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Ruling

Subject: Employee Share Scheme - Trust

Question 1

Will the irretrievable contribution to the Trustee of the Trust by the Employer be assessable income of the Trust pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

Question 2

Will any capital gain or capital loss that arises for the Trustee of the Trust and the employees, at the time when the employees become absolutely entitled to the shares under section 104-75 of the ITAA 1997 be disregarded under subsection 130-90(1A) of the ITAA 1997?

Answer:

Yes

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commences on:

1 July 2011

Relevant facts and circumstance

The scheme the subject of this Ruling has been ascertained from the following documents:

Application for private ruling

· Plan rules

· Trust deed of the Trust

· Shareholders agreement

· Offer documents

· Loan agreement

· Constitution

· Management agreement

Relevant legislative provisions

Income Tax Assessment Act 1936 - section 95

Income Tax Assessment Act 1997 - subsection 6-5(1)

Income Tax Assessment Act 1997 - subsection 6-10(1)

Income Tax Assessment Act 1997 - section 10-5

Income Tax Assessment Act 1997 - subsection 130-90(1A)

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 - subsection 130-85(1)

Reasons for decision

Question 1

Summary

The irretrievable contributions received by the Trustee of the Trust are not assessable income of the Trust as they represent capital receipts.

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 was a resident, less all allowable deductions.

Subsection 6-5(1) of the ITAA 1997 states:

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

And subsection 6-10(1) states:

Your assessable income also includes some amounts that are not ordinary income.

None of the provisions listed in section 10-5 of the ITAA 1997 are relevant in this situation and therefore irretrievable contributions will be net income of the trust only if they are income according to ordinary concepts.

The Trust Deed obliges the Trustee to hold the trust funds on trust for the beneficiaries in the manner required by the Plan Rules. It must, subscribe for or acquire and hold shares in the Employer for the benefit of Participants under the terms of the Plan.

Consistent with ATO Interpretative Decision ATO ID 2002/965, as contributions to the Trustee are used in accordance with the Trust Deed and Plan Rules for the sole purpose of providing shares under the employee share scheme, contributions will constitute capital receipts of the Trustee, and will not be assessable under sections 6-5 or 6-10 of the ITAA 1997.

Question 2

Summary

Subsection 130-90(1A) 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.

Detailed reasoning

Subsection 104-75(1) of the ITAA 1997 states that a CGT Event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee of the trust. Subsection 104-75(2) provides that the timing of the event is when the beneficiary becomes absolutely entitled to the asset, and under subsection 104-75(3) the trustee makes a capital gain if the market value of the asset is more than its cost base.

It is necessary to determine when absolute entitlement occurs to ascertain if and when CGT event E5 happens.

In this case it is considered that the employee becomes absolutely entitled to the Shares as against the Trustee of the Trust and CGT event E5 happens when the shares are allocated to the employee.

Further, where the conditions of subsection 130-85(1) of the ITAA 1997 are met, the employee share schemes provisions and capital gains provisions apply as if an employee was absolutely entitled to the relevant share or right from the time of acquisition of the ESS interest.

In this case it is accepted that the conditions of subsection 130-85(1) are met and CGT event E5 happens when the shares are allocated to participating employees.

However, subsection 130-90(1A) states:

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 for 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) …

Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest.

It is considered then that any CGT event E5 that arises for the Trustee of the Trust can be disregarded pursuant to subsection 130-90(1A) of the ITAA 1997.

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