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Ruling

Subject: Income Tax

Question 1

Will the non-refundable cash contributions made by Company A to the trustee of the EST be assessable income of the EST?

Advice/Answers

No

Question 2

In respect of shares acquired by the Trustee of the EST under the terms of the Incentive Plans, will any capital gain or capital loss made by The Trustee under CGT Event E5 (section -104-75 ITAA 1997) be disregarded when Participants become absolutely entitled to shares in Company A?

Advice/Answers

Yes

Question 3

In respect of shares disposed of by the Trustee of the EST under the terms of the Incentive Plans, will the Trustee make a capital gain or capital loss under CGT Event E7 (section 104-65 ITAA 1997) when the Participants "acquire the shares?

Advice/Answers

No

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

1 July 2011 to 30 June 2013

1 July 2011 to 30 June 2014

1 July 2011 to 30 June 2015

1 July 2011 to 30 June 2016

The scheme commences on:

Year ending 30 June 2012

Relevant facts and circumstances

The facts are as provided by the applicant in the following documents:

· Application for Private Ruling

· Annual Report of Company A for 2011

· Financial Statement for Company A for 2011

· Rules of Company A for the ESOP and PRP

Relevant legislative provisions

Section 95 of the Income Tax assessment Act 1936

Section 6-5 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Section 20-20 of the Income Tax Assessment Act 1997

Section 83A-10 of the Income Tax Assessment Act 1997

Section 83A-20 of the Income Tax Assessment Act 1997

Section 104-75 of the Income Tax Assessment Act 1997

Section 109-10 of the Income Tax Assessment Act 1997

Section 130-85 of the Income Tax Assessment Act 1997

Section 130-90 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Income Tax Deductions

Question 1

Will the non-refundable cash contributions made by Company A to the Trustee of the EST be assessable income of the EST?

Advice/Answers

Answer No. Non-refundable cash contributions made by Company A to the Trustee of the EST will not be assessable income of the EST.

Detailed reasoning

The basic trust assessing provisions are contained in Division 6 in Part III of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 95(1) of the ITAA 1936 defines net income of a trust as the total assessable income of the trust calculated as if the trustee were a resident taxpayer in respect of that income, less all allowable deductions.

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that assessable income includes income according to ordinary concepts (also called ordinary income) and subsection 6-10(1) of the ITAA 1997 provides that assessable income also includes some amounts that are not ordinary income (called statutory income by virtue of ss6-10(2) ITAA 1997)

An employee share trust is defined in subsection 130-85(4) of the ITAA 1997 as follows:

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

(iii) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b)

An employee share scheme is defined in subsection 83A-10(1) of the ITAA 1997 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 employees' employment.

A trust will satisfy the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997, and be an employee share trust as defined, where the activities of the trustee of the trust are limited to managing an employee share plan and the general administration of the trust

The terms and conditions set out in the Trust Deed confirm that the Trust is an employee share trust as defined in subsection 130-85(4) of the ITAA 1997.

The irretrievable cash contributions made by Company A to the EST are used in accordance with the Trust Deed and plan rules for the sole purpose of and under the employee share scheme. The contributions constitute capital receipts to the Trust and are not assessable under section 6-5 of the ITAA 1997 (ordinary income) or section 6-10 of the ITAA 1997 (statutory income) (ATOID 2002/965).

Question 2

In respect of shares acquired by the Trustee of the EST under the terms of the Incentive Plans, will any capital gain or capital loss made by The Trustee under CGT Event E5 (section -104-75 ITAA 1997) be disregarded when Participants become absolutely entitled to shares in Company A?

Advice/Answers

Answer Yes. Any capital gain or loss made by the trustee under CGT Event E5 will be disregarded.

Detailed reasoning

Where a participant becomes absolutely entitled to the shares as against the Trustee CGT event E5 will occur and therefore under section 104-75 of the ITAA 1997, the Trustee will make a capital gain or loss. However, section 130-90 of the ITAA 1997 operates to disregard that gain or loss where the specified conditions are satisfied.

Section 130-90 of the ITAA 1997 provides the following:

(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 (1) does not apply if the beneficiary acquired the beneficial interest in the 'share for more than it's *cost base in the hands of the employee share trust at the time the 'CGT event happens.

It is first necessary to determine whether the activities of the EST falls within the definition of an 'employee share trust' (subsection 130-90(1)) of the ITAA 1997). Subsection 130-85(4) defines an 'employee share trust' as:

(4) 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).

As detailed in question 1, the terms and conditions set out in the Trust Deed confirm that the Trust is an employee share trust as defined in subsection 130-85(4) of the ITAA 1997.

With respect to section 130-90 of the ITAA 1997 all of the conditions therein are satisfied as the CGT Event happening is E5; it happens in relation to a share as defined; the beneficial interest is acquired by exercising a right and that right was an ESS interest to which Subdivision 83A-B of the ITAA 1997 applies as follows:

Subsection 83A-20(1) of Subdivision 83A-B of the ITAA 1997 states:

This subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

The term 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as:

a scheme under which ESS interests in a company are provided to employees or associates of employees (including past or prospective employees) of:

(a) the company….

In relation to the employees employment.

For the purposes of subsection 83A-10(2) of the ITAA 1997, section 995 of the ITAA 1997 defines the term scheme as follows:

scheme means:

(a) any arrangement; or

(b) any scheme, plan proposal action, course of action or course of conduct whether unilateral or otherwise

Thus this arrangement satisfies the definition of employee share scheme and all the conditions in subsection 130-90(1) of the ITAA 1997 have been satisfied.

Provided that the beneficiary does not acquire the beneficial interest in the share for more than its cost base in the hands of the employee share trust at the time CGT Event E5 happens, subsection 130-90(2) of the ITAA 1997 will also have been satisfied.

In these circumstances, section 130-90 of the ITAA 1997 operates to disregard any capital gain or loss made by the trustee on any share when a participant becomes absolutely entitled to that share.

Question 3

In respect of shares disposed of by the Trustee of the EST under the terms of the Incentive Plans, will the Trustee make a capital gain or capital loss under CGT Event E7 (section 104-65 ITAA 1997) when the Participants "acquire the shares?

Advice/Answers

Answer No. The Trustee will not make a capital gain or capital loss under CGT Event

Detailed reasoning

Section 130-90 of the ITAA 1997 provides the following:

(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 (1) does not apply if the beneficiary acquired the beneficial interest in the 'share for more than it's *cost base in the hands of the employee share trust at the time the 'CGT event happens.

The EST is an employee share trust for the purposes of subsection 130-85(4) of the ITAA 1997.

Section 104-85 of the ITAA 1997 contains rules dealing with CGT Event E7. CGT Event E7 occurs if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary so as to satisfy the beneficiary's interest of part of an interest, in the capital of the trust (subsection 104-85(2) of the ITAA 1997).

CGT Event E7 will occur at the time the Trustee of the EST disposes of a CGT asset (i.e. shares held in the EST or the Participants' behalf in satisfaction of the beneficiary's interest in the trust capital (section 104-85 of the ITAA 1997). prima facie, the transfer of shares to Participants in accordance with the Incentive Plans will result in a capital gain or loss to the Trustee.

A capital gain arises to the Trustee of the EST if the market value of the share at the time of disposal to the Participant is more than the share's cost base (subsection 104-85(3) of the ITAA 1997).

As discussed in question 2 all the conditions in subsection 130-90(1) of the ITAA 1997 have been satisfied.

Provided the Participant does not acquire the beneficial interest in the share for more than its cost base in the hands of the EST at the time that CGT Event E7 happens, subsection 130-90(2) of the ITAA 1997 will have also been satisfied.

Under these circumstances, section 130-90 of the ITAA 1997 operates to disregard a capital gain or capital loss made by the Trustee.

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