not acquire shares in advance of options being exercised. Options issued prior to 1 July 2009 were 'qualifying rights' as defined in former section 139CD of the ITAA 1936. The exercise price will not exceed the cost base of the Shares in the hands of the Trustee for the purpose of applying the exemption under section 130-90 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1936 former Division 13A | Income Tax Assessment Act 1936 section 139E | Income Tax Assessment Act 1997 Part 1-3, Division 6 | 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 section 83A-10 | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 Part 3-1 and Part 3-3 | Income Tax Assessment Act 1997 Subdivision 130-D | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 the former section 130-90 | Income Tax Assessment Act 1997 section 130-90 | Income Tax (Transitional Provisions) Act 1997 subsection 83A-10(2) | Income Tax (Transitional Provisions) Act 1997 subsection 83A-25(1) Issue 1 | The non-refundable cash contributions to the Trustee of the EST (the Trustee) will not be assessable income of the Employee Share Trust (EST) in accordance with Part 1-3, Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997). Detailed reasoning | The operative provisions of Part 1-3, Division 6 of the ITAA 1997, that define assessable income are sections 6-5 and 6-10 of the ITAA 1997. | Subsection 6-5(1) of the ITAA 1997 states: | Your assessable income includes income according to ordinary concepts, which is called ordinary income . | The trust deed states all funds received by the Trustee from Company A or its related body corporate 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. | The contributions received from Company A must only be used to acquire shares in accordance with the terms of the trust deed and the Plan's rules. The receipt of the non-refundable cash contributions will constitute capital receipts in the hands of the Trustee. | Accordingly, the non-refundable cash contributions made by Company A to the Trustee to acquire shares will not be considered as 'ordinary income' and not assessable to the Trustee under subsection 6-5(1) of the ITAA 1997. | Subsection 6-10(1) of the ITAA 1997 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 of the ITAA 1997 are relevant in this situation. Therefore, the non-refundable cash contributions made by Company A to the EST will not be assessable income under subsection 6-10(1) of the ITAA 1997. | In view of the above the contributions from the settlor constituted non-taxable capital receipts to the Trustee, and were not assessable under sections 6-5 or 6-10 of the ITAA 1997. | Issue 2 | Upon the beneficiary having absolute entitlement under the terms of the Plan, any capital gain or capital loss made by the Trustee under CGT event E5 will be disregarded because of the operation of section 130-90 of the ITAA 1997. | Detailed reasoning | Section 104-75 of the ITAA 1997 contains the rules dealing with CGT event E5. Subsection 104-75(1) of the ITAA 1997 states that CGT event E5 happens if a beneficiary of a trust becomes absolutely entitled to an asset of the trust as against the trustee of the trust. Subsection 104-75(2) of the ITAA 1997 provides the timing of the event is when the beneficiary becomes absolutely entitled to the asset, and under subsection 104-75(3) of the ITAA 1997 the trustee makes 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. | Subsection 104-75(2) of the ITAA 1997 applies when the participant on allocation of the shares by the Trustee becomes absolutely entitled to those shares. | As the trustee, in this case, will not acquire shares in advance of the options being exercised, CGT event E5 will occur when the participants are allocated their shares by the Trustee under the Plan. | Based on the fact that the Trustee allocates the share as soon as the Trustee acquires the share, the cost base for CGT event E5 would be equal to the market value of the share at the time of the allocation and the Trustee will not make a capital gain or capital loss under section 104-75 of the ITAA 1997. | However, If a gain or loss is made in accordance with subsection 104-75(3) of the ITAA 1997 section 130-90 of the ITAA 1997 may apply to disregard any capital gain or capital loss made by an employee share trust. | Subsections 130-90(1) and 130-90(2) of the ITAA 1997 state: | 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 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. | Section 130-90 of the ITAA 1997 | Based on the facts presented subsection 130-90(1) is satisfied. In this case the Trustee acquires shares on behalf of the Participant, the Participant obtains a beneficial interest when the Trustee acquires and allocates the share to them and this beneficial interest obtained by the Participant is an ESS interest to which Subdivision 83A-B or 83A-C will apply. | Subdivision 83A-B applies to those interests issued at a discount prior to 1 July 2009 where no section 139E of the Income Tax Assessment Act 1936 (ITAA 1936) election has been made and cessation has not occurred prior to 1 July 2009. Subdivision 83A-B also applies to those interests issued at a discount after 30 June 2009 where taxation has been deferred by the application of section 83A-120 of the ITAA 1997. Subdivision 83A-C will apply to those interests issued after 30 June 2009 where subsection 83A-25(1) of the Income Tax (Transitional Provisions) Act 1997 (ITTPA) applies to include the discount received in assessable income. Further, subsection 130-90(2) of the ITAA 1997 does not apply based on the assumption that the exercise price will not exceed the cost base of the shares in the hands of the Trustee. That is the participant will not acquire the beneficial interest in the share for more than its cost base. Therefore, as the requirements of subsections 130-90(1) and 130-90(2) of the ITAA 1997 have been fulfilled any capital gain or capital loss made by the Trustee would be disregarded. | However, section 130-90 of the ITAA 1997 will not apply to the ESS interests received prior to 1 July 2009 where section 139E of the ITAA 1936 election was made. Former Division 13A of the ITAA 1936 will still apply in accordance with subsection 83A-10(2) of the ITTPA 1997. In particular, the application of former section 130-90 of the ITAA 1997, which will now be considered. | Former section 130-90 of the ITAA 1997 | The former section 130-90(1) of the ITAA 1997 stated: | A capital gain or a capital loss a trustee or a beneficiary makes when the beneficiary becomes absolutely entitled to a share or right in a company is disregarded if these conditions are satisfied. | Former paragraph 130-90(1A)(a) of the ITAA 1997 required the beneficiary to be an individual who receives (or is entitled to receive) withholding payments covered by subsection (5) from the company or from another company (at the time the beneficiary first became beneficially entitled to the share or right). This requirement has been satisfied as the participants were in receipt of salary and wages, which is covered by the former subsection 130-90(5) of the ITAA 1997. | Former subsection 130-90(5) of the ITAA 1997 covers a withholding payment covered by item 1, section 12-35 of the Tax Administration Act 1953 (TAA) dealing with the subject matter of payments to employees which is listed in the table in Schedule 1 to the TAA . Under former subsection 130-90(2) of the ITAA 1997, the terms of the trust must require or authorise the trustee to transfer the share or right to the individual, associate or affiliate company. This requirement has been fulfilled by the Trust Deed which requires the Trustee to transfer the shares to the participant. | Former subsection 130-90(3) of the ITAA 1997 is satisfied as the participant has acquired the share in satisfaction of a beneficial interest that was the result of exercising a right acquired under an employee share scheme. | Former subsection 130-90(4) of the ITAA 1997 requires that the individual, associate or affiliate company must not acquire the share or right for more than the cost base of the share or right (in the hands of the trustee) at the time of the transfer. This requirement is satisfied as it is assumed that the exercise price will not exceed the cost base of the shares in the hands of the Trustee. | In view of the above, former subsection 130-90(1) of the ITAA 1997 will apply to disregard any capital gain or capital loss the Trustee may make when the participant becomes absolutely entitled to their shares. | Therefore, upon the beneficiary having absolute entitlement under the terms of the Plan, any capital gain or loss made by the Trustee under CGT event E5 will be disregarded because of the operation of former section 130-90 of the ITAA 1997. | Issue 3 | Section 106-50 of the ITAA 1997 will apply such that if the Trustee disposes of the shares under the Plan, the Trustee will not make a capital gain or capital loss under CGT event E7. | Detailed reasoning | Subsection 104-85(1) of the ITAA 1997 provides that CGT event E7 happens if the trustee of a trust 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 of the ITAA 1997 provides: | If you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it. | The participant on allocation of the shares by the Trustee becomes absolutely entitled to those shares. In accordance with the trust deed each participant is the beneficial owner of the trust shares held by the Trustee on their behalf; and absolutely entitled to all other benefits and privileges attached to, or resulting from holding, those trust shares (subject to the relevant Plan Rules and relevant terms of participation). As the participants are 'absolutely entitled' to shares held on their behalf by the EST, section 106-50 of the ITAA 1997 will deem the disposal of the shares by the Trustee to be done by the Participant. | Therefore, section 106-50 of the ITAA 1997 will apply, such that if the Trustee disposes of the shares under the Plan, the Trustee will not make a capital gain or capital loss under CGT event E7


Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.